We upgrade Titan Industries to ‘add’ from ‘reduce’ and value the stock at 28 times FY15e EPS, raising the target price to Rs 275, after the company received RBI's approval to hedge gold in international exchanges and $/INR in the domestic market.
We have essentially increased our margin assumption for the jewellery business to factor in the forward premia the company should be able to capture.
We have also gone more conservative on volume growth assumptions, reflected in reduction in our revenue forecasts. We note that while the 7-8.5% premia on currency (on 80% of gold inventory; gold, in turn, is around 70% of jewellery sales) should yield around 400-500 bps of margin expansion, we build in only 200 bps margin expansion to factor in (a) hedging costs (rollover, desk running expenses, bank charges, etc. and (b) negative operating leverage of lower sales growth. The bottom-line is, we have built in ample conservatism in our numbers.
Titan received final RBI approval to hedge gold in the international exchanges and $/INR in the domestic market recently. We understand that the company should be able to start with the new mode of hedging in less than a month from now.
We also understand that Titan would not be able to hedge 100% of its gold inventory on international exchanges; it would be allowed to hedge only the ‘imported’ portion; essentially, it would not be allowed to hedge gold procured through exchange or buyback schemes.
Kotak Institutional Equities