Will RBI gold import curbs lead to de-rating of Titan?

Moneycontrol Bureau

Until recently Titan Industries was a darling of Dalal Street. Last year the stock gained 12 percent, outperforming the wider Nifty, which gained 7 percent.
However, the market reaction to the stock in recent days suggests the party could be over for the watches to jewellery maker.
While, the overall retail environment in the country has seen slow growth, as consumers have postponed discretionary spends, Titan, which is India's largest jewellery retailer, faces more pressing issues following the recent gold import norms issued by the Reserve Bank of India.
According to the clarifications issued by RBI to Titan, jewellers can't use credit to buy gold and will have to pay in cash upfront.
Bhaskar Bhat, Titan's MD said on Wednesday, it was certainly not a time to celebrate.
On the sales front, he says consumers have the ability to buy, but not the inclination. Some retail segments have seen good growth in the last two months due to the wedding season, but overall for the retail sector sales are not like they used to be a few years ago.
Also, jewellery retailers will be hit by the recent RBI norms on gold import, he said.
"There will be an impact on the gold industry. People will have to change their financial models. It is too early to say what impact it will have on our company, but all financial models of all companies will change," Bhat told reporters on the sidelines of the CII Retail and FMCG summit in Mumbai.
Separately, speaking on CNBC-TV18, the company's CFO, said the new RBI norms will push up interest costs significantly.
Titan shares plunged for the second straight session, shedding more than than 13 percent on Wednesday to a 52-week low of Rs 201. This follows over 12 percent fall in last two sessions.
Several analysts downgraded the stock or cut target price and lowered their earnings estimates, saying there were balance sheet pressures ahead.
"Titan will resort to debt to fund the higher working capital. To factor in lower interest income and higher finance cost, we revise downwards our earnings estimates," Axis Capital said in its report. It has advised investors "sell" the stock and cut its price target to Rs 210 from Rs 243.
"RBI's recent notification implies Titan wouldn't be able to utilise the gold lease model anymore and needs to fund gold purchases at spot price. Titan would hedge the gold price. This would lead to Titan turning a net borrower (from current net cash position) and would lead to substantial increase in interest charges," JP Morgan said in its report.
Additionally, the investment bank feels increased capital requirements to fund gold purchases would weigh on returns of jewellery division, which would likely come down to 45 percent in FY14 from 90 percent in FY13.
JP Morgan still is "overweight" on the stock, but has cut its target price to Rs 265 from Rs 305.
Titan's jewellery division reported revenue of Rs 8,108 crore in FY13, while PBIT (profit before interest, taxes) was at Rs 891 crore.
"We believe FY14 and FY15 earnings will be hit by at least 10-12 percent as Titan adjusts its business model to incorporate this change," IDFC Securities said, cutting its target price by 17 percent to Rs 250.
Titan shares finally ended at Rs 204.55, down about 14 percent. Nachiket Kelkar
nachiket.kelkar@network18online.com