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Titan Industries -Riding the tide of discretionary spending…
Favourable demographics like increased urbanisation, rising number of
middle class households & working population and increased
disposable income are expected to fuel discretionary spending. India is
expected to see a shift towards discretionary spending, the share of
which is expected to reach ~ 70% in 2025E from 52% in 2005. Titan
Industries (TIL) is aptly positioned with product offerings to cater to
discretionary spending in the lifestyle segments. With a strong
distribution network (149 new stores expected in FY11E) and robust
brand presence in India, we believe TIL is suitably placed to fulfil the
rising aspirations of domestic consumers. We expect TIL’s revenues to
grow at a CAGR of 28% to | 9,751 crore in FY10-13E driven by strong
volume growth in the jewellery and watches segments. We are
initiating coverage on the stock with an ADD rating.
Jewellery to remain key growth driver; other segments to aid growth
TIL has ~40% market share in the domestic organised jewellery market.
With a diverse product portfolio (catering to all income groups), trusted
brand and expanded retail presence we believe TIL will be able to attract
more customers from the domestic unorganised retail sector. We forecast
volume and value growth of 13% CAGR in jewellery segment in FY10-13E
and expect the jewellery segment to contribute ~75% to TIL’s topline.
With the planned retail expansion we expect 21% and 54% (albeit on a
small base) CAGR in the watches and eyewear segment, respectively,
during FY10-13E.
Margin expansion and better working capital management
We expect TIL’s EBITDA margins to improve by ~113 bps to 9.6% in
FY10-13E driven by a diverse product portfolio, introduction of premium
segment products, improvement in working capital and a decline in
losses in the eyewear segment.
Valuation
At the CMP of | 3487, the stock is trading at P/E of 32.2x in FY12E and
24.5x in FY13E. We expect TIL’s standalone revenues to grow at 28%
CAGR to | 9,751 crore in FY10-FY13E driven by aggressive expansion
plans in jewellery, watches and eyewear markets. We forecast margin
accretion due to rising share of premium products in the overall product
mix and decline in losses in the eyewear segment. We value the stock
using DCF methodology and initiate coverage with an ADD rating.
Investment Rationale
Increased discretionary spending to drive TIL’s growth
Increased share of discretionary items in households wallet
We believe that the discretionary spending in India will receive a
significant boost primarily driven by expectation of robust economic
growth (GDP growth at ~9% CAGR in FY10-15E according to Economic
Intelligence Unit), the rapid rise in the middle class population and
improving disposable income. According to McKinsey Global Institute
(MGI), the average household disposable income in India is expected to
grow at a 5% CAGR to | 319,518 in 2010-25E on the back of ~10 times
rise in middle class households in 2025E (128 million vs. 13 million
households in 2005).
In addition, India is blessed with favourable demographics as the share of
working population in the total population is expected to reach ~68% in
2025E (vs. 63% in 2005), pushing household discretionary spending to
~70% of the total household spending in 2025E (vs. 52% in 2005). Also,
the rapid rise in organised retail in the domestic market, which is
expected to grow at a 35% CAGR to US$67 billion in CY10-CY14E as per
Business Monitor International (BMI) estimates, provides credence to the
consumption growth story in the country.
Risks and Concerns
Volatility in gold prices
Jewellery demand is highly dependent on the movement in gold prices
with stable/falling prices leading to an improvement in jewellery demand
and vice versa. The significant jump in gold prices can lead to a significant
slowdown in jewellery demand in the domestic market and negatively
impact our demand forecast.
Increasing competition from international watch manufactures
Several international watch majors such as Tissot, Omega, Rolex Fossil,
Calvin Klein, Giordano, Esprit and Tommy Hilfiger complete directly with
TIL primarily in the premium watch category. With growing disposable
income and rising aspirations levels, India presents an attractive market to
the foreign premium watch manufacturers. TIL is highly susceptible to an
increase in competition from foreign brands, which can negatively impact
our revenues and margin forecast in the watches segment.
Higher rentals in short-term
With robust expansion plans in FY11E (149 new stores), TIL is exposed to
rising rental expenses on new stores as well as existing stores that are on
lease. A higher than expected increase in rental expenses can negatively
impact the company’s expansion plans, leading to reduced profitability.
Slower than expected recovery from economic slowdown
TIL’s products fall under the discretionary category, which has high delta
with the growth in disposable income and is highly dependent on the
healthy growth of the economy. A slower than expected recovery in the
economy can lead to lower spending on discretionary items (and more on
necessities) leading to reduced volume growth for the company. Also,
middle class consumers are highly likely to delay upgrading to premium
products in the event of a delay in economic recovery. This, in turn, can
negatively impact our revenues and margin forecasts.
Continued dominance of unbranded jewellery
The jewellery market in India is dominated by unorganised players with
over 90% of the market share. In the recent past, TIL has been able to
increase its market share by targeting young and educated customers in
metros and Tier I cities with the guarantee on purity of gold and
presenting contemporary designs. However, TIL’s incremental growth is
dependent on its ability to attract a large consumer base in Tier II and Tier
III cities who still rely on family jewellers.
Quality of franchisee products
We expect a significant increase in the number of TIL’s franchisees with
the expansion of the company in suburban and rural markets. As product
quality is one of the key drivers of TIL’s growth, any dilution in the quality
of the jewellery products offered by franchisees would have an adverse
impact on the company’s brand image.
Valuations
At the CMP of | 3487, the stock is trading at a P/E of 32.2x in FY12E and
24.5x in FY13E. We have valued TIL using the DCF methodology. Our
valuation is based on assuming a 10.4% WACC and 4% terminal growth.
We expect TIL’s standalone revenues to grow at 28% CAGR to | 9,751
crore in FY10-FY13E driven by aggressive expansion plans in the
jewellery, watches and eyewear segment leading to strong growth in
volume sales. We forecast margin accretion on the back of rising share of
premium products in the overall product mix and decline in losses in the
eyewear segments leading to growth of 36% CAGR in bottomline.
However, we believe the market is factoring in the growth potential of the
company given the 94% jump in the stock price in a year (vs. 4% in the
Sensex). Hence, we are initiating coverage on the stock with an ADD
rating and a target price of | 3624/ share (premium of 4% from the current
price).
DCF assumptions
WACC (%) 10.4
Terminal Growth (%) 4.0
PV of Free Cash Flows (| crore) 4,984
Terminal Value of Free Cash Flows (| crore) 11,193
Total Value of Free Cash Flows (| crore) 16,177
No. of Shares (in crore) 4.4
DCF-derived Price Target 3 ,624
Implied PE (on FY11E EPS) 33.5
Source: Company, ICICIdirect.com Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Titan Industries -Riding the tide of discretionary spending…
Favourable demographics like increased urbanisation, rising number of
middle class households & working population and increased
disposable income are expected to fuel discretionary spending. India is
expected to see a shift towards discretionary spending, the share of
which is expected to reach ~ 70% in 2025E from 52% in 2005. Titan
Industries (TIL) is aptly positioned with product offerings to cater to
discretionary spending in the lifestyle segments. With a strong
distribution network (149 new stores expected in FY11E) and robust
brand presence in India, we believe TIL is suitably placed to fulfil the
rising aspirations of domestic consumers. We expect TIL’s revenues to
grow at a CAGR of 28% to | 9,751 crore in FY10-13E driven by strong
volume growth in the jewellery and watches segments. We are
initiating coverage on the stock with an ADD rating.
Jewellery to remain key growth driver; other segments to aid growth
TIL has ~40% market share in the domestic organised jewellery market.
With a diverse product portfolio (catering to all income groups), trusted
brand and expanded retail presence we believe TIL will be able to attract
more customers from the domestic unorganised retail sector. We forecast
volume and value growth of 13% CAGR in jewellery segment in FY10-13E
and expect the jewellery segment to contribute ~75% to TIL’s topline.
With the planned retail expansion we expect 21% and 54% (albeit on a
small base) CAGR in the watches and eyewear segment, respectively,
during FY10-13E.
Margin expansion and better working capital management
We expect TIL’s EBITDA margins to improve by ~113 bps to 9.6% in
FY10-13E driven by a diverse product portfolio, introduction of premium
segment products, improvement in working capital and a decline in
losses in the eyewear segment.
Valuation
At the CMP of | 3487, the stock is trading at P/E of 32.2x in FY12E and
24.5x in FY13E. We expect TIL’s standalone revenues to grow at 28%
CAGR to | 9,751 crore in FY10-FY13E driven by aggressive expansion
plans in jewellery, watches and eyewear markets. We forecast margin
accretion due to rising share of premium products in the overall product
mix and decline in losses in the eyewear segment. We value the stock
using DCF methodology and initiate coverage with an ADD rating.
Investment Rationale
Increased discretionary spending to drive TIL’s growth
Increased share of discretionary items in households wallet
We believe that the discretionary spending in India will receive a
significant boost primarily driven by expectation of robust economic
growth (GDP growth at ~9% CAGR in FY10-15E according to Economic
Intelligence Unit), the rapid rise in the middle class population and
improving disposable income. According to McKinsey Global Institute
(MGI), the average household disposable income in India is expected to
grow at a 5% CAGR to | 319,518 in 2010-25E on the back of ~10 times
rise in middle class households in 2025E (128 million vs. 13 million
households in 2005).
In addition, India is blessed with favourable demographics as the share of
working population in the total population is expected to reach ~68% in
2025E (vs. 63% in 2005), pushing household discretionary spending to
~70% of the total household spending in 2025E (vs. 52% in 2005). Also,
the rapid rise in organised retail in the domestic market, which is
expected to grow at a 35% CAGR to US$67 billion in CY10-CY14E as per
Business Monitor International (BMI) estimates, provides credence to the
consumption growth story in the country.
Risks and Concerns
Volatility in gold prices
Jewellery demand is highly dependent on the movement in gold prices
with stable/falling prices leading to an improvement in jewellery demand
and vice versa. The significant jump in gold prices can lead to a significant
slowdown in jewellery demand in the domestic market and negatively
impact our demand forecast.
Increasing competition from international watch manufactures
Several international watch majors such as Tissot, Omega, Rolex Fossil,
Calvin Klein, Giordano, Esprit and Tommy Hilfiger complete directly with
TIL primarily in the premium watch category. With growing disposable
income and rising aspirations levels, India presents an attractive market to
the foreign premium watch manufacturers. TIL is highly susceptible to an
increase in competition from foreign brands, which can negatively impact
our revenues and margin forecast in the watches segment.
Higher rentals in short-term
With robust expansion plans in FY11E (149 new stores), TIL is exposed to
rising rental expenses on new stores as well as existing stores that are on
lease. A higher than expected increase in rental expenses can negatively
impact the company’s expansion plans, leading to reduced profitability.
Slower than expected recovery from economic slowdown
TIL’s products fall under the discretionary category, which has high delta
with the growth in disposable income and is highly dependent on the
healthy growth of the economy. A slower than expected recovery in the
economy can lead to lower spending on discretionary items (and more on
necessities) leading to reduced volume growth for the company. Also,
middle class consumers are highly likely to delay upgrading to premium
products in the event of a delay in economic recovery. This, in turn, can
negatively impact our revenues and margin forecasts.
Continued dominance of unbranded jewellery
The jewellery market in India is dominated by unorganised players with
over 90% of the market share. In the recent past, TIL has been able to
increase its market share by targeting young and educated customers in
metros and Tier I cities with the guarantee on purity of gold and
presenting contemporary designs. However, TIL’s incremental growth is
dependent on its ability to attract a large consumer base in Tier II and Tier
III cities who still rely on family jewellers.
Quality of franchisee products
We expect a significant increase in the number of TIL’s franchisees with
the expansion of the company in suburban and rural markets. As product
quality is one of the key drivers of TIL’s growth, any dilution in the quality
of the jewellery products offered by franchisees would have an adverse
impact on the company’s brand image.
Valuations
At the CMP of | 3487, the stock is trading at a P/E of 32.2x in FY12E and
24.5x in FY13E. We have valued TIL using the DCF methodology. Our
valuation is based on assuming a 10.4% WACC and 4% terminal growth.
We expect TIL’s standalone revenues to grow at 28% CAGR to | 9,751
crore in FY10-FY13E driven by aggressive expansion plans in the
jewellery, watches and eyewear segment leading to strong growth in
volume sales. We forecast margin accretion on the back of rising share of
premium products in the overall product mix and decline in losses in the
eyewear segments leading to growth of 36% CAGR in bottomline.
However, we believe the market is factoring in the growth potential of the
company given the 94% jump in the stock price in a year (vs. 4% in the
Sensex). Hence, we are initiating coverage on the stock with an ADD
rating and a target price of | 3624/ share (premium of 4% from the current
price).
DCF assumptions
WACC (%) 10.4
Terminal Growth (%) 4.0
PV of Free Cash Flows (| crore) 4,984
Terminal Value of Free Cash Flows (| crore) 11,193
Total Value of Free Cash Flows (| crore) 16,177
No. of Shares (in crore) 4.4
DCF-derived Price Target 3 ,624
Implied PE (on FY11E EPS) 33.5
Source: Company, ICICIdirect.com Research
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