With the RBI on Friday easing restrictions on gold imports by scrapping the controversial 80:20 scheme, R S Subramaniam, CFO, Titan in an interview to CNBC-TV18 spoke about the benefits to the industry and his company per se.
He says the scrapping of export rule is very positive for the industry and would now reduce the arbitrage opportunity for smugglers.
"The premium is based on the scarcity and the demand-supply situation gap. The premium that was averaging around USD 75-100 per ounce over the last one year would come down to USD 3-4 per ounce level, so that is one big advantage with the removal of the curbs, " he adds.
Moreover, now with the consumer requiring to pay less in terms of premium will look at purchasing more gold jewellery, which in turn would benefit both. "It has been decided by the Government of India to withdraw the 20:80 scheme and restrictions placed on import of gold. Accordingly, all instructions issued about the scheme from time to time...stand withdrawn with immediate effect," the RBI said in a notification.
Below is the transcript of S Subramaniam's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: Tell us the spin for your company. You all have got used to the import control rule. Now that it is not there is it going to make a difference?A: It’s great news. A good gift on Friday evening from the Reserve Bank of India (RBI) and the government of course. Basically we did not have any problem in procuring gold during the period but the impact was seen on the high premium over the last one year or so, which touched USD 100-150 per ounce. However, it did cool off significantly in the last two-three months and now with the 80:20 removed, the premium would come back to normal USD 3-4 per ounce level, so that is a good thing which means the arbitrage opportunity for smugglers etc would come down significantly and that is good news. Smuggling, hopefully with this should come off entirely, there maybe 10 percent customs duty but we would hopefully see more people complying with it rather than smuggle because that was an issue that we had and therefore there is a differential rate in the gold rates in the market at times. So that would now disappear. So it’s a level playing filed, its good, cost of funding should come down because with this gold only should be back entirely.Latha: You said two specific things – (1) premium for gold falls to USD 3; falls from what to USD 3 and (2) cost of funding. On each how much would the impact be, how much would your margins improve? If you can give us the quantity A: The premium was based on the scarcity. The demand-supply situation gap, so as I said it was averaging around USD 75-100 per ounce over the last one year. It had touched a peak of USD 150 per ounce and so on. Having said that in the last two-three months the supply situation is better, some relaxation has happened in the import curbs and therefore it had come down to about USD 10-15 per ounce levels – that would come down to USD 3 per ounce level, so that is one big advantage with the removal of the curbs. However, we did not have much of an impact on that because we all passed on this to the consumer. It is good that the consumer now will have to play less in terms of premium, so that’s a positive from consumer perspective and therefore for us as well because one assumes that if the rates are more attractive then consumers will buy more gold, more jewellery. So that’s one expectation. The second is cost of funding. Without gold on lease, which was there for about six-eight months, we had to borrow at the local banking system or whatever else and of course we did get a lot back in terms of premium when we hedged ourselves internationally, so it did bring our cost down to around 3 percent level. Therefore, with gold on lease expected to be back now in full swing, we would be at the same level. However my balance sheet will be significantly different because there would be no debt now. It’s a natural hedge; it’s easier and much better. Sonia: How much do you think the return on capital employed (RoCE) in the jewellery business could improve to now?A: It would go back to its old levels. There was a time it touched 100 percent, I am not saying we will go back to that but 60-70 percent yes; it will go to that level.Sonia: What about an improvement in your operating cash flows, in your free cash flows, any kind of indication on how this move maybe not now but in the last three-six months?A: It would take some time because going forward all the gold that we buy could be on lease, we still have some which we have paid in cash so that will come off. If 100 percent of gold is going to be on lease and you get six months credit and stock turn is normally 2.2, which means we have five month holding, so we could actually be ending up with one month surplus cash which is good news. So balance sheet looks far better.
Latha: What about profit and loss (P&L), if you can tell us EBITDA margin in basis points?A: The big difference here would be that when we had premium in the market, we unfortunately had to have swings in margins on a quarter to quarter basis, for example last quarter we had to get a charge of the high premium that were in the inventory, which we had procured two quarters before that and last quarter when we could not charge the consumer because the premiums had fallen. Those anomalies would come off entirely and that’s a great thing. Therefore, on margin basis I do not think there will be a significant difference overall but balance sheet will be much cleaner, hedging is much easier and so on.
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