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Titan Industries Q3FY11
Comment: Earnings upgrade of 11%
Key highlights Q3FY11 results and interaction with the management
• Titan (TTAN) continues to surprise on positive with revenues growing by 47% to Rs19.5bn (estimates of Rs16.4bn),
EBITDA of Rs1.95bn (estimates of Rs1.6bn) and PAT growth of 76% to Rs1.37bn (estimates of Rs1.1bn)
• Upbeat consumer sentiments, retail network expansion (624 outlets now), higher gold prices and festive season have
contributed to such a high growth momentum
• While watches business has grown by 35% to Rs3.25bn, jewelry business has grown by 50% to Rs15.8bn. Other
businesses (including precision engineering and Titan Eye+) reported 37% growth to Rs553m.
• Jewelry business revenue growth has come on the back of 20% higher gold prices, higher contribution from studded
jewelry and ~20% volume growth. Gold prices at over Rs2000/ gram during the quarter has really not impacted the
volume offtake,
• Watches business growth came on the back of 25% underlying volume growth. While this volume growth was helped
by festive season, we expect the volume growth to normalize at 15-17%.
• Segmental EBIT during the quarter stood at Rs1.95bn – 220bp of margin expansion with watches business margins
improving by 330bp to 18% and jewelry business margins improving by 200bp to 9%.
• EBITDA margins during the quarter came in at 10% (improvement by 200bp) with gross margins improving by 80bp
(helped by price led and mix led growth), employee cost improving by 70bp and other overhead savings of 50bp.
• We believe that growth led by continuing stores has also played a critical role in margin improvement. Current year
margins in watches as well as jewelry business are best ever for TTAN
• Other income during the quarter has risen sharply to Rs153m. TTAN currently has cash and cash equivalent of Rs8bn
on its books.
• TTAN has added 44 stores during the quarter to reach 624 outlets and currently pans across 0.77m sq. ft. of retail
space. TTAN is expected to incur annual capex of Rs800m to add 80-100 stores annually.
Growth and margin outlook
TTAN has seen a sharp recovery in the current year after discretionary spending had taken a back seat in FY09 and FY10.
TTAN has also achieved its best ever segmental margins on the back of favourable product mix within watches as well as
jewelry business, value led growth in jewelry business and operating leverage. With festive season behind us, we expect
the growth to stabilize at 30% in Q4FY11 and we upgrade our FY11E earnings estimates by 11% to EPS of Rs103. Going
into FY12, we expect TTAN to grow at 26% with watches business growing at 15% (ahead of industry growth of 10-11%)
and jewelry business growing at 30% (predominantly volume led) on the back of retail space expansion (80-100 new
stores). TTAN is expected to add 4-5 more large format Tanishq stores after strong success of Delhi and Chennai store.
However, as we expect the growth to be led by retail space expansion and jewelry business growing faster, we expect the
margins to remain flat. Overall earnings growth would also be helped by higher non operating income on the back of
Rs8bn of cash and free cash generation. After a long run up, gold prices have corrected by 5% in the past few weeks to
Rs1967/gram. We believe that such short term correction in gold prices would bode well for jewelry business volume
offtake. It is only if the correction is prolonged that the margins would get impacted (making charges linked to gold
prices), though largely offset by higher volumes. We expect 25% earnings growth in FY12 and revise our EPS estimates
upward by 11% to Rs130.
Valuations and View
TTAN has been our most preferred retail and lifestyle play with network of over 600 outlets, presence in businesses
with low organized penetration (penetration of <30% in watches and <10% in jewelry) and strong consumer brands
like Titan, Sonata, Fastrack, Xylys, Tanishq, Titan Eye+. Superiority of TTAN’s business model is reflecting in its 35%
revenue CAGR and 42% earnings CAGR over the past five years (19% earnings growth even in the toughest year –
FY09). High growth, strong balance sheet (free cash flow generation of over Rs5bn annually), low dependence on
retail infrastructure development (low presence in mall), low inventory risks and RoCE of 50%+ makes a case for
premium valuations. Trading at 27x FY12E earnings, we maintain our Outperformer call with price target of Rs3912.
Maintain Outperformer.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Titan Industries Q3FY11
Comment: Earnings upgrade of 11%
Key highlights Q3FY11 results and interaction with the management
• Titan (TTAN) continues to surprise on positive with revenues growing by 47% to Rs19.5bn (estimates of Rs16.4bn),
EBITDA of Rs1.95bn (estimates of Rs1.6bn) and PAT growth of 76% to Rs1.37bn (estimates of Rs1.1bn)
• Upbeat consumer sentiments, retail network expansion (624 outlets now), higher gold prices and festive season have
contributed to such a high growth momentum
• While watches business has grown by 35% to Rs3.25bn, jewelry business has grown by 50% to Rs15.8bn. Other
businesses (including precision engineering and Titan Eye+) reported 37% growth to Rs553m.
• Jewelry business revenue growth has come on the back of 20% higher gold prices, higher contribution from studded
jewelry and ~20% volume growth. Gold prices at over Rs2000/ gram during the quarter has really not impacted the
volume offtake,
• Watches business growth came on the back of 25% underlying volume growth. While this volume growth was helped
by festive season, we expect the volume growth to normalize at 15-17%.
• Segmental EBIT during the quarter stood at Rs1.95bn – 220bp of margin expansion with watches business margins
improving by 330bp to 18% and jewelry business margins improving by 200bp to 9%.
• EBITDA margins during the quarter came in at 10% (improvement by 200bp) with gross margins improving by 80bp
(helped by price led and mix led growth), employee cost improving by 70bp and other overhead savings of 50bp.
• We believe that growth led by continuing stores has also played a critical role in margin improvement. Current year
margins in watches as well as jewelry business are best ever for TTAN
• Other income during the quarter has risen sharply to Rs153m. TTAN currently has cash and cash equivalent of Rs8bn
on its books.
• TTAN has added 44 stores during the quarter to reach 624 outlets and currently pans across 0.77m sq. ft. of retail
space. TTAN is expected to incur annual capex of Rs800m to add 80-100 stores annually.
Growth and margin outlook
TTAN has seen a sharp recovery in the current year after discretionary spending had taken a back seat in FY09 and FY10.
TTAN has also achieved its best ever segmental margins on the back of favourable product mix within watches as well as
jewelry business, value led growth in jewelry business and operating leverage. With festive season behind us, we expect
the growth to stabilize at 30% in Q4FY11 and we upgrade our FY11E earnings estimates by 11% to EPS of Rs103. Going
into FY12, we expect TTAN to grow at 26% with watches business growing at 15% (ahead of industry growth of 10-11%)
and jewelry business growing at 30% (predominantly volume led) on the back of retail space expansion (80-100 new
stores). TTAN is expected to add 4-5 more large format Tanishq stores after strong success of Delhi and Chennai store.
However, as we expect the growth to be led by retail space expansion and jewelry business growing faster, we expect the
margins to remain flat. Overall earnings growth would also be helped by higher non operating income on the back of
Rs8bn of cash and free cash generation. After a long run up, gold prices have corrected by 5% in the past few weeks to
Rs1967/gram. We believe that such short term correction in gold prices would bode well for jewelry business volume
offtake. It is only if the correction is prolonged that the margins would get impacted (making charges linked to gold
prices), though largely offset by higher volumes. We expect 25% earnings growth in FY12 and revise our EPS estimates
upward by 11% to Rs130.
Valuations and View
TTAN has been our most preferred retail and lifestyle play with network of over 600 outlets, presence in businesses
with low organized penetration (penetration of <30% in watches and <10% in jewelry) and strong consumer brands
like Titan, Sonata, Fastrack, Xylys, Tanishq, Titan Eye+. Superiority of TTAN’s business model is reflecting in its 35%
revenue CAGR and 42% earnings CAGR over the past five years (19% earnings growth even in the toughest year –
FY09). High growth, strong balance sheet (free cash flow generation of over Rs5bn annually), low dependence on
retail infrastructure development (low presence in mall), low inventory risks and RoCE of 50%+ makes a case for
premium valuations. Trading at 27x FY12E earnings, we maintain our Outperformer call with price target of Rs3912.
Maintain Outperformer.
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