JPMorgan

In past two, months we had three notifications from RBI, making changes to the gold import/sourcing mechanism. There have been some flip-flops too. Gold leasing was prohibited as per the June notification, which was reversed in July, and, now, it has again been prohibited as per a new RBI circular.

As per the new regulations, Titan may not be able to utilise the gold lease model anymore and might need to make upfront payments to purchase gold. This would lead to Titan turning a net borrower and adversely impact its interest costs and ROCE for the jewellery business. Separately, RBI has also prohibited the import of gold coins/medallions. Titan has already stopped sale of gold coins over the past month. This is a low-margin segment and contributed less than 5% of jewellery profits for Titan; so, we don?t expect much impact on account of this.

Gold import duty has been further raised to 10% from 8%. This would imply higher gold prices in the local market and would be passed on to customers. This may not affect imports in a significant manner. However, the increased arbitrage versus international markets on account of high import duty will increase the risk of gold smuggling into the country.

Specific to Titan, an increase in gold import duty may benefit margins to some extent in the short term due to inventory gain on gold prices.

Clarity is awaited on issues like the ability of Titan to hedge gold price risk effectively in the new gold sourcing regime and import gold directly given the new 20/80 rule for gold imports. We reduce FY14/15E EPS by 2%/4% as we build in higher interest costs. Our June 2014 target price is revised to R265.

?Underperform? on Essar Oil

Credit Suisse

Essar Oil posted a R830-crore loss, worse than our expectation of R110 crore. GRMs were broadly in line, but the rupee volatility reflected in a R910-crore forex charge on the company?s books; Essar suggests it hedges crude exposure ?net? of product exports.

We update our model for $/INR (59 for FY14E) and Q1 forex losses. Our FY14 estimated EPS is down 47%, and target price reduces to R52 (at 6.4x FY14E Ebitda). With cash breakeven GRMs at c$8/bbl, another poor quarter could put significant pressure on ESOIL?s finances. We maintain underperform.

Essar Oil replaced a further $340 million of rupee loans with dollar-denominated debt in Q1. Management hopes to replace an incremental $200 million by October 13.

Interest charges account for over half of Essar Oil?s cash costs, and a reduction in interest rates could be a material positive. Even excluding forex losses, interest cover has deteriorated to 1.05x in Q1. We estimate the company?s net worth has eroded to R240 crore against FY13-end net debt of R22,300 crore.

Essar Oil may have to convert FCCBs to provide breathing room in near term. Throughput was up q-o-q to 5.14MMT and c.92% of the refinery slate consisted of heavy/ultra-heavy crude. Operating expenses increased to $3.3/bbl for Q1, above the FY13 average of $3.1/bbl.