While the near-term demand environment remains subdued, we believe Titan would be a key beneficiary of any improvement in consumer sentiment in 2H, given its dominant positioning in the leading lifestyle categories of jewellery and watches. Our EPS estimates for FY15/16 are raised by 3%/5%.
Titans ability to hedge gold in the overseas markets would considerably address concerns about hedging risk. The forward premium on gold and currency would help reduce the cost of financing to 4-4.5%, which is largely similar to the cost incurred under gold leasing. We now build in approximately 100-bps improvement in jewellery margins in FY15.
Import restrictions on gold were imposed given concerns over CAD. Now that the CAD and Indian currency have stabilised, there is expectation that the need to continue import restrictions is not as strong. An import duty reduction or scaleback of the 80:20 rule would result in lower local prices, aiding demand and reducing the consumer shift toward unorganised players.
With expectations of an economic growth revival in 2H, we believe Titan stands to gain owing to its dominant positioning in the discretionary categories of jewellery and watches. Unlike some peers, Titan is not facing capital constraints and remains committed to expanding its store presence in jewellery with a focus on high-margin diamond sales.