Gold prices are trending down again. After recovering from mid April
fall, gold prices have started to trend down again and are now closing the
lows seen during April. This has raised fresh investor concerns regarding
consumer demand in falling gold price environment. There is a risk that
consumers may choose to postpone their purchases hoping for a better
purchase price in future or may not find gold as an attractive investment tool
any longer. So far though, volume offtake seems to have held up well for
jewelery retailers. In the past, periods of falling gold prices have triggered
sharp uptick in volumes and jewelery retailers have benefited in terms of
overall increase in sales. Data over the last decade (refer Fig 4 inside)
suggests that a substantial correction in gold prices has typically led to an
increase in gold imports. Also, there seems to be baseline support to India
gold import volume at average 850-900 tonnes as seen over past six years.
Please refer to Bharat Iyer’s note India’s Gold Obsession - Not Easy to
Wish Away for more color.
Gold price sensitivity for Titan's earnings. We have built in various
scenarios for gold price and volume change for gold jewellery for Titan. We
keep diamond jewellery/watch/eyewear sales assumptions constant.
Assuming gold price decline from -5% to -15% for FY14 and volume
change varying between +10% and +30%, we estimate Titan's FY14E EPS
would be affected by +2 to -8%. Please refer to Table 1 inside for details.
Falling gold price is more detrimental to unorganised players that
largely have unhedged exposure to gold prices. Organised players like Titan
follow gold on lease model and are hedged on gold prices to a large extent.
Making charges for Titan are also variable (linked to gold prices) vs fixed
charges for unorganised and some regional players. In the scenario of
falling gold prices, the gap between making charges for Titan and other
players narrows. The recent RBI notification restricting gold imports via
consignment route would also affect unorganised players more adversely
than organised players that source gold on lease basis as per our discussions
with various industry players.
Margin impact. As lower gold prices trigger higher purchases of gold
jewellery vs diamond jewellery (which is witnessing slower offtake in recent
months) we expect margins to be affected adversely on account of
unfavorable product mix. However absolute EBIT growth for jewellery may
still be healthy owing to strong sales growth
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fall, gold prices have started to trend down again and are now closing the
lows seen during April. This has raised fresh investor concerns regarding
consumer demand in falling gold price environment. There is a risk that
consumers may choose to postpone their purchases hoping for a better
purchase price in future or may not find gold as an attractive investment tool
any longer. So far though, volume offtake seems to have held up well for
jewelery retailers. In the past, periods of falling gold prices have triggered
sharp uptick in volumes and jewelery retailers have benefited in terms of
overall increase in sales. Data over the last decade (refer Fig 4 inside)
suggests that a substantial correction in gold prices has typically led to an
increase in gold imports. Also, there seems to be baseline support to India
gold import volume at average 850-900 tonnes as seen over past six years.
Please refer to Bharat Iyer’s note India’s Gold Obsession - Not Easy to
Wish Away for more color.
Gold price sensitivity for Titan's earnings. We have built in various
scenarios for gold price and volume change for gold jewellery for Titan. We
keep diamond jewellery/watch/eyewear sales assumptions constant.
Assuming gold price decline from -5% to -15% for FY14 and volume
change varying between +10% and +30%, we estimate Titan's FY14E EPS
would be affected by +2 to -8%. Please refer to Table 1 inside for details.
Falling gold price is more detrimental to unorganised players that
largely have unhedged exposure to gold prices. Organised players like Titan
follow gold on lease model and are hedged on gold prices to a large extent.
Making charges for Titan are also variable (linked to gold prices) vs fixed
charges for unorganised and some regional players. In the scenario of
falling gold prices, the gap between making charges for Titan and other
players narrows. The recent RBI notification restricting gold imports via
consignment route would also affect unorganised players more adversely
than organised players that source gold on lease basis as per our discussions
with various industry players.
Margin impact. As lower gold prices trigger higher purchases of gold
jewellery vs diamond jewellery (which is witnessing slower offtake in recent
months) we expect margins to be affected adversely on account of
unfavorable product mix. However absolute EBIT growth for jewellery may
still be healthy owing to strong sales growth
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