Chart beat: What higher gold prices mean for Titan

ICICI Securities has analysed the data for the past 10-15 years and has found that a secular rise in the price of gold brings more tailwinds (1% rise in gold price leads to 2% increase in earnings before interest and tax, or Ebit) than headwinds. This is because the demand for wedding jewellery is relatively inelastic in value terms, making charges paid by Titan consumers are linked to the price of gold, and Titan hedges its gold price exposure completely.

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Typically, when gold prices are volatile, consumers prefer to postpone their purchases in anticipation of lower prices, which adversely affects demand. This also means a steady rise in gold price is welcome even as it hurts sales volume, especially given that consumers often have a fixed budget for purchases. 

Still, on a ‘revenue per store’ metric, ICICI Securities notes that a higher gold price leads to higher realisation for Titan’s flagship brand Tanishq, owing to the benefit of linking making charges to the gold price. As the chart below shows, over FY09-23, the price of gold has increased a compound annual growth rate (CAGR) of 12% while Titan’s revenue per store has increased at a CAGR of 11%.

Titan stock has been an investors’ favourite for quite some time. But amid rising competitive pressures in the organised jewellery market, it's down about 3% so far in FY25, versus an almost 12% gain in the benchmark Nifty 50 index. Yet, valuations remain pricey. The stock trades at nearly 64 times estimated FY26 earnings, showed Bloomberg data. Currently, the stock is around 5% below its 52-week high of ₹3,886.95, achieved on 30 January.

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“Titan’s stock price has demonstrated a strong correlation of 0.9 with gold prices over the past ~20 years. Similarly, Kalyan’s stock price also has shown a high correlation of 0.9 with gold prices over the past five years," said ICICI Securities, adding, “This is comprehensible given Titan’s and Kalyan’s jewellery revenue and Ebit/profitability are both linked to gold price."

Going ahead, investors will closely track the impact of lab-grown diamonds on Tanishq’s studded business growth and overall earnings. Titan’s June quarter (Q1FY25) was hurt by volatile gold prices, election-led restrictions across many markets, and fewer wedding dates. 

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For FY25 as a whole, margins will be in focus. The recent cut in import duty on gold to 6% from 15% is expected to boost demand in the short term. BNP Paribas said in a report last month, “Titan saw consumers reacting positively to the reduction in gold price. However, this will have a negative ₹500-550 crore one-time impact over the next two quarters due to the duties already paid on the gold-on-lease inventory Titan is holding."