On Friday, RBI revoked the 80:20 scheme for gold imports that restricted the supply of gold that can be imported into India. The scheme created distortion of the gold price in the market that disadvantaged organised jewellers like Titan. Since Titan was allowed to hedge its gold price internationally, its effective cost of owning the gold and managing price risk was lower than the prevailing gold leasing rate. So the incremental gain for Titan on the P&L as a result is likely to be negligible. Nonetheless, we believe that now gold inventory for Titan (which is 30% on gold on lease) will increasingly move to gold on leases and the business model will return to its original form, giving Titan a complete natural hedge on the gold price.
Since gold premiums should now become negligible, this should help Titan price its underlying gold price more competitively. With gold supply restrictions gone and no risk of premiums, we believe that retail expansion plans will get a new impetus and aid the strategic priority of Titan to double its jewellery market share in the next five years.
We upgrade Titan to overweight with a target price of R460. The regulatory easing is now almost complete with 80:20 removal, but Titan’s re-rating this year already reflects that for the most part, in our view. Now we believe the incremental catalyst will be improvement in underlying demand, which in our view has already bottomed out. With removal of 80:20, Titan will be able to shape its pricing more competitively to monetise the jewellery demand revival which is now imminently due with the correction in the gold price.