Next 2 quarters could be soft for Titan: CFO Subramaniam

Below is the verbatim transcript of S Subramaniam’s interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy

Sonia: Titan stock is down because despite the income going higher, the margins have actually crunched down this quarter. Tell us what took place?

A: The main reason was if you remember the revenues shot up significantly because we had to redeem the Golden Harvest Scheme prematurely because of the new regulations under the Companies Act. What that also does is that the entire discount that we give on that scheme, got bunched up in one quarter. So that along with some other discounts that we gave, contributed around Rs 59 crore in this quarter alone. So a major chunk of that was because of the Golden Harvest impact.

The other thing was that we did have an issue on inventory valuation. If you remember we talked about premiums in gold prices over the last year plus after the import curbs came in. The premiums have been ranging around USD 75-100 per ounce. We had to inventorise this unfortunately, we cannot charge it off during the period in which we buy the gold. Therefore as we are inventorising it the charge to the consumer happens at the same time as the gold prices, the premiums are high in the market which means there could be a time lag between revenue from the customer on this premium and the charge to P&L account. So what has happened is in the last quarter the premiums came down very sharply to around USD 10-15 as the supply of gold eased over the last two-three months.

Therefore while the collections from the customers was in that range, USD 10-15 range, the charge was in the USD 75-80 range to the P&L. So this is a mismatch. We don’t expect this to recur. At this point in time the premiums are generally between USD 15 around that range. So if it continues it should not recur. So the revenues came in a quarter or two earlier and the charge came in a little later so it is more of an accounting issue. So we are not concerned about that. Otherwise the margin has been quite good. The studded ratio has been very good, 35 percent on a very high base. The overall growth in studded jewellery was 48 percent and that is amazing. So margin wise we are pretty much intact, these are quarterly aberrations.

Sonia: By the end of FY15 what kind of margin do you think Titan can close the year with?

A: It is going to be difficult to say that however what I can see and may be predict is that in the next two quarters margins should be better. There are two reasons, one is the international hedging impact or the benefits of that would come in over the next two quarters starting from November onwards which has not come in the previous quarter as well. The other thing would be that without the Golden Harvest Scheme the discounts will be lower on sales and therefore margins should be slightly higher.

So one is hoping that the margins would be much better than what we have seen in Q2.

Latha: The Indian passion for gold became a craze over the last five years because of international reasons. Now we will normalise, will be passionate but not as crazy as it was in the last few years. What is the sedate volume growth, the sustainable volume growth in jewellery that you are looking at FY15 as well but more importantly FY16?

A: It is very difficult to predict because it depends on gold prices. Gold prices have been soft in the current year and therefore we have seen significant volume gains. The other reason is last year if you remember we had stopped selling gold coins, in this year we started that again. So therefore volume gains have been good. So it is a little difficult to predict volume gains but what we are seeing is that people do tend to work on a budget and if it gets them more grammage they tend to buy it. Particularly with the wedding season coming in now, one is hoping that grammage growth will be decent as gold prices have been quite soft in the last three-four months at least.

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Sonia: What about the watches segment, what kind of trend are you noticing over there? I understand it has been a 9 percent volume growth in this particular quarter?

A: Yes we had a good quarter for watches. Of course there was also the sales promotion we had during the quarter and a volume growth of 9 percent was quite good under the circumstances.

But what we have been also saying is that the Diwali season has not been great, it has been very tepid. While we expected it to be much better than last year’s Diwali, we are quite disappointed there that Diwali has been quite lukewarm. So there is some concern that the discretionary spend is not really back and it stands out that many other companies also are reporting very similar trends. So we are not really back into high spending and it is going to be at least a few quarters away.

Latha: What are you expecting by way of volume growth both for watches and jewellery? We have an economy turning, we have probably discretionary spending returning at the same time the passion for gold is declining. So you should be working with some kind of volume growth in mind?

A: No we don’t work with that, we work more on revenue and we still think we should grow on a revenue basis. The only impact that we are going to see over the next two quarters is that we don’t have the Golden Harvest scheme, revenues coming in from that and therefore to that extent how much are we actually going to do over last year is going to be a big question mark. Don’t forget Golden Harvest used to give us 30 percent of our revenues. So you are going to have revenue for the next two quarters without this major scheme and therefore we are going to face problems for the next two quarters as far as gold is concerned.

If you were to look at it on without Golden Harvest scheme basis for example if you take the Dussehra to Diwali season I think we have done very well. Growth has been almost 40 percent without coins and without Golden Harvest. So it has been good but on reality terms it is not going to be great because 30 percent of a base of last year it is going to be very tough. So even if we grow at 30 percent we are just going to be catching up with last year. So next two quarters for us will be tough in that respect because of the Golden Harvest not being there.

On watches it is going to be soft, I don’t think it is going to be very bullish, we are not very bullish because the economy really hasn’t turned.

Sonia: On watches the EBIT percentage has been very high at 13 percent. Will this also slowdown given that you are expecting the demand for watches to slowdown as well and second if you could quality how much will the margins benefit once the international gold hedging kicks in?

A: As far as watches is concerned 13 percent yes is a little high this quarter because we had a good quarter on the top line and if the top line growth is going to soften then I think we would be between 11-12 percent margin. So that is what we would possibly do in the next two quarters.

As far as jewellery is concerned yes the benefits of international hedging will kick in from sometime in November for us and that would be a fairly good percentage. Up to 1 percent you should look at on an EBIT basis.

Sonia: In your studded jewellery segment your share has come down a tad bit. How are the promotions doing?

A: We did a 35 percent studded share in a quarter where the sales were 65 percent up. So the growth in studded was actually very high at 48 percent. So we did very well on studded. The percentage is low only because the base was very high. The activation did go very well and the good thing was even when we did the Golden Harvest redemption as we had to force customers to buy it, almost all of them opted to buy jewellery and a lot of them opted to buy studded jewellery. So that was a very good sign.