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The Economic Times

Titan Industries: Further fall can make it value pick

After several years of secular growth, the earnings growth of Titan Industries will take a hit due to the recent policy changes effected by the Reserve Bank of India to curb gold imports.

The company's stock fell by 23% in two days after RBI made the policy announcement, but it later bounced back on the third day gaining 5% as industry officials reckoned that the policy is likely to reverse in a year or two once the current account deficit comes under control and the recent developments are likely to benefit Titan Industries in the long term. However, there will be near-term pressure on the stock price.

According to the new policy, jewellers will not be allowed to lease and sell gold; they will have to pay for the gold upfront. This means that companies will need more cash to invest in their inventories, increasing the working capital requirements. None of the jewellery companies have a debt-free balance sheet or strong cash generating business model like that of Titan's.

This will make it difficult for high-debt peers to sustain. Not only is Titan debt-free, it also has cash of close to Rs 1,170 crore, which will give it an edge over the other jewellers - organised as well as unorganized - in capturing and increasing its market share at a faster pace compared to the past.

But the bottom line is bound to be hit in the near-term. The impact on the company's profit before tax, or PBT, for FY14, is estimated to be in the range of Rs 250-300 crore as it will have to fund its inventory through debt and the cash it has. Its PBT in FY13 was Rs 840.5 crore, which also includes the profit from its watch and precision tool businesses.

Besides, the company will have some additional hedging costs as it will now be exposed to gold price and currency risks. After factoring in all these additional costs, analysts expect the company's profit after tax to grow by 12-14% this fiscal, assuming it will be able to gradually pass on the additional cost to customers.

Although, the upside in the company's stock over the next few months will be capped, any major correction from here could make its valuation attractive for long-term investors.
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