Titan will have to revamp its financial model on gold business

Titan Industries, which is among the leading gold jewellery retailers in the organised segment through Tanishq, will have to overhaul the management of its cash flows in the context of the RBI making it pretty much clear that there will be no credit on import of gold.

Tanishq, presently operates on a 90-day cycle, from the earlier 180-day cycle, for the import of gold and has been pretty much careful to not bet on gold prices and marking the prices to the day on which the sale is done.

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"There is a certain cost attached to it on how we will have to rework the cash flows and we are working on the extent of the cost impact on us. It is indeed a negative for us," S Subramaniam, CFO, Titan Industries, told Business Standard.

However, Titan Industries is pretty much hopeful it will be able to work out a viable alternative while being fully compliant to the regulations and stressed that the operational model will not undergo a change.

The jewellery business accounts for a chunky 80 per cent of Titan's revenues of Rs 10,000 crore (Rs 100 billion), and it grew by close to 15 per cent during FY13 on a YoY basis.

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Titan, on an average, consumes around 20 tonnes of gold annually and has a licence to import around 10 tonnes of gold directly, an option which it had not been using to the full extent.

Going forward, it is understood they will rely more on this route which will enable them to save on tax and the company is hopeful that the licence will be renewed as well.

Titan Industries, in the new scheme of things, will have to rely more on bank funding and given the strong balancesheet of the company, it will not have much of a problem in securing this.

Titan has cash reserves of Rs 1,100 crore (Rs 11 billion), minimal debt and has enough unfunded facilities already with key banks which they are using sparsely.

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Going forward, Titan will have to utilise these limits more often. While the company declined to spell out the impact on the costs involved in revamping its financial model, industry analysts indicated that there will be a 11 per cent impact on Titan's EPS during FY14 and 9 per cent impact on FY15 EPS.

Vivek Veda, Consumer Research Analyst, Espirito Santo Securities, said that Titan's trade payable will reduce drastically due to upfront payment.

"The cash balance will reduce, resulting in a drop in other income and infusion of new funds for working capital will increase interest cost," Veda said.

Titan has reduced its net working capital by 12 per cent of sales in 2007 to 3 per cent of sales in 2013, thanks mainly to the introduction of gold saving schemes, where the customer pays cash upfront and buys gold after 12/18 months.

Though the company pays a high yield (12-16 per cent) on these advances, this scheme supports Titan's working capital requirements to as much as 19 per cent.