The premium on the products will rise

Gold again saved the day for Titan Industries Ltd, with the company’s jewellery business compensating for the poor performance of the watch division in the March quarter.
The jewellery business is a major contributor to Titan’s overall financial performance, accounting for almost four-fifths of revenues. In the just ended fiscal year, it contributed 81.76% to the firm’s earnings before interest and tax (Ebit), compared with 76.67% a year ago.

In the March quarter too, the jewellery business did well. Volumes increased by 9% from a year ago. Although it was slower than the 12% growth seen in the December quarter, the latter was boosted by festival season sales. Consequently,Home energy monitor  revenues increased by 16% from a year ago. Profitability in this business was stronger with its Ebit increasing by 36%, the best in the last four quarters. Titan also saw an improvement in share of studded jewellery last quarter compared to the full year, which boosted margins.

This performance was in stark contrast to the watch business, the second largest category for Titan. Revenue from this division increased by just 1.5% from a year ago. Even that growth was owing to prices that Titan raised over the last year. Watch volumes declined by as much as 10%,Home energy management  compared with a growth of about 4% in the preceding two quarters. An excise duty hike and higher material costs also dented the profitability of this business and Ebit declined 15%.

Collectively, the company saw a 28% growth in the March quarter net profit to Rs.185 crore. What next then?
The watch business will depend mainly on an improvement in consumer sentiment, which could be some time away. On the other hand, Titan is planning to add 20 new showrooms this financial year in newer towns which will restrict cannibalization and boost sales. The good news is that jewellery volumes will continue to grow.

“Volume growth is likely to pick up in FY14 due to softening of gold prices and a large number of marriage days are on the list,” an Edelweiss Securities Ltd says in a recent report.

At the current market price of Rs.271, the Titan stock trades at 26.5 times its estimated earnings for the current fiscal year. At these valuations, Power monitor shareholders already seem to be factoring all the positives.

“The RBI’s restriction on the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery, will have repercussions on the industry.The premium on the products will rise, the volatility will rise, there will be disparity in the market, disturbance in the supply chain and flourishing of the grey market,” GJF Chairman Haresh Soni said in a statement.

Instead, the government should take steps like banning imports of coins, unlock public coins in market, limit or ban sale of coins by banks, encourage local coin manufacturers, he added and called for introducing measures to identify gold used for investment purpose and for retail consumption.

“The non productive gold lying with exchange traded funds (ETF) should be channelised through nominated agencies in the domestic market, so that the import of the precious metal can be reduced,” he said.

The RBI last week tightened the screws on both bank and NBFCs into gold funding business and restricted banks financing gold import to gold jewellery exporters. The apex bank, while announcing the annual monetary policy, also restricted the lending against gold coins up to 50 gm.

GJF Director Ashok Minawala said the industry does not believe that the apex bank’s latest move this move would help in addressing the issue of widening current account deficit. However, curtailing the import of gold on consignment basis will harm jewellery makers as they won’t be able to secure loans in the form of gold from banks as prevalent in the industry.

“This move will definitely have a negative impact on procurement of gold for manufacturing and distribution and the consumer will eventually face shortages,” he said.