Policy changes in the recent Union Budget may have a negative structural impact on the organised jewellery industry in India. We believe markets may be underestimating the impact on the group. We reduce our industry view to ?in-line?. For Titan Industries, our price target is now R198 and its rating has been lowered from ?overweight? to ?underweight?.
Our long-held positive view on Titan was based on the company?s ability to deliver strong volume growth and mix-driven margin expansion ahead of market estimates. However, after the Budget, we have a lower conviction on this occurring. A combination of recent stock outperformance, reduced visibility for earnings growth and near-peak valuations will likely drive the stock lower.
Among the measures in the Budget to temper household gold consumption, we are most focused on the proposal directing jewellers to collect 1% of the sale consideration as tax collected at source (TCS) for cash purchases higher than R2 lakh (we estimate cash purchases account for over 50% of Tanishq?s sales). Also, buyers will be required to quote their PAN for these purchases. This proposal could mean consumers will shift to the unorganised trade (household jewellers), a significant portion of which may not be subject to the tax.
While it may be difficult to crystallise the impact of the Budget proposals on Titan, we lower our earnings estimates. Given emerging uncertainty on the business model, we shift to a probability-weighted PT (25% weight to bear and to 5% bull case), implying 17% downside.