Restrictions on gold imports by the Reserve Bank of India would increase jewellery maker Titan Industries’ working capital requirements.
According to analysts, before the regulation, almost the entire gold inventory of Titan was purchased through the gold-on-lease scheme. The scheme provides a credit period of 180 days, automatic hedging against gold price fluctuations, and low funding cost for inventory.
Rating agency Crisil said that Titan’s debt would increase to between Rs 1,600 crore and Rs 1,800 crore.
“The regulatory change has resulted in a change in Titan’s business model. Key implications include relatively higher debt levels compared with the pre-regulation period, hedging through other modes such as futures/forward contracts, and an increase in funding cost for inventory,” Crisil said.
Religare, however, estimated an additional fund requirement of around Rs 2,500 crore in FY’14. It would stretch the company’s balance sheet with a net debt of Rs 1,450 crore in the current fiscal against its net cash of Rs 1,140 core in FY’13. “We expect Titan’s net debt/equity to increase 0.6x in FY’14,” it added.
100% cash margins
RBI had last month that all gold imports intended for domestic consumption and made either through banks, nominated agencies or directly, could only be based on 100 per cent cash margins.
The apex bank has prohibited credit from any suppliers or bullion banks for domestic use, which may impact gold imports made through non-consignment basis (like gold lease/loans).
Espirito said that during an investor call Titan management refrained from stating if the new regulations would have any financial impact immediately and mentioned that it was exploring various credit/hedging options.
Espirito’s analysis suggested Titan’s net working capital for FY’14/15 would increase from 3 per cent of sales to 22 per cent, forcing the company to raise Rs 100-crore debt in FY’14 after exhausting its cash balance.
Further, the company will have to pay finance charges on the funds raised and it will have to forfeit interest income. “However, the company will still get a 1 per cent VAT benefit under the direct import of 10 tonnes of gold”, Espirito said.
According to analysts, supply side constrains, however, will not impact demand.