Jewellery major Titan Ltd expects gold lease rates to go up in the coming quarters amid concerns over possible U.S. tariffs on gold imports and a brewing supply tightness stemming from shifting market dynamics and reduced availability of physical gold.
A "gold lease" in India refers to a financial arrangement where an individual or investor "rents out" their gold (usually held digitally) to a jeweler or manufacturer, allowing them to use the gold as working capital in exchange for a fixed interest payment, typically paid in the form of additional gold grams, on top of the gold's market price appreciation.
Rising gold lease rates could squeeze margins unless the jewellery makeing companies adjust pricing strategies or find alternative sourcing methods.
" We're seeing, a phenomenon of the past one month, a slight increase in the gold on lease rates indicated by the banks. But, again there is also a supply situation that they are also trying to, address. So we need to see therefore over the next few months how the supply situation of gold plays out and in that context how the rates stabilise. But the initial indications are that the gold on lease rates could go up. It's just that we need to wait for a month or two to understand how the supply and therefore the pricing will play out," said Vijay Govindarajan, Associate Vice President - Finance, Titan.
Shares of Titan Company took a three percent tumble in the early session on February 5, as the jewellery major reported a miss on estimates for the quarter ended December as the impact from the cut in customs duty was felt sharply.
Gold prices hit a record high on Wednesday, bolstered by fears of a new trade war between the United States and China after Beijing slapped tariffs on U.S. imports in a response to new U.S. duties on Chinese goods. If the U.S. imposes tariffs on gold imports, it can disrupt global supply chains, leading to price volatility. Indian banks, sensing higher risks in the gold market, might raise interest rates on gold loans to protect themselves from potential losses.
While U.S. President Donald Trump hasn't explicitly included precious metals in his tariff plans, the mere risk has been sufficient to drive increased gold deliveries to New York, as parts of the market moved to hedge their positions in anticipation of potential impacts. "Gold moved from London market to COMEX ((a futures and commodities exchange in the U.S.)) because of anticipated tariffs.. suddenly now there was gold shortage in the market last one week and gold metal loan interest rates are also fluid. Banks themselves don't know what to do," Govindarajan added.
London hosts the world’s largest over-the-counter gold trading hub, where transactions occur directly between market participants instead of through an exchange.
"We hope that we are able to sustain some kind of growth rates that we have seen between, cumulatively between all the quarters put together or at least quarter two plus quarter three. But, slightly difficult to predict. But long, longer term we are more confident," said managing director C K Venkataraman.
The Tata group commpany reported a marginal decline in third quarter profit at Rs 1,047 crore on February 4, as a cut in customs duty on gold imports led to inventory losses, impacting margins.
Sales from the domestic jewellery business grew 25 per cent, with sales to retailers or distributors (secondary sales) rising by about 28% year-over-year, largely due to increased consumer spending during festivals and higher wedding related pruchases.
However, brokerages reiterated their optimism on the consumer discretionary player. Macquarie and Goldman Sachs both reaffirmed their 'outperform' and 'buy' ratings, as jewellery margins were ahead of expectations.
Further, the acceleration in Titan's studded jewellery segment eases rampant concerns on the impact of lab-grown diamonds. As a result, brokerages believe that the strong jewelry revenue growth momentum likely to sustain.
To this extent, Titan Company's management sounded out their performance so far for Q4. "We started very well in the few weeks of January. However, after many developments in the international space, especially in US, has created a lot of excitement on gold price and the dollar. As a result, I think there's a lot of noise and it is very difficult to predict how Q4 will go," said Venkatraman.
He added that while the company hopes to sustain the same kind of growth rates seen in the quarters gone by, Titan is more confident about the long-term prospects.
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