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Rakesh Jhunjhunwala loses biggest shield to his portfolio, as ‘planets’ turn unfavourable

Any sudden jump in gold price is detrimental for jewellery volumes, as consumers delay purchases, waiting for a correction.

, ETMarkets.com|
Last Updated: May 21, 2020, 07.21 AM IST
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ET Bureau
RAKESH JHUNJHUNWALA
Prabhudas Lilladher said 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.
NEW DELHI: Big Bull Rakesh Jhunjhunwala's portfolio is unique in the sense whenever a global crisis or uncertainty erupts, a shield automatically gets activated as uncertainty tends to push up gold prices which in turn end up the benefitting the ace investor’s biggest holding, 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

That shield is not working this time around, as the ‘planets’ seem to have turned unfavourable for the stock. From a December rate of Rs 37,000 per 10 gm domestic, gold price has jumped over 27 per cent to Rs 47,000 now. But shares of Titan have fallen 30 per cent.

This goes against a 15-year trend, which showed a high correlation of 0.8 between the stock and gold price, meaning prices of both moved in tandem.

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.

Titan is the biggest bet in Rakesh Jhunjhunwala’s Rs 4,000 crore portfolio.

Any sudden jump in gold price is detrimental for jewellery volumes, as consumers delay purchases, waiting for a correction. That said, such a development improves the company's margin 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.

Moreover, 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.

"We note 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," ICICI Securities said.

Planets unfavourable
While gold prices were enough to reduce jewellery demand, Covid 19-led disruptions has only added to the woes.

Prabhudas Lilladher said 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.

Why?

As Phillip Capital explains: “There is a deadly combo of Adik maas – a period considered inauspicious by Hindus and occurs every 32 months. It also coincides with Shraddh – a period considered inauspicious for purchases, in which rituals are performed to appease the souls of ancestors.

An increased contribution from the margin-dilutive Gold Exchange Scheme contributed 42 per cent of Titan's Q3FY20 sales. “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 said.

"Many of the highly profitable and large-format L1 stores 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.

Phillip Capital, which has a ‘sell’ rating on Titan, said family-run jewellers are in a more comfortable position now.

"Our 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," said Prabhudas Lilladher which has a 'hold' rating on the stock.

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