Titan in Diamond Jewelry Push to Protect Profit: Corporate India

Titan in Diamond Jewelry Push to Protect Profit
A manager measures a jewel under the eye of an assistant in a Tanishq jewelry store, a brand of jewelry produced by Titan Industries Ltd. Photographer: Santosh Verma/Bloomberg

Titan Industries Ltd., India’s largest maker of branded jewelry by market value, plans to expand sales of diamond adornments to shield profit margins as the rising cost of gold crimps demand for the precious metal.

The company will focus on premium products, including watches, as the slowest pace of economic growth in three years dents earnings from its consumer goods such as Sonata watches and fashion accessories, Managing Director Bhaskar Bhat said in an interview with Bloomberg TV India. The company is spending 2 billion rupees ($36 million) this year to increase retail space and manufacturing, he said.

“We need to address these low-growth periods, so what we are doing is pursuing profitable opportunities,” Bhat said. “It’s really the diamond jewelry sales that we are pushing. If the growth on the diamond side is higher, your margins are better and therefore profits are achieved.”

Shares of Bangalore-based Titan declined as much as 1.2 percent to 223.05 rupees in Mumbai today, and traded at 224.80 rupees as of 11:36 a.m. The shares have retreated 9.5 percent from their April 4 record as demand for jewelry in India, the world’s biggest buyer of gold, tumbled 30 percent last quarter.

Sales of diamond jewelry in India are set to rise 16 percent annually in the five years to 2015, twice as fast as the 7 percent growth predicted for adornments made of the yellow metal, according to a study by New Delhi-based consultants AM Mindpower Solutions. Prices of the gems have dropped this year.

Import Duty

Gold in Mumbai has risen 15 percent this year as the government, in a bid to curb imports and rein in a record current-account deficit, doubled the duty in March to 4 percent on coins and bars. Inbound shipments slumped 56 percent in the second quarter after touching a record 969 tons in 2011.

Policy makers may increase the levy for a third time this year, curbing demand for the metal, according to Prithviraj Kothari, president of the Bombay Bullion Association.

In contrast, internally flawless, one-carat diamonds have dropped 11 percent this year after climbing 26 percent in 2011, according to data compiled by Bloomberg.

“With the price of gold going up, buyers no longer feel that diamonds are expensive,” said Rajiv Jain, chairman of the government-backed Gem & Jewellery Export Promotion Council in Mumbai. “Diamond is more of fashion and is a security when it is more than one carat. It is a good investment.”

Bain & Co. estimates global demand for rough diamonds will climb more than 6 percent annually this decade, exceeding growth in supply.

Significant Decline

The Tata Group venture, set up in association with Tamil Nadu Industrial Development Corp. in 1984 to make watches and compete against state-owned HMT Ltd., is finding ways to boost earnings as inflation and slowing growth threaten to shrink disposable income in the $1.8 trillion economy.

Demand for coins and bars for investment slid 51 percent last quarter from a year earlier, the World Gold Council said in a report on Aug. 16.

“Certainly investment demand has come down, and we haven’t had such a significant decline in market sales,” Bhat said. “When people had extra money, they were parking it in gold, and I don’t think they are doing that anymore. The tendency is not to park significant sums.”

India’s GDP rose 5.4 percent in the first half of 2012, the smallest gain since 2009, even as consumer price inflation remained the fastest among the four biggest emerging economies of Brazil, Russia, India and China.

Jewelry accounted for 79 percent of Titan’s sales in the year ended March 31, while watches made up for about 17 percent, with the rest coming from the company’s eyewear and precision engineering businesses, according to data compiled by Bloomberg. The company controls 5 percent of India’s jewelry market, which is fragmented and dominated by family businesses, Bhat said.

Bridal Trousseau

Gold jewelry sales in India may reach $41.3 billion by 2015, compared with $9.5 billion for diamond ornaments, according to estimates by AM Mindpower Solutions. In India, gold is traditionally bought during the festival season, on auspicious days and for weddings as part of the bridal trousseau.

Sixteen of the 31 analysts who track Titan Industries, recommend buying the stock, while eight rate it a sell and seven a hold, according to data compiled by Bloomberg. The shares have risen 32 percent this year and reached 249.25 rupees on April 4, the highest closing price on record.

A weakening rupee adds to the “landed cost” of gold, making it even more expensive and reducing sales volume, said Kaustav Kakati, an analyst with Proactive Universal Group in Mumbai. He recommends holding the stock with a 12-month target price of 249 rupees.

“Since the jewelry segment is the largest contributor to the topline, that would imply that volumes would be lower,” he said. “That is one of the key reasons we are expecting a muted growth outlook for the next 18 months.”

Rupee Weakness

The Indian currency has plunged 18 percent against the dollar in the past year, making it the worst performer in Asia. A weaker rupee drives up import costs.

Net income at Titan grew 39 percent to 6 billion rupees in the 12 months to March 31. Earnings before interest, tax, depreciation and amortization, or Ebitda, a key measure of profitability, stayed at about 9.5 percent in the last two financial years, compared with as high as 13.2 percent in 2002, according to data compiled by Bloomberg.

A government approval that allows Titan to import gold directly by cutting out intermediaries and sales of more diamond jewelry will help boost the margin, said Dhvani Modi, a Mumbai-based analyst with ICICIdirect.com, who rates the stock a buy. India previously allowed only state-run banks or companies such as MMTC Ltd. to import gold directly.

Return Ratio

“The company still stands better among the entire consumption pack, considering its strong return ratios,” she said. “The company is looking at aggressively expanding its retail space. The stores will also add to the topline growth.”

Titan’s return on equity, another measure of profitability, was 48.2 as of March 31, compared with 17.3 for Gitanjali Gems Ltd., data compiled by Bloomberg show.

Titan has 847 stores in India, it said in a presentation to investors on Aug. 1, of which 134 are Tanishq stores. The maker of Tanishq jewelry and Xylys watches will raise retail space for jewelry to 600,000 square feet (55,742 square meters) this year from 500,000 square feet a year earlier, Bhat said.

“Tanishq, particularly, has awareness greater that its actual access, so providing access to all those customers who are aware of Tanishq would be the least we can do,” Bhat said.

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