Titan Industries Ltd Riding on the spurt in discretionary spending; Buy: BoA ML

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Titan Industries Ltd - Riding on the spurt in discretionary spending; Buy


􀂄 Sep Q profit up 68% yoy, beat our estimates by 14%
Titan continues to surprise with a strong operating performance on a structural
high growth trajectory for consumer discretionary spending. Sales growth of 34%
yoy was 5% below our est on lower jewelry sales, which was more than offset by
a sharper-than-expected rise of 200bp in margin. Consumers continue to uptrade
in both watches and jewelry, which is leading to this margin surge. We raise our
estimates for FY11-12E by ~15% to factor in this surprise and a higher margin
trajectory, and raise our PO to Rs3650 (Rs3200) accordingly. Maintain Buy.
Watches: Moving to a higher growth trajectory
We believe Titan’s watch business is moving to a higher growth trajectory, both in
terms of sales and margins. The Sep Q had sales growth of 21% yoy (vs. our est of
12%) and a margin gain of 160bp on an already all-time-high base. This trend is led
by a changing outlook toward watches, which are now seen as accessories and not
just time-telling devices, leading to multiple-watch ownership and up- trading.
Jewelry: Sales take a breather, but margin gains continue
Jewelry sales growth of 37% yoy was strong, but 9% below our expectations. This
was led by volume growth of ~17%, which was lower than recent trends, as the
surge in gold prices during the quarter could have hurt. However, the margin
surge continued, with a 210bp gain led by a shift of consumers toward highermargin
studded jewelry. With rising gold prices, gap between gold and diamond
jewelry cost continues to narrow down, encouraging this profitable trend for Titan.
Strong growth potential justifies valuations; PO Rs3200
Titan is currently trading at 22xFY12E, in line with the sector avg. However,
given EPS CAGR of 60% over FY11-12E, we believe there is a case for further
re-rating of the stock to capture much higher earnings growth potential. Our PO
of Rs3650 is based on 24xFY12E, in line with its last 5-year avg and at 10%
premium to the sector.