NEW DELHI: Ace investor Rakesh Jhunjhunwala has sought clarity over Titan Company’s large hedges, which dragged the jewellery maker’s June quarter bottom line into the red.

The Tata Group firm, which reported Rs 270 crore loss, said its numbers were impacted by hedging losses, even though they were offset partly by inventory gains.

Brokerages such as Kotak Securities noted that the quantum of hedging losses and inventory gains were not disclosed in the company’s June quarter earnings and believed that the company should have given the materiality.

Even as Titan is fully hedged for gold price movement, it incurred notional hedging losses pertaining to the mismatch between the timing of anticipated sale of inventory and actual sale. “Hedging loss and inventory gains should offset each other, and thus, would be Ebit neutral during the course of the year,” Kotak Securities said.

During the company's post-earnings call with analysts, Jhunjhunwala requested the Titan management to send a note on the accounting procedure.

“When you unwind that hedge, would you provide a profit and loss account? Would you also raise the value of the gold? You do not keep anything unhedged, all your gold is hedged,” Jhunjhunwala said.

To this, the Titan management said: “If it is only that issue of ineffective hedge, you are right, it will reverse.”

Large jewellers hedge their gold inventory by buying back gold equivalent to their sale volume in the futures market to remain net neutral. In a rising price environment, such hedges work out costly.

The company top brass said the mismatches are going to continue in the next quarter too.

Jhunjhunwala then asked whether it means the mismatches are going to continue for the next three quarters, and he should not assume the loss to be permanent and that it will reverse at some point.

The company management said that the loss on the hedge would reverse, but the inventory gains will also reverse.

“What gain I get now will also reverse, that is the issue,” a company spokesperson said. “The hedges will be at a lower value and will depend on which hedge gets cancelled.”

Jhunjhunwala said he would appreciate it if the company makes a note and explains the issue with examples.

The ace investor and his better half Rekha Jhunjhunwala together hold 5.53 per cent stake in Titan Company.

Titan on Monday said its sales plunged to Rs 1,862 crore from Rs 4,939 crore a year ago. The company said demand was so low that it had to sell bullion worth Rs 601 crore during the quarter, which is also included in the revenue.

Till the end of June, 83 per cent of the company stores were opened after the Covid-induced lockdown. Many of them, however, were not operating for all days.

Overall, the jewellery division recorded sales worth Rs 1,783 crore, down 56 per cent. The watches business got impacted far more and recorded an income of Rs 75 crore, down 90 per cent year on year.

“The recovery in business, particularly in the jewellery segment, is encouraging and we expect to get back to normal by the fourth quarter of this year. The company's reassessment of its cost structure during this period and inherently strong balance sheet will help create a stronger base for a sustainably higher profit margin business," Managing Director C K Venkataraman said.

Goldman Sachs has maintained a ‘sell’ call on the stock with a price target of Rs 705. Jewellery sales in September quarter may remain down in double digits, it said. Morgan Stanley has an ‘underweight’ call on the stock with a target of Rs 807.

It felt macro and business-related headwinds would likely outweigh the company's market share gains. The brokerage said full-fledged demand recovery will remain elusive in FY2021.

“The impact of higher-than-expected depreciation and interest costs along with the impact of ineffective hedges has led to 6 per cent decline in EPS forecasts for FY21. However, a gradual improvement in outlook for the jewelry business (over 80 per cent of sales) has led us to increase in FY22E EPS by 6%. We currently prefer to be conservative given the volatile environment,” said Motilal Oswal Securities.

Kotak has cut its FY2021 EPS estimate by 12 per cent and maintained FY2022-23 estimates. “We roll over to Sept-2021 and revise our DCF-based fair value to Rs 1,270 from Rs 1,215 earlier,” it said.