Why Titan was shaved off 6 percent today

Only a week after Ambit Capital initiated coverage on Titan Industries with a ‘buy’ target and a target price of Rs 266, Titan received a blow from Morgan Stanley.

The financial services agency has double downgraded Titan from ‘overweight’ to ‘underweight’, its target price being Rs 198 - showing a 17 percent downside from yesterday’s closing at Rs 237. The company’s stock is already down 6.3 percent today, at Rs 222.

Though the Ambit report was released after the Budget on 21 March, it hardly mentions the impact the change in duty regimes can have on the gold sector and therefore the stock.

The contribution of jewellery to Titan’s revenue and profit have gone up over the years and changes in the gold regime will have a significant impact on the stock.

The main reason Morgan Stanley is upset about the Budget is that jewellers must collect 1 percent of the sale consideration as Tax Collected at Source (TCS) for cash purchases higher than Rs 2 lakh.

Cash purchases account for over 50 percent of Tanishq’s sales. Moreover, buyers will be required to quote their Permanent Account Number (PAN) for these purchases.

MS says, “This proposal could mean consumers will shift to the unorganised trade (household jewellers), a significant portion of which may not be subject to the tax, we believe.”

The fear is not unfounded as S Subramaniam, CFO, Titan, told CNBC TV18 that Titan would be worried about the issue of compliance. Unbranded smaller players could evade collections of TCS, especially for expensive jewellery in order to draw more customers.

In that case, players like Titan will suffer.

The budget has also raised the basic customs duty on gold from 2 percent to 4 percent, raising the procurement cost for the industry.

Apart from that, valuations of Titan are high at the moment with the stock trading at 28 times expected earnings for financial year 2013. For better returns from this level, the earnings trajectory of Titan must move to a better level which looks unlikely with the government proposals in the Budget.

As a result the stock has be downgraded to Underweight with the much lower target price of Rs 198.