The Government of India using its Powers have never aided any business to grow, but only to deter them. The Golden Harvest Scheme (GHS) of Titan Jewellery will only start contributing to revenue in Q4FY16. Apart from weak demand, competition in the jewellery and watches segment is intensifying, and Titan appears to be losing market share. The company’s long-term strategy continues to be under pressure from regulatory risks such as, high customs duties on gold imports, mandatory requirement to furnish income tax details for big purchases and, more recently, the proposed recommendations to the Goods and Services Tax (GST) for precious metals.
In 1Q2013, the 80:20 rule was introduced for gold imports, along with the abolition of the Gold-on-lease scheme. As a result, the company’s gold supply was affected, and it had to resort to working capital financing. In Q2FY14, the customs duty on gold was increased to 10%, which negatively affected the company’s gold rate being offered to consumers. We believe that the strongest impact on Titan is yet to come from: the regulation of its Golden Harvest Scheme (GHS), new government initiatives to control black money, and now, most recently, the possible increase in the GST for precious metals.
Jewellery purchase schemes were regulated by the government in early FY15, which had a significant impact on Titan’s revenue trajectory. The recently enacted law, which makes it mandatory for consumers to furnish income tax details for any purchases of above INR100,000, is a key risk to Titan. Titan’s average ticket size for the Tanishq business (~80 of its jewellery business as of FY15) is INR63,000, which implies that a substantial portion of sales are above the threshold value.
In a step towards a unified GST, a committee headed by the chief economics advisor has recommended a three-tiered tax structure for goods, with 12% for essential items, 40% for luxury cars, tobacco products and aerated beverages and a standard rate of 17-18% for most other goods and services. Currently, the committee has not recommended a tax rate for precious metals but has used a range of 2-6% GST to compute the standard rates. The panel also highlighted that the current tax rate used for these metals is low. We believe this news is negative for Titan, because if the GST does increase beyond 1%, the attractiveness of jewellery, as an investment, would reduce further, especially if gold prices continue to decline. Also, the application of this GST rate will make branded companies more expensive than the unorganised companies that can easily avoid paying taxes.
