Interest fee to go up; jewellery EBIT won't be hit: Titan

In a bid to reduce the import of gold, the RBI has mandated gold importers to make full payment for the shipments upfront. But Titan Industries believes it won't have difficulty in raising money as it has a strong balance sheet, although it is going to cost more. Speaking to CNBC-TV18, S Subramanian, CFO, Titan says interest fee would be impacted in a large way because now everybody has to pay upfront for gold.

Subramanian believes Titan will be able to go ahead with its expansion plans. According to him, the current supply constraints will be short term in nature. 
He does not think jewellery EBIT margins will be hit too much. Titan will be looking at hedging as it is selling gold forward, which would bring costs down, says Subramanian.
The company does not export any gold on its own, he says. If the Directorate General of Foreign Trade (DGFT) allows it to import and give 20 percent to exporters, that is something that Titan would be looking at, adds Subramanian. Below is the verbatim transcript of S Subramanian’s interview on CNBC-TV18 Q: The Reserve Bank of India's (RBI) Wednesday measures are taking the industry back to the June rules where you have to pay money upfront, so the lease model breaks down again. Can you just take us through what this means for Titan? How much it might raise your working capital, interest costs and reduce your margins?
A: It is back to square one. We thought bliss was back after the July 22 notification, but this is a setback. I think we need to get prepared again to leveraging our balance sheet. As I said our balance sheet has been very strong, so we do not have a problem in raising money, but obviously costs are going to go up. I think it would impact the interest fee in a larger way, because now everybody has to pay for gold upfront.
We have all been enjoying substantial credit up to 180 days from banks and so on, so that is going to go now. Interest cost obviously will be higher. I cannot give you numbers at this point in time. It is too early. We need to work out our balance sheet, because this happened just a day and half. We will work out and come back. Q: The situation maybe a little worse than what you thought you were in June, because in June you all were not aware of this volume restriction. In July they took away the upfront requirement, but they also said that for every one unit exported you can import only four units. Now you have both the volume as well as the need to pay upfront. So you maybe a little worse off than you were in June. Therefore will you even rethink your expansions? You have a lot of space expansion plans, will that also now be a little under question because volume is a problem?
A: As of now I really cannot comment on that. I do not think we will look at our expansion plans. I think we should be able to manage. We do believe that while there are constraints on supply I would assume they would be short-term. there have been clear directions in the RBI circular and the Government of India is stating that the customs would have to come out with regulations very soon on how they were going to monitor this and I am assuming that therefore will happen hopefully in a few weeks' time.
We have actually been having supply constraints for the last one month. From July 22, I think most banks have not been importing. That would hopefully now get addressed and once that starts I would assume supply should not be an issue at least for people like us with credibility. So we are hoping that we would be back on track on the supply part, but it is going to cost us a little more. Q: There are some assessments being made on how much jewellery Earnings Before Interest and Taxes (EBIT) margins could be hit. Some analysts believe that it could be hit by about 30-50 bps as well. Do you think that is a realistic assumption?
A: No, I think that is way off the mark. I do not think there is anything like that which we expect to get hit. There will be an increase in interest costs because we need to borrow. We would look at hedging as well and hedging because we are selling gold forward would bring our cost down. So there will be an impact, but exactly how much and how effectively we can hedge is going to be the key at this point in time and that is something that we need to look at now as to how we can do this. Q: Will you be looking to import gold on your own license now?
A: We have our license, but the question here is we do not export on our own. So I am not very sure whether we would be able to import directly. We might require some approvals. If the Directorate General of Foreign Trade (DGFT) allows us to import and give 20 percent to exporters, that is something that we would look at. Q: A lot of brokerages are looking at reduction of your profit growth by about 14 percent. How much would you say would be the impact on the bottom-line?
A: Too early to say, because it finally also depends on how our hedging strategy works. As we mentioned earlier when we sell gold forward we actually get premium, so it in a way brings down the interest impact. It is all a question of how effective that is going to be. Q: Will the import duty increase crimp you in anyway or people buy at any price?
A: No, I do not think so. That is the point I have been making. Import duty increases do not really affect gold demand as much. Q: How much your working capital cycle could suffer? There are some estimates being made on your cash conversion cycle increasing to around 120 days in FY14 which is double of what you had in FY13. Do you fear that it could rise to as much?
A: When you say cash cycle I am assuming you are talking about inventory turns. Inventory turns anyway are around 150 days for us now. The question now is that how do we make that better. Those are the things that we need to be working out very quickly now. How do we improve our inventory turn is going to be a key task for us.