Titan, PC Jewellers and Tribhovandas Bhimji Zaveri (TBZ) and many other jewellery stocks gained up to 20% on Monday, when the benchmark S&P BSE Sensex went down 0.5%. The gains followed removal of gold import curbs and the 80:20 scheme by the Reserve Bank on Friday evening.
The 80-20 scheme mandated authorised gold importers to ensure 20% of any gold consignment they imported was exported before any more import. These authorised importers typically provide gold to jewellery companies and so, were seeking export proof before providing additional gold.
The two import curbs were introduced in August 2013 and had hit jewellery companies' business in multiple ways. The premium (price difference between domestic and imported gold) rose sharply due to reduced supply, making gold sourcing an expensive and difficult task. Second, the curbs restricted these companies' ability to buy gold on lease from banks. Thus, while their margins took a beating, interest costs surged. Third, as a result, companies slowed on their expansion plans. Fourth, the companies had to resort to the more expensive methods of hedging on international commodity exchanges. Both earnings and return ratios thus came under pressure.
However, with the removal of these curbs, gold premiums have already begun correcting (to an estimated $3-4 from $10-15 an ounce; these had risen to as much as $75). The companies are thus expected to gradually see a reduction in sourcing pressures. Jewellery companies' volumes could also get a push, as they can now meet the rising demand in the ongoing wedding season.
"Titan could increase the quantum of gold-on-lease post these measures. This would be a key positive, as gold-on-lease is a low cost and effective hedging tool and bolster Titan's ability to expand without resorting to debt," analysts at Motilal Oswal Securities wrote in a recent note.
Notably, Titan had resorted to debt to fund its expansion plan after implementation of the curbs last year. From being a net cash company (Rs 83 crore) as of March 2014, Titan reported net debt of Rs 730 crore on its balance sheet as of September.
PC Jewellers' borrowings also rose, by 4.3 times to Rs 10,034 crore in FY14 over FY13. TBZ's debt increased 34.3% to Rs 563 crore in FY14 over FY13. Titan, PC Jewellers and TBZ's return on capital employed (RoCE) compressed by 2,220 basis points, 760 bps and 460 bps, to 14.9%, 26.7% and 37.2%, respectively, in FY14 versus the previous year.
However, Titan being a leading player, able to import gold directly from the international market, was relatively less impacted by the sourcing curbs as compared to its peers.
Abneesh Roy of Edelweiss Securities says, "PC Jewellers had export revenues, while Titan and TBZ had negligible exports at the time of imposition of the curbs. Thus, PC Jewellers was able to manage better on that front."
The removal of curbs is positive for all jewellery entities, as the volatile gold premium will now be minimal or zero. This will aid their quarterly numbers and improve their cash flow and margins, adds Roy.
While the three stocks rallied on Monday, they're still eight to 22% lower than their respective 52-week highs. Most analysts remain positive on the prospects of these companies and have Titan as their preferred pick, given its larger size and leadership position. Since Friday, nine analysts have issued a recommendation on the stock, says Bloomberg -- seven have a 'buy' and two a 'hold' rating. Their average target price of Rs 436 indicates a potential upside of about 12%.
