Recent RBI circular to materially impact Jewelry business
Cutting estimates; maintain Buy with a reduced target price
Titan Industries (TTAN) recently issued a notification/press release to stock exchanges
and later held a Conference Call to discuss the implications of the RBI circular dated 4
June 2013. Key takeaways:
The management highlighted the unprecedented nature of changes for the Jewelry
business: (a) All gold imports for domestic consumption only on 100% cash margin
basis, (b) No credit allowed for import of gold for domestic use, including gold imports
under lease route, (c) Implementation of these rules in letter and spirit, precluding
any alternate credit mechanism. It refrained from giving any details about the impact
in terms of numbers.
Key implications for TTAN: (a) Termination of gold-on-lease method and shift towards
cash-and-carry model, with upfront cash payment for procurement, (b) Change in
hedging mechanism - earlier gold on lease used to work as a natural hedge; now TTAN
will explore various means including forwards on domestic exchanges, (c) Higher interest
costs - earlier TTAN incurred 4-5% interest cost on gold-on-lease method; now it may
need to pay existing market borrowing rates, (d) Higher working capital - payable days
will reduce post the shift to cash-and-carry model. Given that its free cash generation
would be impacted, TTAN is reviewing its expansion plans. The management believes
it will turn net debt in 2HFY14 (ended FY13 with net cash of INR11.4b).
Two silver linings: (a) Availability of direct import route (this is currently allowed for 10
tonnes of import, but the management clarified that this license can be renewed),
which will help save ~100bp of margin (will no longer pay VAT), (b) Continuation of
Golden Harvest Scheme - RBI has not made any adverse decision yet on this scheme
and the management mentioned that it will use the advances taken under this scheme
(currently ~INR10b) for inventory funding.
Cutting estimates 10-13%: We have revised our estimates to incorporate the changes
in the Jewelry business model. We now model higher credit costs, lower expansion,
lower payable days and higher working capital. Consequently, our earnings estimates
for FY14 and FY15 are cut 10-13%. While the change in business model is indeed
material, given the industry wide impact of these measures, we expect a partial pass
through of costs. However, conservatively we do not model for the same.
It had appeared to us that regulatory actions would recede. However, the severity of
the current account deficit and currency situation has warranted fresh regulatory
measures. While we do not rule out further measures to restrict gold consumption ,
our conviction on the long-term prospects for Branded Jewelry remains undiminished.
Changes in gold inventory funding will impact financial metrics, but operational metrics
remain unperturbed, as far as demand is concerned. In other words, nothing changes
as far as TTAN's jewelry consumer is concerned.
In view of the material changes in the Jewelry business model - TTAN's valuation
multiples need to correct to reflect the lower RoCE of the business.
We retain our Buy rating, with a revised target price of INR240 (23x FY15E EPS, 15%
discount to three-year average v/s our earlier ascribed P/E multiple of 26x).
Implementation of PMLA, with a lower threshold of INR50k, and changes in gold deposit
scheme remain the key risk factors.
��
-->
Cutting estimates; maintain Buy with a reduced target price
Titan Industries (TTAN) recently issued a notification/press release to stock exchanges
and later held a Conference Call to discuss the implications of the RBI circular dated 4
June 2013. Key takeaways:
The management highlighted the unprecedented nature of changes for the Jewelry
business: (a) All gold imports for domestic consumption only on 100% cash margin
basis, (b) No credit allowed for import of gold for domestic use, including gold imports
under lease route, (c) Implementation of these rules in letter and spirit, precluding
any alternate credit mechanism. It refrained from giving any details about the impact
in terms of numbers.
Key implications for TTAN: (a) Termination of gold-on-lease method and shift towards
cash-and-carry model, with upfront cash payment for procurement, (b) Change in
hedging mechanism - earlier gold on lease used to work as a natural hedge; now TTAN
will explore various means including forwards on domestic exchanges, (c) Higher interest
costs - earlier TTAN incurred 4-5% interest cost on gold-on-lease method; now it may
need to pay existing market borrowing rates, (d) Higher working capital - payable days
will reduce post the shift to cash-and-carry model. Given that its free cash generation
would be impacted, TTAN is reviewing its expansion plans. The management believes
it will turn net debt in 2HFY14 (ended FY13 with net cash of INR11.4b).
Two silver linings: (a) Availability of direct import route (this is currently allowed for 10
tonnes of import, but the management clarified that this license can be renewed),
which will help save ~100bp of margin (will no longer pay VAT), (b) Continuation of
Golden Harvest Scheme - RBI has not made any adverse decision yet on this scheme
and the management mentioned that it will use the advances taken under this scheme
(currently ~INR10b) for inventory funding.
Cutting estimates 10-13%: We have revised our estimates to incorporate the changes
in the Jewelry business model. We now model higher credit costs, lower expansion,
lower payable days and higher working capital. Consequently, our earnings estimates
for FY14 and FY15 are cut 10-13%. While the change in business model is indeed
material, given the industry wide impact of these measures, we expect a partial pass
through of costs. However, conservatively we do not model for the same.
It had appeared to us that regulatory actions would recede. However, the severity of
the current account deficit and currency situation has warranted fresh regulatory
measures. While we do not rule out further measures to restrict gold consumption ,
our conviction on the long-term prospects for Branded Jewelry remains undiminished.
Changes in gold inventory funding will impact financial metrics, but operational metrics
remain unperturbed, as far as demand is concerned. In other words, nothing changes
as far as TTAN's jewelry consumer is concerned.
In view of the material changes in the Jewelry business model - TTAN's valuation
multiples need to correct to reflect the lower RoCE of the business.
We retain our Buy rating, with a revised target price of INR240 (23x FY15E EPS, 15%
discount to three-year average v/s our earlier ascribed P/E multiple of 26x).
Implementation of PMLA, with a lower threshold of INR50k, and changes in gold deposit
scheme remain the key risk factors.
No comments:
Post a Comment