The Reserve Bank of India (RBI) has given approval to Titan for hedging of gold on international exchanges.
Speaking on the development, its CFO S Subramanian said the move will provide the company a better liquidity and longer duration contracts at international exchanges.
He said the company had applied to RBI sometime back requesting the move.
“Earlier, we had the gold-on-lease scheme under which hedging was a very natural phenomenon. We used to fix our gold rate at the rate of the sale, and therefore, we did not have any exposure to gold rate risk at all. Unfortunately, after the gold-on-lease scheme was suspended by the RBI because of the measures they wanted to take on gold imports, we were left to hedge only with the commodity exchanges in India,” he told CNBC-TV18’s Latha Venkatesh and Sonia Shenoy.
He said the problem was that commodity exchanges have a very low liquidity, adding that the company was not witnessing any premium in terms of hedging in local commodities.
“Now (post approval)… for all the gold that we are buying, we will be able to hedge ourselves through the authorised banks in India, both on the gold front which might be on the commodity exchange internationally, and on the USD-INR rate in India. So, we would be able to hopefully take longer contracts. We don’t need to roll them over very frequently and that would be very beneficial for us,” Subramanian said.
International future prices are at a premium and thus will help reduce costs for Titan, said a Motilal Oswal report.
Motilal Oswal retains ‘neutral’ rating on Titan with a revised target price of Rs 258.
“Despite emerging regulatory stability, we are not upgrading our rating as we believe jewellery demand is still subdued given the weak discretionary spending environment,” it said.
Below is the interview of S Subramanian, CFO, Titan with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: If you could just tell us what this approval from the RBI for gold hedging could actually mean for you in terms of better liquidity as well as lower interest cost?
Subramanian: We had applied to the RBI quite some time back basically because earlier we had the gold on lease scheme under which hedging was a very natural phenomenon. We used to fix our gold rate at the rate of the sale and therefore we did not have any exposure to gold rate risk at all. Unfortunately, after the gold on lease scheme was suspended by the RBI because of the measures they wanted to take on gold imports. We were left to hedge only with the commodity exchanges in India.
The problem with the commodity exchange in India is that the liquidity has been very low. We do no have contracts for five to six months because our average stock holding period would be around five months and therefore we had the issue of having frequently rollover the contract that we took and there was also the issue with the total quantity gold that we could hedge in the local commodity exchange because of the overall volumes in the commodity exchange.
Therefore, we had requested RBI for approval to hedge gold outside India. We also therefore wanted to get the US dollar INR because gold is a dollar denominated asset so we need to also hedge the dollar INR part. So, we had requested them to hedge ourselves both outside India and in India for the dollar INR through our banks. The idea was that, we duplicate in a way what we used to do with the gold on lease scheme. So, the good part is now that we have got that approval.
Now what that means to us is that for all the gold that we are buying we will be able to hedge ourselves through the authorised banks in India both on the gold front which might be on the commodity exchange internationally and on the USD-INR rate in India. So, we would be able to hopefully take longer contracts. We don’t need to roll them over very frequently and that would be very beneficial for us.
Latha: So what should investors take from this? How much of margin pressure did you face when the lease scheme was stopped and will all that be won backed by this hedging?
Subramanian: I won’t say fully won backed but the major issues we had was – we had started borrowing because we don’t have gold on lease now. Today borrowing at sub 10 percent but the point is we used to be incurring not more then 3 percent or so earlier when we had the gold on lease scheme.
With this we have, debt is at higher rate but normally when you hedge your gold, you are selling gold forward and you tend to get a premium – its like selling dollar forward and therefore get a premium. The problem has been that in the local commodity exchange there has been no premium – we have been going at a discount because of the very low volumes traded in the commodity exchange.
Hopefully with this when we go and do our hedging outside India – because there should not be a problem with volumes – you should possibly get some premium back and that would effectively bring down the interest cost while it might be different item the idea is it might effectively bring it down.
Titan Company stock price
On February 28, 2014, at 12:49 hrs Titan Company was quoting at Rs 242.35, down Rs 3, or 1.22 percent. The 52-week high of the share was Rs 302.00 and the 52-week low was Rs 200.00.
The company’s trailing 12-month (TTM) EPS was at Rs 8.11 per share as per the quarter ended December 2013. The stock’s price-to-earnings (P/E) ratio was 29.88. The latest book value of the company is Rs 22.13 per share. At current value, the price-to-book value of the company is 10.95.