Shares of Titan Industries rose by nearly eight per cent during the day's trade on the exchanges on Monday. This was on the back of the Government's decision to allow the company to import gold directly.
The stock closed at Rs 243, up 6.17 per cent over the previous close on the BSE. The company had approached a unit of the Commerce Ministry seeking a license for gold imports. Currently, only public sector units and other authorised associations are allowed to import gold directly.
This is considered to be the first instance of the Government allowing a private player to import gold directly. “There is not much clarity on the branded/ unbranded part of this but it is definitely beneficial for Titan. It can result in savings of nearly one per cent, resulting in margin improvement,” said Mr Sandeep Gupta, Vice-President and Head Business Associates Equity Advisory, Motilal Oswal Financial Services.
Major contributor
Jewellery is one of the major contributors to Titan's topline. The total income of the company was 6,571 crore for 2010-2011, with gold contributing Rs 5,014 crore, according to Titan's annual report.
Gold, while meant primarily for the jewellery division, is also used in the watches segment. In both segments, operating margins slipped in the December 2011 quarter compared to the year-ago period as input costs and a depreciating rupee bit. Total input costs inched up to 77 per cent as a proportion of revenues in the quarter, compared to the 75 per cent a year ago.
Operating margins for Titan Industries are likely to show healthy improvement as the company gets cheaper access to its chief input of gold. The quick churn of inventory of around 90 days suggests that margin improvement could show up from the next quarter or two itself.
Downgrade & after
However, last week, global bank Morgan Stanley downgraded Titan Industries to ‘underweight' from ‘overweight.' “It is more of value buying than news on the import of gold. As the stock was downgraded, it fell by nearly five per cent. Now it is a good time to buy, that's the reason the stock rose,” said Mr Gaurang Shah, Assistant Vice-President, BNP Geojit Paribas.
Margin pressures in watches may well continue on higher costs of other component imports. But an improvement in the jewellery segment's margins from the current levels of nine per cent could further cement Titan's standing as among the best in terms of margins compared to listed peers.