Sanity will return to gold pricing

It will be difficult for most players to cut making charges beyond a level and remain profitable, saysS Subramaniam, CFO of Titan



Titan, the largest gold retail brand in the country, is also facing the heat of competition. But as there are several small players in the industry who are working on wafer thin margins already, the price war may not sustain beyond a point, says S Subramaniam, CFO, Titan. With a stable regulatory environment and with the launch of new gold schemes, conditions can improve for gold companies. But volatile gold prices are spoiling the party and keeping demand erratic, says Subramaniam. Excerpts from an interview

With falling gold prices, is demand catching up?

After a long period of inactivity, there was surge in demand in June-July. But after that it has been flip-flopping. The demand is not anywhere close to levels seen two years ago as gold prices themselves have been erratic. People are not finding it easy to take a view on gold. They don’t know if it will continue to fall or begin to move up.

Also, because of volatile prices, people who buy gold as an investment are postponing their buying decisions. Even if it is buying for weddings, people have three to six months’ time on hand; they try to time their purchases and buy only when they think the price is reasonable.

We are seeing competition intensifying in the south, with players getting desperate and cutting making charges. Are you also feeling the heat?

Yes, definitely competition is increasing, but, in the south I think competition is intense because there are several large players. And, the other thing is, the south is a plain gold market.

The customer base is entirely value seeking, it is not the adornment type as in the north or the west where people don’t mind spending on brands or on diamond-studded jewellery.

So, I think it is also the customer who is driving the competition in the south. But fortunately, we are fairly well spread between all four regions and we are not seeing any major problem.

Do you think the industry itself will settle for lower margins in the next three-five years?

I think there would be competition which may drive making charges lower. But having said that, this is a low-margin business and it will be difficult for most players to take making charges lower beyond a level and remain profitable. Therefore, there is a limit to which they will do it. There can be some irrational competition like something that’s happening in the online space, but that’s for sometime, it can’t sustain beyond a point and sanity will come back to pricing.

Now that gold import curbs have been removed, how do you source your gold?

We buy it from banks, bullion traders as well as copper mines where gold is a by-product. Earlier, we used to buy gold only from banks under ‘gold-on-lease’ scheme, but now, we do purchase from the spot market too. Buying in the spot market makes hedging necessary. We don’t take any open position on gold at any time, we believe in 100 per cent hedging.

How does the gold-on-lease model work? How long is the credit period?

When we buy it from banks we get a credit of six months. But, normally we sell the gold between the fourth and fifth months and the rate at which we will be paying the bank is fixed on the date we sell that gold.

Anyway, as the payment has to be made only at the end of six months, we hedge ourselves in the futures market. Say, we sell the gold on the 120th day, from 120th to 180th we will hedge our forex and gold and on the 180th day, the payment is made. So, the credit is there for six months, and for that, we pay an interest for the full 180-day period.

Where and how do you hedge your currency and gold exposure?

There are two legs to it — one, the gold, which we do in a commodity exchange outside India; other is the dollar hedge which we do in the forwards market through the local bank.

The biggest advantage of hedging outside India is that those exchanges let you hedge for whatever period you want.

In MCX, the biggest problem we had was the volumes traded were so low and the maximum tenor for which one can hedge then was for two months.

So, if I hold stock for five months, I had to do two roll-overs at least and every time I did a roll-over, I was losing money. In exchanges outside, I can hedge for six months in a single contract, but here I don’t have any such option, all contracts are short term and it doesn’t help our hedging process.

The problem in India basically, is that there no gold hedgers, so there is no counter party when we want to do large volumes.

Do you think the gold monetisation scheme will work out?

We really hope that it works out. Gold monetisation is being talked about because, despite about 20 per cent of the gold demand being met by recycled old jewellery, the country imports about 800-900 tonnes of gold in a year.

The issue I see here is, first, if it is in the form of jewellery, it has to be melted and people may not want it, given their sentiments.

If the scheme has to work, gold given to the deposit has to be melted to be made as gold bars to be then given to people like us, but I’m not sure how many people will be willing to melt their gold.

Secondly, people who have bars and coins of gold may not have actually declared it, so when you have to do it with a bank, KYC norms will come into play and people may actually shy away.

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