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Government raises import duty on Gold to 12.5% from 7.5%

* The government announced a 5% increase in gold import duty to 12.5% from the prevailing 7.5%, in an effort to restrict further depreciation of the Rupee (Link).

* Gold imports also attract a 2.5% Agriculture Infrastructure and Development Cess. However, the 0.75% Social Welfare Surcharge on gold imports has been exempted, making the effective duty on gold at 15%.

* Domestic gold spot prices closed at INR50,700/10gms on 30th Jun’22 and the increase in duty could potentially drive prices up by an additional INR1,900- 2,000/10gms.

* We believe the entire increase may not be passed on by all industry players as the quantum of the announced hike is steep. ? If domestic gold prices do go up, we would need to watch out for any postponement of demand, albeit, it could be mostly by one quarter.

* The period between July and November has a much higher share of adornment demand v/s wedding demand as opposed to the rest of the year. Buyers may adopt a wait-and-watch approach until the situation stabilizes.

Impact on Titan

We look at Titan (TTAN)’s jewelry performance in Jul’19 when gold import duty was increased to 12.5%.

* Gold import duty was hiked to 12.5% from 10.0% in Jul’19 (2QFY20).

* TTAN's jewelry sales were flat YoY/down 12.3% QoQ and volumes dipped 14% YoY in 2QFY20.

* Margins, however, remained flat YoY at historical averages for 2Q, which is a seasonally weaker quarter with lower wedding demand.

* Sales were quick to rebound growing 12.2% YoY and 53.6% QoQ in 3QFY20. There was also a 10bp YoY/260bp QoQ margin improvement in 3QFY20. Volumes, however, remained subdued.

* Since the near-term gold demand is led by adornment, there could be a temporary negative impact on jewelry purchases as buyers may wait for a clear direction on gold price movement.

* Nevertheless, demand in the adornment category is likely to be delayed by a few months only depending on the intensity of gold price movement.

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