We spoke to two jewellery store managers and a few jewellery traders and watch retailers to get an update on the demand for these products.
Gold prices have surged 41% since September 2008 and 21% in the last three months in local currency (INR). The gold price (in US$) is now 13% ahead of the Macquarie forecast.
There is a 30% difference between the peak and trough of the last three months. As discussed in our initiation report (It glitters and it’s not just gold, 19 November 2008), a spike in gold prices or volatility has a material impact on consumption.
Our channel checks suggest the demand for gold jewellery has remained stable so far. This is because of the fact that the wedding season runs virtually uninterrupted until July 2009; it is an important driver of jewellery demand.
Consumers are also buying gold as a safe-haven investment in the form of jewellery (as is typical in India). Anecdotal evidence suggests an initial change in behaviour due to the surge in gold prices.
Jewellers confirmed they are seeing lower footfalls and a rise in the proportion of consumers exchanging old jewellery vs purchasing fresh gold in the last few days. They, however, believe that a fall in price of Rs1,000 per 10g would spur consumption.
Overall sales volumes in watches are holding up but the mix has been unexpected. Watch retailers had expected the slowdown in GDP growth to impact the demand for high-end watches (price point above Rs1,000).
The retail inventory was adjusted over the last few months to reflect this expectation. However, the forecasted ‘trading down’ did not occur, especially in the rural areas.
Industry sources confirm that watch manufacturers (including Titan) are slowing down the production of low-end watches to rectify the inventory situation.
We will be keeping a close eye on a deviation in watch and gold demand trends before we adjust our sales growth and margin forecasts.
While there are no confirmed trends, it is possible that Titan’s earnings growth may come under pressure if gold prices surge further or if GDP growth surprises negatively.
This is especially of concern as Titan’s quarterly earnings come up against a high base in the next couple of quarters. Our 12-month price target is Rs1,150 based on a DCF methodology.