Titan Industries – 3QFY2011 Result Update - Angel Broking

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Titan Industries – 3QFY2011 Result Update

Angel Broking maintains a Neutral on Titan Industries.

For 3QFY2011, Titan Industries (Titan) reported stellar performance, which was in

line with our expectations. The company reported top-line growth of 47% yoy to

`1,955cr, backed by robust revenue performance by the jewellery and watches

segments, which grew by 50% yoy and 35% yoy, respectively. For the quarter,

EBITDA and PAT registered yoy growth of 82% each to `195cr (`107cr) and

`138cr (`75cr), respectively. Operating margins stood at 10% (8%) 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 50% yoy in

revenue to `1,579cr (`1,055cr) on the back of higher gold prices, higher offtake

of studded jewellery and overall strong volume growth (~20%). The jewellery

segment also witnessed a ~200bp yoy surge in PBIT margin to 9%. The watches

segment’s revenue witnessed 35% yoy growth to `325cr (`241cr) on improved

sales of high-margin medium/high-end watches. PBIT margin of the watches

segment improved by 330bp yoy to 18% (14.7%). Strong sales were driven by

buoyant consumer sentiment and discretionary spending. Revenue of the

company’s other businesses (eyeware and precision engineering) grew by 64%

yoy and managed to curtail loss by 15% to `5cr on PBIT level as compared to loss

of `6cr in 3QFY2010.

Outlook and valuation: Although we remain positive on Titan’s growth prospects,

we believe at 28.2x FY2012E earnings it discounts the same fairly well. Hence,

we maintain our Neutral rating on the stock.

Jewellery segment witnesses growth, sales up 47%: During the quarter, Titan’s

jewellery segment witnessed a 47% yoy increase in revenue on the back of higher

volume offtake (up ~20%) and strong gold prices (`2,000/gram). PBIT margin

also improved by 200bp yoy to 9% during 3QFY2011.

Watches segment’s revenue up 35%, margins improve: The watches segment

posted robust growth of 35% yoy in revenue to `325cr (`241cr). Higher same store

sales and increased offtake of high-margin medium/high-end watches were

largely responsible for the increase in margins. Total volume growth during the

quarter stood at 25%. On the PBIT front, Titan witnessed growth of 65% yoy, with

margin improving by 330bp to 18% (14.7%).

Other businesses continue to report losses in PBIT: The other businesses segment

comprising eyewear and precision engineering reported sales growth of 64% to

`66cr (`40cr) during the quarter. The new eyewear business has grown its retail

presence through Titan Eye+ stores. On the back of opening of new stores, the

segment incurred loss of `5cr on PBIT level. We expect the performance of the

segment to improve in the ensuing quarters.

Investment arguments

Organised national player in the 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 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 7% 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. The company’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 30%, 34% and 41% 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. The company 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 49% and 44% in FY2011E and

FY2012E, respectively.

Outlook and valuation

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 28.2x FY2012E earnings it discounts the same fairly well.

Hence, we continue to maintain our Neutral rating on the stock.