Gold leasing norms could hit Titan, says Citi

The shares of Titan Industries declined 2.1 per cent to Rs 279.80 on Friday, after Citi warned that the Reserve Bank of India's recent gold leasing norms could adversely impact the company's cash flows and return ratios.

RBI capped the gold lease period at 90 days under the direct import route, for which Titan got approval earlier this financial year, the investment bank said. The lease period for domestic gold procurement, even through state-owned MMTC, has been capped at 90 days.

"The move could imply a rise in working capital intensity and/or administrative burden," said Citi analysts Aditya Mathur and Jamshed Dadabhoy, in a note to clients.

"Typically, Titan enters 180-day leases for gold procurement, which in our view was a key positive of its business model, given that inventory turns on gold jewellery are on average estimated to be 3x (times), i.e., around 120 days," they said, while reiterating their sell rating on the stock.

The shares of Titan, where billionaire investor Rakesh Jhunjhunwala and his wife, Rekha, together own almost 10 per cent, have gained almost 56 per cent so far in 2012.

Citi, however, raised its price target for the stock to Rs 275 from the earlier Rs 230.

"The management has made a representation to the authorities, highlighting that the gold procured is for domestic consumption and there is no misuse likely. While it awaits clarity, we think implementation would hurt overall profitability," the Citi analysts said.

"Besides, the operational/administrative requirements might increase, as the company would continue with its hedging strategies to protect margins against the gold price variations."

Broking firm Batliwala & Karani, in a report on Wednesday, said the direct benefit of gold had been delayed as the company had still not resumed its gold imports due to the 90-day credit period for imports as against the 180-day gold lease period.

"The company is discussing this with the authorities and is positive of a positive outcome," said B&K's analyst, Ashit Desai, in a client note, while maintaining its buy rating with a price target of Rs 330.

Citi's new price target values the stock at 27 times the March 2014 estimated earnings per share. The previous price target valued it at 25 times September 2013 estimated earnings.

"The target multiple is perhaps a little more than appropriate, given the underlying consumer sentiment and potential balance sheet risks on account of the regulatory changes," the Citi analysts said.