The government's clampdown on gold has been playing out for some months now. After a series of restrictions, the government fired the knockout round on August 14, when it made it mandatory to pay 100 per cent cash to buy gold. Many gold retailers --as a standard business practice-- acquire gold on lease. An additional restriction mandated that importers will need to export 20 per cent of the gold. This directive has naturally hit all gold retailers. Titan is still down 18 per cent since this announcement.
Why you should add Titan to your portfolio?
Titan will be hit by the government restrictions but this Tata group company is still your strongest bet in the branded jewellery space.
The company's primary concern is acquisition of gold. It requires 18-19 tonne of the yellow metal annually. Given the brand identity that Titan enjoys, it is highly likely to be able to cobble up its requirements. Costs could go up though. Compared to earlier gold acquisition cost of 2 per cent (on lease), the company could have to shell out an additional 5-6 per cent per year towards cost of buying gold.
Titan is offering a 15 per cent discount on its studded jewellery. This is aimed to bring clients to its studded jewellery which accounted for 30 per cent of sales (FY13) before falling to 16 per cent (Q1FY14) on account of higher gold sales.
The company in the meantime is not cutting down on its expansion plans. This year it plans to add 1,00,000 sq ft of retail space to its existing 2,40,000 sq ft retail space (FY13). Out of this, it has already added 37,000 sq ft in Q1 of this year.
Topline is not expected to be impacted as a result of the recent restrictions. Earnings though are estimated to take a knock of 4 per cent this year and around 10 per cent in the following year (Kotak Securities estimates) on account of higher debt and financing costs.
This article was originally published on December 10, 2013.
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