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Higher jewelry revenue growth drives increase in earnings
Following management commentary, we raised our earnings estimates for
FY12/13 by 9% and 8%, respectively, on higher jewelry revenue estimates. We
remain confident that despite the high gold price, Titan will experience continuing
growth in jewelry volumes, albeit at a slower pace. After the 39% jewelry volume
growth in 1Q, we factor in 4% volume growth for 2Q-4Q FY12 and 8% for FY13.
We are 6%/7% ahead of consensus on FY12/ FY13 earnings; consensus estimates
imply a 6% volume decline for 2Q-4Q FY12, which we believe is too conservative
Will the impressive 1Q performance fade away? We don’t think so
Over the last seven quarters, Titan has seen 34-72% yoy growth in jewelry
revenue despite a gold price rise of 16-33%, implying strong double-digit volume
growth in the period. The World Gold Council has also estimated 30-70% growth
in the Indian jewelry market in the same period. We attribute this strong market
growth to the non-discretionary nature of a large portion of demand for jewelry in
India, i.e., purchases for events like weddings/festivals (Dhanteras, Diwali, Akshay
Tritiya) which cannot be deferred indefinitely. While the high gold price will likely
dent volume growth momentum, we expect volume growth to remain positive
and forecast 29% revenue growth for 2Q-4QFY12 (4% volume, 25% price).
High diamond prices to force a shift to lower margin simple gold jewelry
We believe high diamond prices could force a buying shift from relatively highermargin studded jewelry to simple gold jewelry. We believe this was the primary
reason why gross margin declined 120bps in 1QFY12. However, since 80% of
jewelry stores are franchise/semi-franchise, the operating leverage would restrict a
fall in jewelry EBIT margin. This explains the 168bps increase in jewelry EBIT
margin in 1Q despite the gross margin decline.
36% earnings CAGR (FY11-13) key driver of target price
We raised our jewelry realization assumption to mirror the current gold price trend
as the gold price is a pass-through for Titan. We factor in 4% volume growth for
2Q-4Q FY12 and 8% for FY13. Our DCF-derived target price of INR 275 is based
on 13.75% CoE, 36% earnings CAGR over FY11-13E. Jewelry volume decline is
the biggest downside risk
Valuation
36% earnings CAGR FY11-13 drives target price of INR 275
A 36% CAGR in FY11-FY13 earnings is the driver of our DCF-derived target price of INR 275
(up from INR 250). Our DCF derived target price of INR 275 is based on cost of equity of
13.75% and a 4% terminal growth.
The key assumptions for our two-stage FCFE methodology are:
a) Risk-free rate of 6.7%, market risk premium of 8.1% (we apply a standard estimated
risk-free rate and market risk premium to all the Indian companies we cover) and
beta of 0.87 (Bloomberg Finance LP data).
b) We have taken growth in the stable phase of 4%. We have taken this growth rate
with the assumption that the long-term growth would be driven by the penetration
of organized retail and consequently demand for branded watches jewelry and
eyewear.
Our value for Titan works out to INR 275 per share. At our target price the exit P/E results in
30.5x FY13. We are 6% ahead of consensus on FY12 earnings and 7% ahead of consensus
on FY13 earnings.
Risks and concerns
Jewelry volume decline
We see a decline in jewelry volumes due to the high gold price as the biggest downside risk.
Titan benefits equally from a rise in gold price and growth in jewelry volumes. While we
expect Titan to fully pass-through gold price hikes, a too-high gold price may cause a volume
collapse, putting our earnings estimates at risk. However, we have assumed 4% jewelry
volume growth for 2Q-4Q FY12 vs. the 39% volume growth achieved in 1Q FY12.
Equity dilution
According to management, if gold on lease arrangement (which is a part of current liabilities)
were included, the company’s debt:equity ratio is slightly aggressive. Should it prove
necessary, the decision to raise capital through a rights issue will be made by the joint
promoters TIDCO and Tata. We believe that dilution is a risk, but assume it is unlikely to be
an issue for the next 12 months.
International presence
Titan opened 12 stores in Europe in the nineties and had to write off its international foray.
Management clarified that it has no plans for any major acquisitions -- India is management’s
focus market. Moreover, the company also confirmed that any such acquisition would have
to be vetted by the two promoters, TIDCO and Tata.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher jewelry revenue growth drives increase in earnings
Following management commentary, we raised our earnings estimates for
FY12/13 by 9% and 8%, respectively, on higher jewelry revenue estimates. We
remain confident that despite the high gold price, Titan will experience continuing
growth in jewelry volumes, albeit at a slower pace. After the 39% jewelry volume
growth in 1Q, we factor in 4% volume growth for 2Q-4Q FY12 and 8% for FY13.
We are 6%/7% ahead of consensus on FY12/ FY13 earnings; consensus estimates
imply a 6% volume decline for 2Q-4Q FY12, which we believe is too conservative
Will the impressive 1Q performance fade away? We don’t think so
Over the last seven quarters, Titan has seen 34-72% yoy growth in jewelry
revenue despite a gold price rise of 16-33%, implying strong double-digit volume
growth in the period. The World Gold Council has also estimated 30-70% growth
in the Indian jewelry market in the same period. We attribute this strong market
growth to the non-discretionary nature of a large portion of demand for jewelry in
India, i.e., purchases for events like weddings/festivals (Dhanteras, Diwali, Akshay
Tritiya) which cannot be deferred indefinitely. While the high gold price will likely
dent volume growth momentum, we expect volume growth to remain positive
and forecast 29% revenue growth for 2Q-4QFY12 (4% volume, 25% price).
High diamond prices to force a shift to lower margin simple gold jewelry
We believe high diamond prices could force a buying shift from relatively highermargin studded jewelry to simple gold jewelry. We believe this was the primary
reason why gross margin declined 120bps in 1QFY12. However, since 80% of
jewelry stores are franchise/semi-franchise, the operating leverage would restrict a
fall in jewelry EBIT margin. This explains the 168bps increase in jewelry EBIT
margin in 1Q despite the gross margin decline.
36% earnings CAGR (FY11-13) key driver of target price
We raised our jewelry realization assumption to mirror the current gold price trend
as the gold price is a pass-through for Titan. We factor in 4% volume growth for
2Q-4Q FY12 and 8% for FY13. Our DCF-derived target price of INR 275 is based
on 13.75% CoE, 36% earnings CAGR over FY11-13E. Jewelry volume decline is
the biggest downside risk
Valuation
36% earnings CAGR FY11-13 drives target price of INR 275
A 36% CAGR in FY11-FY13 earnings is the driver of our DCF-derived target price of INR 275
(up from INR 250). Our DCF derived target price of INR 275 is based on cost of equity of
13.75% and a 4% terminal growth.
The key assumptions for our two-stage FCFE methodology are:
a) Risk-free rate of 6.7%, market risk premium of 8.1% (we apply a standard estimated
risk-free rate and market risk premium to all the Indian companies we cover) and
beta of 0.87 (Bloomberg Finance LP data).
b) We have taken growth in the stable phase of 4%. We have taken this growth rate
with the assumption that the long-term growth would be driven by the penetration
of organized retail and consequently demand for branded watches jewelry and
eyewear.
Our value for Titan works out to INR 275 per share. At our target price the exit P/E results in
30.5x FY13. We are 6% ahead of consensus on FY12 earnings and 7% ahead of consensus
on FY13 earnings.
Risks and concerns
Jewelry volume decline
We see a decline in jewelry volumes due to the high gold price as the biggest downside risk.
Titan benefits equally from a rise in gold price and growth in jewelry volumes. While we
expect Titan to fully pass-through gold price hikes, a too-high gold price may cause a volume
collapse, putting our earnings estimates at risk. However, we have assumed 4% jewelry
volume growth for 2Q-4Q FY12 vs. the 39% volume growth achieved in 1Q FY12.
Equity dilution
According to management, if gold on lease arrangement (which is a part of current liabilities)
were included, the company’s debt:equity ratio is slightly aggressive. Should it prove
necessary, the decision to raise capital through a rights issue will be made by the joint
promoters TIDCO and Tata. We believe that dilution is a risk, but assume it is unlikely to be
an issue for the next 12 months.
International presence
Titan opened 12 stores in Europe in the nineties and had to write off its international foray.
Management clarified that it has no plans for any major acquisitions -- India is management’s
focus market. Moreover, the company also confirmed that any such acquisition would have
to be vetted by the two promoters, TIDCO and Tata.
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