05 Jul , 2022 By : Monika Singh
Government of India (GoI) has raised the basic customs duty on jewellery imports to 12.5% (from 7.5%), effective 30 June, 2022. Through this move, it intends to curtail gold imports ($6 bn in May ‘22) amid a worsening current account deficit (CAD), a factor contributing to the depreciation in rupee to record low levels.
Clearly a negative event: 1) This results in a higher gold price and may push consumers to postpone their jewellery purchases. 2) In two previous instances of custom duty hikes (August 2013, July 2019), Titan saw demand weakness for a quarter or two. 3) If a high import duty regime persists for a long time, it could result in increased smuggling and cause price distortions in the market, which is especially unfavourable for organised segment companies such as Titan.
But we think it’s unlikely to cause material damage to prospects: 1) Gold price in INR terms has stayed elevated and after a recent correction, a 5?fective increase in price is still part of normal fluctuations from a consumer point of view.
2) We expect Q1 to be solid and Q2 is a studded jewellery promotion quarter; Q3 and Q4 should benefit from a big wedding season. 3) Titan has sufficient resources, including use of recycled gold (a third of its total gold consumption) through attractive gold exchange schemes and quantity-led discounts to mitigate any impact on demand in key seasons. 4) Since custom duty paid is largely unhedged, the increase will result in one-off inventory gains, which Titan can still use to create demand. We expect c27% jewellery sales growth in FY23e, which should serve as key catalyst for stock.
We see a compelling compounding construct for Titan: 1) Titan’s share price is down 28% from its 22 March, 2022 peak amid a market sell-off. We think its valuation is quite appealing and offers attractive risk-reward. 2) Titan has structural momentum to gain market share and aims to grow jewellery revenue at a 5-year CAGR of c20%. 3) During this 5-year period, we see significant scale from three additional businesses: a) Taneira (ethnic wear) targeted at Rs 10-bn revenue (which we think is conservative), b) CaratLane, for which revenue is already close to Rs 18 bn on a run-rate basis, and still growing in excess of 50?ch year, c) significant growth in the eye care business as well. 4) Jewellery growth momentum and rise of these three businesses, in our view, will prevent any material multiple compression. Hence, we maintain our Buy rating and TP of Rs 3,000.