CK Venkataraman, MD, Titan Company, says the profits took a big dip in Q2 and substantially on account of the losses that they had called out in their last quarterly call relating to the customs duty drop. When Titan imports gold through gold on lease, the customs duty part of that price of gold, can’t be hedged and so it remains open. Whenever customs duty has increased over the years, Titan benefited from that exposure. But this time there was a significant drop and so they knew that they were going to get hit to the extent of nearly Rs 600 crore and they had called it out in their August investor call.Let us start with quarterly numbers because there is a decline of 15%. Can you share the big picture for us, then we will get into specifics?
CK Venkataraman: The biggest impact from a profit point of view was from the customs duty reduction which happened in July of 24 and I will just come to that. From a sales growth point of view, Q2 was very satisfying. Our two main businesses, jewellery and watches and wearables, grew quite handsomely in retail in company sales. Even though the diamond jewellery growth was a little less on account of external factors, customer perceptions related to diamonds and maybe share of wallet issues as well. But the overall sales growth, notwithstanding that, in the businesses as a total was very satisfying. However, the profits, as you said, took a big dip and substantially on account of the losses that we had called out in our last quarterly call as well relating to the customs duty drop. What happens is that when we import gold through gold on lease, the customs duty part of that price of gold, it is not possible to hedge it and therefore there is no instrument to hedge it and all that, so it remains open. And whenever there have been customs duty increases over the years, we have benefited from that exposure.
But this time there was a significant drop and so we knew that we were going to get hit to the extent of nearly Rs 600 crore and we had called out this in our August investor call. And we knew that this would hit us in a big way in Q2, which came at about Rs 290 crore and that was the single biggest reason for the significant drop in the profits. We were aware of it. The losses were slightly more than the Rs 290 crore, but that is because of in a way operations relating to the diamond jewellery business. But all in all, because we knew this big impact item, it was not a surprise to us and it was not a disappointment either.
Everyone is curious to understand the impact of lab grown diamonds on Titan. I was looking at your numbers and I was also looking at your quarterly update where you have gone on record and you have said that diamond jewellery, especially the natural diamond category is contracting. Historically, that is where margins are the highest. Are you likely to make up what you are losing because of this trend which is shifting from natural to lab grown diamonds?
CK Venkataraman: Actually, while the potential of the LGDs to become a serious substitute for the naturals in India is very much there, the evidence of that actually is yet to be seen. And our own understanding of the relatively lower growth in diamond jewellery is not really because of lab grown diamonds, but because of overall on the one hand the consumer perceptions relating to natural diamonds continuing value, especially at the very high prices, as well as some of our own doing, if I can say, some gaps in our product strategy in certain price bands, which we have actually fixed in the interim. So while LGD is an important strategic item in our thoughts and in our considerations, it is not a call-out at the moment impacting our diamond jewellery business.
Coming to the margins, this time that was the biggest disappointment. It is lying in single digits for the first half of the year. You have cut down the margin guidance, but the Street is still questioning the ability to go back to that 11% mark on margins because the first half of the year has been rather weak and with the studded ratio mix not inching towards the way it was expected, what gives you the confidence that you will be able to hit 11% on margins?
CK Venkataraman: We had clarified even yesterday on the call that the customs duty adjusted margin for you Q2 was the figure that you speak of and similarly the customs duty adjusted for Q3 likely will also be in that ballpark. Therefore, because the customs duty is an extraordinary item, which does not have a bearing on FY26 and the rest of the years in the future, we had called this out as a big external inflicted loss in August itself and it got booked to the extent that we sold that inventory in Q2. The rest of it will get booked again in Q3. But it is an extraordinary item and therefore, we need to add that back to determine the margin on a continuing basis and that is what Ashok Sonthalia, our CFO, had clarified on the call yesterday and therefore that is the confidence that is behind our statement about the margin on Q3 and later.
What could be the exit rate on the margins, let us say for FY25? Could it be closer to 11.5-12% because there would be no longer any impact of the custom duty losses?
CK Venkataraman: It would be difficult at the moment to tell you that because Q4 is some distance away. We are in a better grip on quarter three. But your basic point is right, that if the customs duty loss in Q3 is of the order of what we booked in Q2, then the bulk of the customs duty loss would be behind us on January 1st and quarter four should have the least overhang of that. It also depends on the actual sellout of the inventory, which pieces sell. We may end up booking a little less in Q3 and a little more in Q4. I would reserve this response to a later date.
Going into the festive season, in terms of expectations, given where gold prices are at, where silver prices are at, etc, are you expecting it to be a bumper festive season? Are you going in with very moderate expectations? And I say festive given that we are already in the thick of things with the wedding season, etc. What is the anticipation there?
CK Venkataraman: We have been very satisfied with the way October has turned out, including Diwali, Dhanteras and all that. And so, Q3 has begun on a very good note for us in terms of confidence and optimism. The number of wedding dates in H2 of this year appears to be markedly more than the wedding dates in H2 of last year and therefore, into December, Jan, Feb should also be good from a jewellery business point of view.
The watch business continues to be on a very good run for many-many months and actually the performance in October for all the businesses has been extremely satisfying, including the other brands of the jewellery business, like CaratLane, Mia and Zoya as well, which we shared yesterday. We did not share numbers and I am not sharing numbers today as well. But we are very-very satisfied about October and the outlook for Q3.
When you say satisfactory, is it in line with historical averages?
CK Venkataraman: I mean, we are very, very, very satisfied.
And what is the definition of very, very, very satisfactory?
CK Venkataraman: It is not our custom to share figures in the middle of a period and that is why you need to sort of infer whatever you want to infer.
Let us say in three years, we see a shift from natural to lab grown diamonds and your brands are getting future ready already. You have in a sense pre-empted this customer change. A shift will naturally happen towards gold jewellery because that is how the psychology of a buyer would move. If natural diamond prices are going higher, you can move towards gold. If there is a big shift in terms of a trend, what happens to Titan of 2024 versus Titan of 2027?
CK Venkataraman: It is not an easy answer to give. It will depend on Titan’s own shaping of this entire thing and the rest of the industry’s shaping of this entire thing. We are clearly recognising the importance of LGD in our lives. And because it is an extremely strategic and important matter, we will reveal things that we plan to do only when we are ready to reveal that.
Much will depend on how the industry shapes the strategy relating to naturals and LGDs. And there are multiple dimensions sitting on the nature of jewellery that Indians buy, the kind of and the sizes of diamonds that are used in Indian jewellery. Indian jewellery uses a lot of very small diamonds where the piece ends up being a very exquisite piece because of the small size of diamonds. LGDs are still in the large sizes. As you come to smaller and smaller sizes of diamonds, the cost of labour sitting in the production of a small diamonds and natural LGD, that cost will be the same and the cost of labour in a small diamond is much higher part of the total cost of a small diamond than in a large diamonds. This means the price difference between LGD and the natural diamonds will dramatically reduce in the kind of diamonds that the Indian jewellery industry uses to make necklaces and jhumkas and bangles and stuff like that.
The whole value proposition that LGD has, will not be there in much of the jewellery that Indian jewellery makes. The entire diamond jewellery manufacturing shifted to India, especially the smaller diamonds because of the labour cost and Surat and Bhavnagar and all that and therefore that point is sitting there.
The second is that the store of value aspect of LGD and the falling prices of LGD will have a bearing on customers moving from one category to that, which means that this is not at all a simple matter and it is a very multidimensional thing which we need to consider, which we are considering and therefore, we are reasonably confident of shaping this. I am sure the rest of the industry will also do that, to actually maximise everything rather than worrying about it.
The curiosity around lab grown diamond category is very high. Now the prices of lab grown diamonds are going down, because you can produce more at will. You are in a business where the production will increase and prices come down. And for a branded manufacturer, that is great news, that means on branded designs you can charge more. So, what looks disruptive right now, given where LGD price is headed, could end up being a higher margin business?
CK Venkataraman: Actually, my answer may not satisfy you, because it is a very complex question that you are asking. And we are wrestling with all the dimensions of this and our final strategy will take into account many of the things that you asked and said, that is the best answer I can give at the moment. It is quite an exciting development in the industry, but we need to sort of make it work from our terms.
That means you are open to the possibility of getting into LGDs in a big way at some point of time because earlier you had stuck a bit to the natural diamonds. What could be the potential studded ratio going forward because this quarter, it has fallen to around 30?
CK Venkataraman: Honestly, we have not really chosen to say that we are open or we are close to anything like that because it is a matter of strategy. And you do not reveal strategic intent to everyone like that. You reveal your strategic intent at the time of your choosing, and that is why this point about open or closed or whatever points we may have made over time, even yesterday there were some questions relating to other companies in the Tata Group and Titan and all that and we give various answers relating to that.
It is a very big development in the industry. We are seriously thinking about it, conversing about it, that is all I can say at the moment. We will be ready to share whatever we want to share at the right time. I am sorry, I missed your last question.
The ratio of the studded jewellery versus solitaires? Where will that move?
CK Venkataraman: Actually, the challenges in the solitaire category are perhaps a little longer drawn out because of multiple reasons on solitaire prices and little worries about continuing value and all that and therefore, Titan Company and the industry in general has to work harder to actually sort of get back some of that lost growth in the solitaire side. But on the diamond jewellery side, like I told you that some of it were operating improvements that we needed to make, which we have done already. W
e have seen the results of that already in the last many weeks and we are very confident that we will certainly go back to the kind of growth rate that we want in diamond jewellery. We need to innovate, create new streams of growth in the diamond jewellery to compensate for whatever could continue to be challenges in the solitaire side and it is certainly our intent to go back to the growth rates in diamond jewellery that we are used to getting reasonably soon.
