Bhaskar Bhat, MD, Titan feels that the bigger problem is availability of gold (raw material) and by putting a curb on that is affecting a thriving industry - an industry which not only serves huge number of customers but also employs large number of people.
Hiking duty on imported jewellery was not a necessary measure and will not derive the required benefit, because Indians prefer local designs to international patterns, says Bhaskar Bhat, MD, Titan in an interview of CNBC-TV18.
India hiked import duty on gold jewellery from 10 to 15 percent on Tuesday in a move to protecting the domestic jewellery industry.
Bhaskar does not see any impact on margins for the company because hikes in gold prices were passed through, but the return on capital employed will be impacted because of borrowing cost.
He strongly feels that the bigger problem is availability of gold (raw material) and by putting a curb on that is affecting a thriving industry - an industry which not only serves huge number of customers but also employs large number of people. The customs duty hike has increased smuggling, he adds.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Did you need this protection; was it a very big competition from imported jewellery?
A: I can only say this is a small measure, which was not necessary because Indians are looking for Indian jewellery and Indian designs, not foreign brands and foreign jewellery. Because of the import duty on gold, there was this difference, which is why government has introduced this but it is not such a big benefit.
However, the bigger problem is the availability of gold. In such a large industry, which is serving so many consumers, employing so many people, adding so much value - to curb this industry is a bit of a pity by making raw material not available.
I think controls and restrictions on a thriving industry which unfortunately has certain habits which need to be curbed not the industry.
So this measure is a good thing but it is going to make little impact whereas the customs duty hike has increased smuggling. You go to the hawala market; you get gold at Rs 200 lower than what a manufacturer legitimately can import and pay duties and sell gold jewellery at. So that is the pity because women still want gold jewellery in India and general manufacturers are employing, designing, adding value and delivering to that promise.
Q: Therefore are you saying that gold availability has become a big problem for domestic jewellery companies such as yours? Is this now serious enough for you to be hit on volumes and margins?
A: No, we are still buying. There is a facility of gold on lease available to this country for buying gold on lease where you pay after 180 days. However, that according to the government has resulted in the ballooning of the current account deficit (CAD). So, it is realistic to curb but the government has to find practical ways of finding raw material, of course we will find our raw material but the problem is that they need to think about the large numbers of people who are employed in this industry genuinely making jewellery for the consumers.
What has happened is that there are some players who have misused the facility and as a result of that the industry has got affected. It is a problem that industry needs to also work with government to solve.
Q: What would the impact be on gold prices because of this particular move and on your margins what are the expectations as we head into the next couple of quarters?
A: There is no impact on the margin because gold prices are passed through. Gold prices have gone up and it has been going up and we don’t expect any change in margin. All that will be affected as a return on capital (RoC) employed because you have to borrow to buy gold, RoC gets affected not the margin.
Q: How much will your interest cost etc go up since you may have to take higher debt now?
A: It could go up marginally. We do have a very strong balance sheet. We are able to borrow and so it is marginal and not significant. However, in the long run, while the RoC employed was very high, it is coming down slightly. It was in excess of 70-80 percent.