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For 2QFY2011, Titan Industries (Titan) reported stellar performance, which was
above our expectations. The company reported top-line growth of 34% yoy to
`1,536cr, backed by robust revenue performance by the jewellery and watches
segments, which grew by 37% yoy and 21% yoy, respectively. For the quarter,
EBITDA and PAT registered yoy growth of 60% to `174cr (`108cr) and 65% to
`128cr (`78cr), respectively. Operating margins stood at 11.3% (9.4%) during the
quarter. At current valuations, we believe the stock is fairly valued. Hence,
we continue to maintain our Neutral view on the stock.
Healthy growth in jewellery and watches segments improves performance: During
the quarter, Titan’s jewellery segment witnessed stellar growth of 37% yoy in
revenue to `1,125cr (`823cr). Higher offtake of studded jewellery resulted in
volumes surging by ~18%. The jewellery segment also witnessed a ~190bp yoy
surge in EBIT margin to 8.9%. The watches segment’s revenue witnessed 21% yoy
growth to `358cr (`296cr) on improved sales of high-margin
medium/high-end watches. EBIT margins of the watches segment improved by
160bp yoy to 21.3% (19.7%). Strong sales were driven by buoyant consumer
sentiment and discretionary spending. Revenue of the company’s other businesses
(eyeware and precision engineering) grew by 81% yoy and managed to curtail
loss by 55% to `5cr on EBIT level as compared to loss of `11cr in 2QFY2010.
Outlook and valuation: Although we remain positive on the company’s growth
prospects, we believe at 35.3x FY2012E earnings, it discounts the same fairly
well. Hence, we maintain our Neutral rating on the stock
Jewellery segment witnesses volume growth, sales up 37%: During the quarter,
Titan’s jewellery segment witnessed a rise of 37% yoy in revenue on the back of
higher offtake of studded jewellery. Growth was accompanied by strong volume
growth also. The EBIT margin also improved by 190bp yoy to 8.9% during
2QFY2011.
Watches segment’s revenue up 21%, margins improve: The watches segment
posted decent growth of 21% yoy in revenue to `358r (`296cr). Factors such as
rise in same store sales were the key growth drivers. Further, higher offtake of
high-margin medium/high-end watches resulted in margin expansion. On the EBIT
front, the company witnessed growth of 31% yoy, with margin improving by 160bp
to 21.3% (19.7%) in 2QFY2011.
Other businesses (eyewear & precision engineering combined) revert to loss in
EBIT: The other businesses segment comprising eyewear and precision engineering
reported sales growth of 81% to `56cr (`31cr) during the quarter. The new
eyewear business has grown its retail presence through Titan Eye+ stores. The
company added 20 stores in 1HFY2011 and expects to add another 30 in
2HFY2011. On the back of opening of new stores, the segment incurred loss of
`5cr on EBIT level compared to profit of `7cr in 1QFY2011. We expect the
performance of the segment to improve in the ensuing quarters.
Investment Arguments
Organised national player in watch and jewellery segments
Titan Watches enjoys more than 65% market share in the organised watch
segment and 41% market share in the organised jewellery retailing segment.
Titan's leadership position enables it to bargain hard with its vendors for bulk
discounts, resulting in lower cost structure as compared to other regional players.
We estimate that this bargaining power of Titan, coupled with its pan-India
presence, will enable it to expand its EBITDA margin to 9% in FY2012E from 8.5%
in FY2010 and PAT margin to 6.1% in FY2012E from 5.4% in FY2010.
Easily scalable franchisee model
Titan operates 85–90% of its stores through the franchisee model, which provides
scalability to its business. Titan's strong positioning in the respective segments has
aided it to attract and scale up its business through the franchisee model. The
company has also built a strong retailing network (nearly 500 own stores besides
dealers/franchisee arrangements), which is unmatched in the area of specialty
retailing. On the back of its further expansion plans and strong demand outlook,
we estimate Titan's top line, EBITDA and adjusted PAT to witness CAGR of 26%,
30% and 33% over FY2010–12E, respectively.
Robust return ratios
Over the years, Titan has consistently posted robust RoE and RoCE, which have
also been the highest in the industry. Titan has consistently delivered RoE of 35%
and above, and we estimate it to maintain RoE of 42.8% and 38.7% in FY2011E
and FY2012E, respectively, on account of high asset-turnover ratio. Titan has a
history of operating at a leverage below 1, which has given it high RoCE.
We estimate Titan to deliver RoCE of 47.3% and 45.9% in FY2011E and FY2012E,
respectively.
Outlook and valuation
We have revised our numbers due to better-than-expected 2QFY2011 results.Considering the improving volume trend in the jewellery and watches segments
coupled with the company’s expansion plans, we expect Titan to witness better
times going ahead. Although we remain positive on the company’s growth
prospects, we believe at 35.3x FY2012E earnings, it discounts the same fairly well.
Hence, we continue to maintain our Neutral rating on the stock
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