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Jewellery stocks dazzle as RBI eases gold import norms

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Hammered by a slew of government and RBI measures to trim gold consumption as a tool to curb fiscal deficit, the stocks of jewellery industry have got a fresh lease of life with the RBI easing the gold import norms.

Shares of two jewellery retailers hit the upper circuit and were frozen on the NSE, indicating the investor enthusiasm the RBI order had generated towards these counters after many of which were badly mauled following steps to curb gold consumption.

Madurai-based Thangamayil Jewellery Ltd rallied by 19.98 per cent or Rs 26.20 to Rs 157.35 and the shares of Mumbai-based Tribhovandas Bhimji Zaveri were up by 20 per cent or Rs 32.05 to Rs192.30. Both stocks were frozen after hitting the upper circuit on the NSE.

The other jewellery stocks to gain significantly were PC Jeweller, Titan Company, Gitanjali Gems and Rajesh Exports. Titan was trading at Rs 334.85, a gain of Rs 24.40, PC Jeweller was up by Rs 18.45 to Rs 121.90, Rajesh Exports gained Rs 16.55 to trade at Rs 144.95 and Gitanjali Gems was up by Rs 11.25 to Rs 102.80.

Trading volume

All these counters witnessed a huge trading volume led by Gitanjali that recorded a trading volume of 65.47 lakh shares and Titan that witnessed a volume of 50.98 lakh shares.

In its comments on impact of the RBI announcement, Motilal Oswal Securities Ltd (MOSL), Mumbai, said that the apex bank has permitted the nominated banks to offer gold metal loans (GML) to domestic jewellery manufacturers “out of the eligible domestic import quota of 80 per cent to the extent of GML outstanding in their books as on March 31, 2013”.

‘Return of gold-on-lease scheme’

MOSL said from its interactions with the management of Titan, TBZ and PC Jeweller, it learnt that in effect the RBI order meant the “return of gold-on-lease scheme”.

The RBI, with a view to clamp down on gold imports, had “banned this low-cost inventory funding with natural hedge mechanism” in August last year.

The RBI had taken other steps like banning the import of gold coins and introduction of 80:20 gold import scheme as a concerted effort to curb gold import. This had lead to the jewellery retailers like Titan and others making upfront payment for the purchase of gold without recourse to the benefit of credit facility.

MOSL said this caused stress on the balance sheets of companies and pointed out that Titan’s net cash in FY’13 balance sheet turned net debt as at the end of 2013-2014 FY.

Hedging mechanism

The industry had also to resort to separate hedging mechanisms that came at a stiff cost. Titan had got the nod recently for international hedging since the domestic contracts were “not sufficiently liquid”. After approval, its P&L had shifted to gold-on-lease regime with regard to costs (as it earned premium on currency forwards), but it still had to pay upfront for procurement of gold.

While noting that the 80:20 scheme of gold imports and regulatory uncertainty around customer advances schemes still continued, Motilal Oswal said that from Titan’s view, the ban on gold on lease “was the harshest step” and MOSL believed that lifting the ban was “a major positive” since it permitted Titan to manage its jewellery business “efficiently without increasing debt requirements”.

While from a P&L perspective, it would not bring about any major change, from a working capital and balance sheet perspective, it would bring “material relief”. It would also obviate the need for any separate hedging through international exchanges “as gold-on-lease itself is a natural hedging tool”, the MOSL report said.

Upgrading Titan stock to buy, MOSL report pointed out that its “cautious stance” on Titan was because of the “harsh regulatory regime” along with “subdued discretionary demand” with the key factor being the disallowance of gold on lease.

But as the ban has been removed, modest sequential recovery in same store performance and no change in expansion plans, Motilal Oswal felt that “major concerns are behind” for Titan. While waiting for greater clarity from Titan management on operational aspects, MOSL upgraded the stock to a “buy from ‘neutral” rating, with a revised target price of Rs 360 (30x FY16E EPS). But a key risk was a sharp correction in gold price, the report said.

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