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The RBI hiked import duty on gold to 15 per cent from 10 per cent on Tuesday. An earlier mandate banning gold imports into the country on a lease basis had led to a dramatic decline in imports from $2.2 billion in July to $650 million in August but has also led to a peak in illicit gold entering the country.
This spells dual problems for Tanishq, Titan’s jewellery retailer, as it struggles to grapple not only with the new RBI gold import norms but also lower prices offered by local jewellers selling gold sourced through various other routes.
Analysts estimate an easy 10 per cent drop in Tanishq’s sequential sales volumes in the coming quarter, despite it being the crucial festive season that typically sees more consumer buying.
Titan’s jewellery division has seen a 67 per cent rise in sales volumes during the June quarter and the current quarter was expected to post higher volumes by comparison.
“With the RBI’s new rule requiring upfront cash payments for the import of gold, Titan’s working capital costs and debt will increase dramatically and the pain on the stock is not over yet,” said an analyst at an FII broking house.
“Their net-cash balance sheet will now become a net-debt one,” said another analyst.
But that presently seems like the least of the worries for the country’s largest organised jewellery retail chain as it will have to woo consumers away from local jewellers who have stocked large amounts of gold through various sources and gain a competitive edge during times when consumer demand for gold is high and the lower prices offered by their shops can lure the buyer to take a turn before the next Tanishq store.
“We spoke to a large number of people — from the MCX to local jewellers and found that bringing gold into the country through illegal routes does not seem to be an issue for retailers at all. So, except for Titan and a handful of other firms importing gold through legal means, no one else appears to have a problem,” says an analyst.
These stores procure gold at a 7 per cent to 8 per cent discount to the trading prices and can easily pass on that price difference to the consumer, while a branded jewellery retailer like Titan would like Tanishq would have to pay higher import duties, now hiked to 15 per cent, and also have other working capital costs to pass on to the consumer. This could deal a huge blow to Titan which plans to open more Tanishq stores in smaller towns in Gujarat and Bihar, among others.
“With working capital costs and debt likely to increase dramatically, the pain on the stock is not over yet. If there is a struggle for inventory, the firm must not open new stores as that will result in negative leverage on the stock,” an analyst at an FII broking house said.
Analysts are also sceptical about resumption of gold imports as the drastic decline in August numbers send worrying signals about the ability to procure gold.
However, Gautam Duggad, an analyst at Motilal Oswal Securities, said he expects imports to resume soon but it is not clear if it will bounce back to its previous highs during the festive season. “While the demand for gold has grown, all consumer verticals have shown a substantial drop in discretionary demand,” he added.
Titan has not offered any clarification on how it will procure gold for the coming quarters. The company has a direct import licence that it may choose to use it for easier access to raw material.
But, the latest RBI rules now mandate that any importer of gold will have to earmark 20 per cent of that gold for exports. Tanishq could not be reached for comment.
