Titan Industries - Risk-reward turning favorable, Upgrade to OW:: JPMorgan

Titan is one of the poor performing stocks in our consumer universe over the past
year, having underperformed the Sensex by 5%/11%/5% over past 3M/6M/12M.
The underperformance has been on account of: 1) slowing jewelry/watch demand,
2) concerns on margin deterioration, and 3) regulatory issues. While these
concerns may not go away entirely in FY14 (Q4FY13 revenue growth was below
expectations), we do expect things to improve from here on for the company. The
recent decline in gold prices has led to good surge in jewelry demand in the last
few weeks, and we expect growth rates, particularly in 1H, to be better if gold
prices stabilize at current levels. The watch segment, in our view, should see an
improved performance in FY14 (more back-ended though) both on the revenue
and margin front. Our recent discussions with industry players indicate that
unfavorable regulations related to the Money Laundering Bill, gold lease rates
and likely restrictions on gold imports may not impact jewelry retailers. We think
Titan remains a good long-term play on discretionary consumption, with strong
brand equity, good management and a strong balance sheet. Upgrade to OW.

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 Mixed Q4FY13 earnings. Titan reported Net Sales, EBITDA and PAT growth
of 15%, 29% and 28% y/y, respectively. While sales came in below
expectations, margins were better leading to in-line earnings. The jewelry
segment registered revenue growth of 16% (9% grammage growth) and margin
expansion of 180bps (supported by lower ad spends and benefits from recent
custom duty hike). The watch segment witnessed muted sales growth of 1.5%
(underlying volume -10%) and margin decline of 200bps y/y. Eyewear sales
growth was strong at 46% y/y with LTL growth of 40%.
 Regulatory concerns – lower probability of impacting jewelry retailing. Our
interactions with industry players indicate that there is high probability that the
Prevention of Money Laundering Bill will be restricted to bullion and precious
gems only, and may not include jewelry retailing. Titan mgmt too clarified that
the recent RBI notification on gold imports through the consignment route may
not impact Titan adversely.
 Space addition to support revenue growth rates further. After adding 152K
sq ft space for its jewelry stores in FY13, Titan plans to add another ~100K sq ft
in FY14. Importantly, mgmt noted that much of the incremental space will be in
new towns which should limit the threat of cannibalisation.
 TP revision. We estimate a 22% EPS CAGR over FY13-15E. We raise our
target multiple from 23x to 25x as we now see limited downside risk to earnings
and lower regulatory risks. We also roll forward TP time frame to Mar’14 (from
Dec’13). We upgrade the stock to OW with a new Mar’14 TP of Rs305. Key
downside risk to our view is further decline in gold prices.