Titan keeps promise to Jhunjhunwala; clarifies on gold hedging policy

After Dalal Street heavyweight Rakesh Jhunjhunwala sought clarification on Titan’s gold hedging policy at its earnings call last week, the company has put out a detailed note explaining it.

In the note shared with stock exchanges, Titan explained that it was protected against the fluctuation in gold prices in two ways. First, is the gold-on-lease method wherein the company borrows gold from banks on an unfixed basis on day 1 and it gets priced whenever the gold gets sold to customers, which could be 5-6 months from the date of purchase. Thus, the pricing of gold is matched with the sale price from customers and hence acts as a natural hedge and there is no impact on the profit & loss (P&L) statement of Titan

The second way in which Titan hedges gold is by purchasing the precious metal in the spot market and immediately entering into a counter position in the gold futures market at the same price. While, this results in recognition of a loss or profit in the short term, over the long term, this hedge unwinds and there is, hence, no impact on Titan’s P&L.

With gold prices surging of late, the company had reported higher hedging losses for the April-June quarter. Titan also sold Rs 610 crore worth of bullion during that quarter.

Jhunjhunwala had questioned the company on its gold hedging policy during the earnings call last week.

“Our expenses have not come down, we haven’t quantified our hedging details and strategy, we don’t know anything about what we have achieved,” Jhunjhunwala asked the management on the call. Jhunjhunwala and his family owned 5.53 percent in Titan as of June 2020. At current prices, the holding is worth around Rs 5,600 crore.

Responding to Jhunjhunwala, Titan  MD & CEO CK Venkataraman said, “The Titan management has been very transparent about a lot of things, and transparent about everything over time.”

Not giving up, Jhunjhunwala said, “The hedging analysis is really complicated, please give us a detailed note on the hedges and clarify what the longer term impact here is going to be.”

“We will give it a thought and come back to you,” Venkataraman had told Jhunjhunwala then.

Analysts said Titan’s clarification has given a clearer picture, in addition to sending a positive signal with regard to the company’s transparency.

Courtesy: CNBC TV18