Titan will aggressively take on rivals
The rise in (relative) competitive intensity in jewellery retailing led to melting-away of gold-rate premium charged by category leaders compared to competition. We observe that in key cities (top 9 cities which contribute 30-35% of Tanishq’s total retail area), (i) premium charged by Tanishq has declined by 50% (to 1-3%) from historical levels; (ii) Tanishq is aggressively competing with retailers like Kalyan, Senco, GRT, Malabar; in 50% of its key markets, gold rate charged by Tanishq has been 0.2-0.8% lower than Senco; (iii) key national competitors (Kalyan, Malabar) have moved to one-nation one-gold price; (iv) gold price charged is similar across companies, as per market rate set in Kerala (v) amongst all key markets, gold-price premium (charged by Tanishq) in Kolkata is the highest.
While one-nation one-gold policy adopted by competitors may benefit them in customer acquisition, we believe the operating leverage benefit enjoyed by Tanishq could enable the company to combat the rise in competitive intensity more aggressively. Having said that, Tanishq’s ability to drive operating margin expansion may be constricted in the near term. We estimate 20% of Titan’s fair value in DCF is contributed by gold price premium, which is at risk now. ADD retained.
We believe, hike in custom duty on gold has likely resulted in higher profit pool for players accessing gold through informal channels. We observe that large regional players have become aggressive on gold-rates. This has created higher competitive pressure on national retailers like Titan, Kalyan and Senco. We expect implementation of hallmarking to help reduce this pressure going forward. However, in the near term, we expect gold-rate premium, as charged by Tanishq in different geographies, to be constricted.
Many national retailers moved to onenation one-gold-price policy under which gold-rate charged by them has been the lowest and uniform. However, we understand to offset the impact of lower gross margin, retailers/brands have hiked making charges. Despite that, overall gross margin is likely to remain impacted (lower) by 100bps as companies have chosen to pass on 1/3rd benefit to customers while retaining 2/3rd through higher making charges.
