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UBS Investment Research
Titan Industries
G ains from increasing affluence
�� Expect demand uptick in festive season
We believe volume growth will be good in Q3 FY12 as festive season buying
begins. After management guidance for muted volume growth in Q2 FY12 due to
higher gold prices, we expect healthy growth in gold jewellery volumes in Q3
FY12. We think the key potential risk to the share price is the weakness in the
underlying commodity (gold) despite Titan Industries (Titan) not having gold in its
inventory, since the stock is perceived as a gold play.
�� ROE improvement due to improving mix
ROE improved from 6% in FY02 to 42% in FY11 as the company continued to
expand its jewellery business and improve scale. Better asset turnover also
contributed to the increase in ROE. Net margin improved from 1.4% in FY02 to
6.6% in FY11 with the high-margin jewellery business increasing in the mix. For
every 1% increase in jewellery net profit margin, we estimate a 3.7% increase in
PAT for the company.
�� Titan’s focus on the premium segment should increase margins
With consumers upgrading, we expect Titan’s strategy of focusing on the premium
segment—with Helios as a pan-India premium watch retailer and Tanishq’s new
strategy of setting up six to eight super-premium company-owned stores—to result
in better margins, as margins are higher in the premium segment.
�� Valuation: maintain Buy rating with price target of Rs250.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.2% and an intermediate growth rate of 17%.
Titan Industries
Titan Industries is a diversified specialty retailer in India with exposure to the
watch, jewellery and eyewear segments. It began operations as a watch company,
diversifying into the jewellery business in 1995, and the eyewear business in
2007. Watches contributed 22%, jewellery 75%, and eyewear 2% of its revenue
in FY10. The company operates around 0.7m sqf of retail space. Its brands
include Sonata, Titan, Fastrack, Xylus in watches; Tanishq, GoldPlus and Zoya
in jewellery; and Titan Eye+ in its eyewear division
Statement of Risk
We believe the key risks that could affect the sector include continued upward
movement of downstream petrochemical products and higher agri-commodity
based raw material costs and the inability of branded consumer companies to
pass on price increases in an increasingly competitive market. The sector enjoys
low corporate tax rates because of factory locations in areas that are designated
as tax benefit zones; any change in this law could affect earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Titan Industries
G ains from increasing affluence
�� Expect demand uptick in festive season
We believe volume growth will be good in Q3 FY12 as festive season buying
begins. After management guidance for muted volume growth in Q2 FY12 due to
higher gold prices, we expect healthy growth in gold jewellery volumes in Q3
FY12. We think the key potential risk to the share price is the weakness in the
underlying commodity (gold) despite Titan Industries (Titan) not having gold in its
inventory, since the stock is perceived as a gold play.
�� ROE improvement due to improving mix
ROE improved from 6% in FY02 to 42% in FY11 as the company continued to
expand its jewellery business and improve scale. Better asset turnover also
contributed to the increase in ROE. Net margin improved from 1.4% in FY02 to
6.6% in FY11 with the high-margin jewellery business increasing in the mix. For
every 1% increase in jewellery net profit margin, we estimate a 3.7% increase in
PAT for the company.
�� Titan’s focus on the premium segment should increase margins
With consumers upgrading, we expect Titan’s strategy of focusing on the premium
segment—with Helios as a pan-India premium watch retailer and Tanishq’s new
strategy of setting up six to eight super-premium company-owned stores—to result
in better margins, as margins are higher in the premium segment.
�� Valuation: maintain Buy rating with price target of Rs250.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.2% and an intermediate growth rate of 17%.
Titan Industries
Titan Industries is a diversified specialty retailer in India with exposure to the
watch, jewellery and eyewear segments. It began operations as a watch company,
diversifying into the jewellery business in 1995, and the eyewear business in
2007. Watches contributed 22%, jewellery 75%, and eyewear 2% of its revenue
in FY10. The company operates around 0.7m sqf of retail space. Its brands
include Sonata, Titan, Fastrack, Xylus in watches; Tanishq, GoldPlus and Zoya
in jewellery; and Titan Eye+ in its eyewear division
Statement of Risk
We believe the key risks that could affect the sector include continued upward
movement of downstream petrochemical products and higher agri-commodity
based raw material costs and the inability of branded consumer companies to
pass on price increases in an increasingly competitive market. The sector enjoys
low corporate tax rates because of factory locations in areas that are designated
as tax benefit zones; any change in this law could affect earnings.
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