Investors with a long-term view can buy the stock of Titan Company — the leader in the organised market for gold jewellery.
The fall in consumer price inflation, a more stable regulatory environment for the sector and consumers shifting to branded jewellery should help the company.
The stock has corrected 24 per cent from its high in February.
At the current price of ₹341, the stock trades at about 33 times its estimated earnings for 2015-16. In the last three years, the stock has traded in the PE band of 25-43 times.
Titan derives 75-80 per cent of its revenues from jewellery business and the rest largely from watches and eyewear.
In 2014-15, the company’s sales grew 9 per cent and profits, 11 per cent.
However, in the June quarter of this fiscal, performance was dented by the jewellery business which saw both volumes and prices decline.
Titan’s sales and profits in the quarter dropped 6 per cent and 14.8 per cent, respectively. Jewellery volumes suffered due to the closing of the company’s ‘golden harvest scheme’, which brought assured sales.
Operating margins overall dropped to 9.6 per cent, down 1.4 percentage points, because of the company’s conscious move to lower making charges and capture market share. The company reported a 22 per cent jump in new customers in the quarter.
In the coming quarters, Titan should see jewellery sales improve as contribution from its new gold savings scheme will kick in and it continues to expand reach. Gold consumption demand in India is price inelastic.
About 60 per cent of the demand for gold jewellery is wedding related, when price is not a factor in purchase decision. The current correction in gold prices is also not a worry for Titan. Unlike other jewellers who take a hit with falling gold prices due to the erosion in the value of their inventory, Titan — the largest branded retail player in the jewellery market — buys most of its gold through lease from banks and hedges the rest of its inventory.
Under the ‘gold-on-lease’ model, jewellers get a credit period for the gold they buy and repay banks at the rate they sell to end-consumers, so, price risk is zero.