Titan is the biggest bet in Rakesh Jhunjhunwala’s portfolio

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Ravi
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Titan is the biggest bet in Rakesh Jhunjhunwala’s portfolio

Post by Ravi » Thu May 21, 2020 12:35 pm

In Rakesh Jhunjhunwala's portfolio Titan is the biggest bet.

Global crisis or uncertainty pushes up gold prices which in turn benefits Titan.

For every 100 basis points rise in gold prices, the company used to see a surge in operating profits by at least 2 percentage points

However, this time, even though gold price has jumped over 27 per cent to Rs 47,000 now from the December rate of Rs 37,000 per 10 gm domestic, the shares of Titan have fallen 30 per cent.

Many brokerages have cut their ratings for the stock to 'sell', saying it is not Covid 19-proof. Others who see long-term potential advise investors to wait for better entry points.

The reason for the fall in the stock price is because a sudden jump in gold price is detrimental for jewellery volumes, as consumers delay purchases, waiting for a correction.

However, Titan's margin are improved as the company moved to a structure of levying making charges as percentage of gold prices since FY2009. Titan used to have a fixed making charge structure earlier.

Titan's jewellery brand Tanishq operates with three store formats – L1, L2 and L3. In case of L1, inventory and store operations are both controlled by Titan. In L2, inventory is Titan’s, store operations are managed by a franchisee. Lastly, in L3 both inventory and store operations are managed by franchisees. The store network is almost equally divided among these three formats.

ICICI Securities has issued a research report on Titan stating that given the inflation in gold price and the fact that L3 franchisees do not hedge their inventories (which is directly bought from Titan), they are likely to be sitting on huge inventory gains, thereby reducing any risk of store closures.

Prabhudas Lilladher has also issued a research report on Titan stating that Tanishq sales will suffer in HF1Y21 due to a wipeout of the FY21 wedding season. This is also due to the fact that the year will have 54 per cent fewer wedding dates.

According to Phillip Capital, an increased contribution from the margin-dilutive Gold Exchange Scheme contributed 42 per cent of Titan's Q3FY20 sales.

It stated that under this, most customers are likely to procure gold bars/coins available in physical markets at a 8-10 per cent discount to Tanishq’s rates, and exchange these for making jewellery, depriving Titan of the profit earned on gold spreads.

Phillip Capital has recommended a ‘sell’ of Titan. It stated that family-run jewellers are in a more comfortable position now.

It also pointed out that many of the highly profitable and large-format L1 stores of Titan are located in malls and high-streets; so, adherence to social distancing norms will make matters worse for Tanishq. Postponement/cancellation of weddings, festival celebrations and social gatherings may also weigh, it said.

Channel checks suggest significant pressure on demand and likely rush to offload jewellery post lockdown and need to improve designing in a post compulsory hallmarking scenario as purity plank might not work to the advantage of Tanishq.
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