The finance minister at the beginning of the discussion on the Finance Bill, 2012, in Parliament has changed a couple of earlier decisions with respect to jewellery retail in India ? a) intends to roll back 0.3% effective excise duty on both branded and unbranded jewellery and b) proposes to increase the threshold for tax collected at source (TCS) from consumers.
The government has withdrawn the plan to levy excise on precious metals jewellery (both branded & unbranded). In the Budget, 1% excise was extended to unbranded players for 30% of the invoice value. We don?t think the withdrawal will meaningfully impact overall demand ? a 0.3% change is unlikely to change consumer buying behaviour in an environment where gold prices are higher by ~35% y-o-y, exacerbated by higher customs duty on gold imposed by the government, in January, and then again in the Budget.
The government had in the Budget proposed the collection of 1% TCS on all cash transactions over R2 lakhs with mandatory disclosure of the customer?s PAN card. It has now raised the threshold limit to R5 lakhs ? which helps jewellers, as the number of consumer transactions over R5 lakhs are substantially lower (~5% of overall). Besides supporting demand, concerns on administrative and cost burden for the jewellers? should abate. The threshold limit for TCS on cash purchase of bullion (ex-coins/articles weighing 10g or less) is retained at R2 lakhs.
Directionally, both changes aid jewellery demand and are a near-term sentiment positive for Titan and other jewellery retail players like TBZ, Thangamayil and Gitanjali Gems. We believe the impact of these on overall revenues/ earnings is likely to be modest. We maintain our Sell recommendation on Titan, premised on higher valuations (31x/25x FY13/14E P/E) and elevated margin expectations. management has been fairly cautious on jewellery volumes given higher gold prices and underlying consumer sentiment. We expect operating margins to remain under pressure given the high discounting, weaker rupee, higher input costs and upfront costs on the company?s aggressive store roll outs plans.