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Margin momentum stalling
Titan reported modest headline results for 4QFY11 with revenue +36%
YoY, Ebitda +6% YoY and PAT +64% YoY. The results were marred by a
one-off employee benefits provision, excluding which operating
performance was broadly in line. Looking ahead, we see the upgrade
cycle for Titan stalling as margin momentum slows due to a stabilising
mix and excise headwinds. This is at odds with the rich 31x FY12 PE and
rerating over the past year. Downgrade to UNERPERFORM from O-PF.
4QFY11 – marred by one-offs, otherwise in line
Titan’s 4Q performance was distorted by ex-gratia payments to employees in
light of the stellar performance during the year (we estimate Rs475m). This
depressed Ebitda growth to 6% and Ebitda margins to 6.0%. Excluding this,
Ebitda growth was ~53% - in line with estimates. Overall net profit growth
was 64% on a low base and net profit for the quarter stood at Rs838m. Top
line growth in the watches business was 17% - the slowest in FY11. In
jewellery, top line growth stood at 39% YoY (against 50% in 3Q and 62% in
4QFY10), backed by gold price inflation of 23% YoY. Titan has also declared a
dividend of Rs25/share and a 1:1 bonus issue followed by a 10:1 stock split.
Margin tailwinds stabilising
Titan has benefitted through FY11 from a mix shift towards higher priced
watches and diamond jewellery. In watches, the product mix shift has
moderated, pointing to stabilising margins in the business. In jewellery, the
focus on diamonds had received an extra fillip from the gap in price escalation
between diamonds and gold. This trend is now moderating with diamond
prices also beginning to rise sharply and we expect that the pace of diamond
penetration increase will be more modest in FY12.
Some headwinds emerging, margin expansion to moderate
Whilst Titan has started paying the 1% duty levied on branded jewellery, the
company has not yet begun to pass it on, delaying the decision in light of high
gold and diamond prices. The overall cost base is also under some pressure
due to the aggressive store opening program, the benefits of which may be a
somewhat delayed relative to the costs. These factors, along with the
stabilising mix, point to a more modest pace of margin expansion in FY12.
Upgrade cycle stalling, downgrade to U-PF
The 37% re-rating of the Titan stock since March 2010, to a 12m forward P/E
multiple of 31x, was driven by steady earnings upgrades (29% on a
cumulative basis). While we remain excited about Titan's strong franchise and
its longer-term outlook, with growth rates moderating and pressures on key
margin drivers, we believe the multiple will recede towards the historical band
of ~24-25x. With a 9% downside to our revised target price of Rs3,670 (24x
FY13 PE), we thus downgrade our recommendation to U-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin momentum stalling
Titan reported modest headline results for 4QFY11 with revenue +36%
YoY, Ebitda +6% YoY and PAT +64% YoY. The results were marred by a
one-off employee benefits provision, excluding which operating
performance was broadly in line. Looking ahead, we see the upgrade
cycle for Titan stalling as margin momentum slows due to a stabilising
mix and excise headwinds. This is at odds with the rich 31x FY12 PE and
rerating over the past year. Downgrade to UNERPERFORM from O-PF.
4QFY11 – marred by one-offs, otherwise in line
Titan’s 4Q performance was distorted by ex-gratia payments to employees in
light of the stellar performance during the year (we estimate Rs475m). This
depressed Ebitda growth to 6% and Ebitda margins to 6.0%. Excluding this,
Ebitda growth was ~53% - in line with estimates. Overall net profit growth
was 64% on a low base and net profit for the quarter stood at Rs838m. Top
line growth in the watches business was 17% - the slowest in FY11. In
jewellery, top line growth stood at 39% YoY (against 50% in 3Q and 62% in
4QFY10), backed by gold price inflation of 23% YoY. Titan has also declared a
dividend of Rs25/share and a 1:1 bonus issue followed by a 10:1 stock split.
Margin tailwinds stabilising
Titan has benefitted through FY11 from a mix shift towards higher priced
watches and diamond jewellery. In watches, the product mix shift has
moderated, pointing to stabilising margins in the business. In jewellery, the
focus on diamonds had received an extra fillip from the gap in price escalation
between diamonds and gold. This trend is now moderating with diamond
prices also beginning to rise sharply and we expect that the pace of diamond
penetration increase will be more modest in FY12.
Some headwinds emerging, margin expansion to moderate
Whilst Titan has started paying the 1% duty levied on branded jewellery, the
company has not yet begun to pass it on, delaying the decision in light of high
gold and diamond prices. The overall cost base is also under some pressure
due to the aggressive store opening program, the benefits of which may be a
somewhat delayed relative to the costs. These factors, along with the
stabilising mix, point to a more modest pace of margin expansion in FY12.
Upgrade cycle stalling, downgrade to U-PF
The 37% re-rating of the Titan stock since March 2010, to a 12m forward P/E
multiple of 31x, was driven by steady earnings upgrades (29% on a
cumulative basis). While we remain excited about Titan's strong franchise and
its longer-term outlook, with growth rates moderating and pressures on key
margin drivers, we believe the multiple will recede towards the historical band
of ~24-25x. With a 9% downside to our revised target price of Rs3,670 (24x
FY13 PE), we thus downgrade our recommendation to U-PF.
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