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Jhunjhunwalas’ Rs 5,000 crore holding in Titan faces hit from Modi CAD control

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NEW DELHI: Rakesh Jhunjhunwala’s biggest bet has just received a ‘sell’ rating from a well-known foreign brokerage. At Friday’s closing price, the 7.09 per cent stake that the ace investor and his better half Rekha Jhunjhunwala held in this jewellery company as of June 30 was worth just over Rs 5,000 crore. Titan has been a multi-bagger, surging over 250 times ever since the Jhunjhunwalas first invested in it in 2002 (based on data available with corporate database AceEquity). But the recent rally on the counter was more of a result of P/E expansion than earnings growth.

Premium valuation is always a concern for growth stocks.

READ MOREBut this time, the company and the jewellery industry are staring at disruption.

The government is planning to come out with measures to curb import of ‘non-essential commodities’, which could also include gold.

Already, the company has missed its jewellery growth guidance for June quarter, raising a few eyebrows. The government’s plan reminds investors of 2013 when a gradual increase in customs duty on gold to 10 per cent from 2 per cent had sent jewellery stocks tumbling. Here’s a chart showing what happened to the Titan Company stock between 2013 and 2015. The rupee has been hitting new lows every day.

The domestic currency has tanked 11 per cent against the dollar this calendar and is among the worst in emerging markets. There have been wide concerns that a rise in crude oil prices would shoot up the government’s import bill and hurt current account deficit (CAD).

Gold imports are non-essential and may come up on the government’s radar.

Analysts say the situation is not as grave as in 2013, but the stock may take a beating in the short term. Data showed India imported 955.16 tonnes of gold in FY18, up 22.43 per cent over 780.14 tonnes in FY17. “Even if the government does not take specific action to curb gold imports in the near term, the overhang would still remain as actions could be staggered,” said CLSA, which has cut the Titan’s rating to ‘sell’ from ‘outperform’.

Titan’s better competitive position and gold exchange plans are safeguards, the brokerage said, but the risk is from its premium valuation.

“Despite being better placed than the previous cycle, we are worried of the impact of a potential hawkish stance on gold regulations, which could weigh on Titan’s premium valuation.

Titan missed its jewellery growth guidance in Q1 of FY19, but retained its 25 per cent guidance for FY19,” CLSA said. History suggests any curbs on gold imports works well for easing deficit.

Gold imports fell to $39 billion in 2013 and $31 billion in 2014 from $53-54 billion in 2011-12. “Imports fell below $1 billion a month for 3-4 months after the restrictions were first imposed, partly due to a hike in customs duty on gold imports.

There were only four instances in the past 90 months when India’s gold imports were less than $1 billion per month.

The run-rate for the current year stands at $33 billion (based on January-August data),” JM Financial said in a note. What happened to Titan then JM Financial noted that Titan’s front-end operations emerged unscathed from all of RBI’s flip-flops in 2013.

Growth slowed down in FY14, but it had more to do with weakening consumer sentiment than gold availability per se. Analysts noted that Titan was able to source the gold it needed and also completely hedge its price exposure – initially on MCX and then on international exchanges. “Its balance sheet, however, bloated severely due to non-availability of credit for gold imports.

ROIC fell from 73 per cent in FY13 to 30 per cent in FY14, as invested capital rose 2.5 times due to a four-times increase necessitated in working capital following the ban of gold on lease,” JM Financial said. Titan has ramped up the percentage of gold sourced through customer-exchange programme to 40-45 per cent from 15-20 per cent in 2013. “We expect Titan shares to remain volatile, and mostly weak.

We do not expect RBI or the government to create disruptions of the kind they did in 2013, which in hindsight did no material damage to Titan’s business model, but did severely impact stock performance in the interim.

Any sharp fall in stock price should be used as a buying opportunity,” said JM Financial. This brokerage said Titan’s intrinsic value would be impacted if and only if RBI’s restrictions stay on for perpetuity; a temporary restriction for a year or two would not impact the intrinsic worth of the business.




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