Titan Company - Evolving With Times; Visit Note :: Edelweiss

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Titan Company: 3QFY15 - revenues beat, margins miss; overall in line :: Kotak Sec, report

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3QFY15 – revenues beat, margins miss; overall in line. Titan reported broadly in-line EBITDA and PAT. Jewelry revenue outperformance and lower-than-expected ETR failed to drive overall performance as the outperformance on jewelry revenues was low on quality and watches had an extremely disappointing quarter. We continue to like Titan’s franchise and execution but remain negative given demanding valuations and high uncertainty on jewelry volumes and gold prices. EPS estimates go up marginally as we bake in the management’s fresh outlook on tax rate. Raise TP to `370 (from `350); retain REDUCE.


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Jewellery business continues to shine… • Titan :: ICICI Securities, report

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Jewellery shines, watches disappoint - Titan’s 3QFY15 review :: HDFC Securities

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Scrapping 80:20 scheme to ease gold supply -Hold Titan ::ICICI Securities, link

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Improvement in margins to drive growth… • Titan:: ICICI Securities PDF link

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Braveheart Series: Titan Company - Blockbuster Q2; Q3 Likely to be Muted; Result Update Q2FY15 :: Edelweiss

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Technicals -Titan, KEC International, PC Jeweller, Shree Ganesh Jewelry, Accelya Kale, R S Software, Idea Cellular :: Business Line

Titan Industries Ltd (TITN.NS): Correction: F1Q14: Strong Revenue, Weak Margin; Outlook Murky :Morgan Stanley Research

Titan Industries Ltd (TITN.NS): Correction: F1Q14: Strong Revenue, Weak Margin; Outlook Murky  :Morgan Stanley Research

Quick Comment: Titan reported F1Q revenue, EBITDA and net income growth of 41%, 16% and 17%, respectively, which compares with our expectations of 28%, 24%, and 20%. Gross margin of 22.1% (down 420bp yoy) was the lowest ever for Titan, driven primarily by adverse product mix in both the jewellery (higher plain gold and coins sales) and watch business. Interestingly, even with poor visibility on the jewellery business with recent policy changes governing gold imports, management held to its 25% revenue growth guidance for F2014.

Jewellery Business - Strong revenue growth but at cost of margins: 1)Jewellery revenue growth of 47% YoY (MSe 30%) was driven by the acquisition of a new customer following the recent sharp drop in gold prices. 2) Tanishq and Gold Plus reported SSG of 29% and 37%, respectively. 3) Operating margin contracted by 130bp YoY (MSe 20bp decline), driven by a combination of adverse product mix on lower studded share (16% in F1Q14 vs. 25% in F1Q13) and inventory accounting loss (details on page 2), partially offset by the positive impact of a customs duty hike. 4) Adjusting for the inventory loss (Rs340mn) and duty increase (Rs150mn), jewellery EBIT margin would have declined 50-60bp yoy. 5) Titan added 37k sq feet under the Tanishq format in F1Q and has guided for 75K sq feet of addition in F2014.

Recent policy action by the RBI clouds long-term growth visibility. Our calculations suggest 40 tons of gold export from Domestic Tariff Area (DTA) in F2013. Based on these numbers, the new policy will entail imports of only 160 tons pa (vs. ~573 tons of jewellery demand and ~923 tons of total demand in F2013). However, management has alluded to F2013 gold export of 70 tons. We expect multiples to compress as markets factor in uncertainties around low visibility on long-term growth. We note that Titan management is confident of sufficient gold allocation to meet its operational requirements even against the backdrop of potential lower imports in F2014.

Strong Q1 but regulatory uncertainty persists: HOLD TITAN :Religare research

Strong Q1 but regulatory uncertainty persists: HOLD
TTAN’s Q1 net sales/EBITDA/PAT grew by a strong 42%/15.6%/16.9% with
topline growth led by the jewellery business (+47% YoY; grammage up 67%
YoY) even as watches clocked a mere 11.4% growth. Jewellery margins
were hit by a lower studded share and inventory losses (~Rs 340mn). We
raise our FY14/FY15 earnings by 7%/9% and our Mar’14 TP to Rs 265 (from
Rs 225) due to reversal to the gold-on-lease scheme. However, gold
availability and further regulatory risks remain key stock overhangs. HOLD.

Titan- Regulatory headwinds : Moving away from gold lease model to adversely impact earnings/returns: JPMorgan

Titan management today provided clarification on recent RBI notification on
changes to the current terms governing import of gold. These new regulations will
have significant impact on Titan’s gold procurement model as current practice of
gold leasing will no longer be feasible and credit of any kind for import of gold
for domestic use is prohibited. These regulations would adversely impact Titan’s
interest costs and ROCE for the jewellery business. Mgmt noted that more clarity
on the new structure will be available over next few weeks as they are exploring
various options. This would imply uncertainty on this name for the short term and
adverse change in the business model may also lead to multiple de-rating. We
expect near term weakness in the stock to continue post sharp correction

Titan plans to diversify further "Deutsche bank,

Fact:
** Titan proposes to change its name to “Titan Company Limited” from “Titan
Industries Limited” (it was incorporated as “Titan Watches Limited” in 1984).
** It plans to amend the “Objects” clause of Memorandum of Association
enabling it to enter newer businesses (excerpts below):
1. Hearing aids and related accessories
2. Apparel, garments, sarees, writing instruments, mobile phones,
musical instruments, lifestyle accessories, etc.
3. Rendering content through educational workshops, conferences,
theater, entertainment shows, gadgets, toys, DIY kits, activity books,
sports products, food and beverages, etc.
4. Kitchen appliances, storage shelves, kitchen utensils, chimneys, hobs,
furniture and cabinets, etc.
5. Products powered by solar energy
Deutsche view:
** While we believe that Titan is unlikely to aggressively enter many of these
new segments, the intention seems clear—to diversify from jewelry (which
accounts for c.80% of profits) in the medium term.
** While the company believes in its ability to incubate and grow new
business lines, it will likely face organizational challenges. It would require a
significant mindset change to incubate smaller business at this point, as the
jewelry division is c.INR80 bn in sales (in our view, there are parallels in
Hindustan Unilever’s Foods and Ice cream business—top management
attention and adequate resourcing are challenges faced by small businesses in
large companies).
Retain Hold
Titan's jewelry business model's attractiveness has diminished substantially
with the recent Reserve Bank regulation which effectively bans the 'gold-onlease' model. Even if we look beyond the near-term earnings cuts, the
overhang of further regulation (likely curbs on advance purchase scheme)
cannot be ignored. Recent stock correction reflects some of the concerns.
Retain Hold rating.

Titan: Recent RBI circular to materially impact Jewelry business :Motilal Oswal

Recent RBI circular to materially impact Jewelry business
Cutting estimates; maintain Buy with a reduced target price
 Titan Industries (TTAN) recently issued a notification/press release to stock exchanges
and later held a Conference Call to discuss the implications of the RBI circular dated 4
June 2013. Key takeaways:
 The management highlighted the unprecedented nature of changes for the Jewelry
business: (a) All gold imports for domestic consumption only on 100% cash margin
basis, (b) No credit allowed for import of gold for domestic use, including gold imports
under lease route, (c) Implementation of these rules in letter and spirit, precluding
any alternate credit mechanism. It refrained from giving any details about the impact
in terms of numbers.
 Key implications for TTAN: (a) Termination of gold-on-lease method and shift towards
cash-and-carry model, with upfront cash payment for procurement, (b) Change in
hedging mechanism - earlier gold on lease used to work as a natural hedge; now TTAN
will explore various means including forwards on domestic exchanges, (c) Higher interest
costs - earlier TTAN incurred 4-5% interest cost on gold-on-lease method; now it may
need to pay existing market borrowing rates, (d) Higher working capital - payable days
will reduce post the shift to cash-and-carry model. Given that its free cash generation
would be impacted, TTAN is reviewing its expansion plans. The management believes
it will turn net debt in 2HFY14 (ended FY13 with net cash of INR11.4b).
 Two silver linings: (a) Availability of direct import route (this is currently allowed for 10
tonnes of import, but the management clarified that this license can be renewed),
which will help save ~100bp of margin (will no longer pay VAT), (b) Continuation of
Golden Harvest Scheme - RBI has not made any adverse decision yet on this scheme
and the management mentioned that it will use the advances taken under this scheme
(currently ~INR10b) for inventory funding.
 Cutting estimates 10-13%: We have revised our estimates to incorporate the changes
in the Jewelry business model. We now model higher credit costs, lower expansion,
lower payable days and higher working capital. Consequently, our earnings estimates
for FY14 and FY15 are cut 10-13%. While the change in business model is indeed
material, given the industry wide impact of these measures, we expect a partial pass
through of costs. However, conservatively we do not model for the same.
 It had appeared to us that regulatory actions would recede. However, the severity of
the current account deficit and currency situation has warranted fresh regulatory
measures. While we do not rule out further measures to restrict gold consumption ,
our conviction on the long-term prospects for Branded Jewelry remains undiminished.
 Changes in gold inventory funding will impact financial metrics, but operational metrics
remain unperturbed, as far as demand is concerned. In other words, nothing changes
as far as TTAN's jewelry consumer is concerned.
 In view of the material changes in the Jewelry business model - TTAN's valuation
multiples need to correct to reflect the lower RoCE of the business.
 We retain our Buy rating, with a revised target price of INR240 (23x FY15E EPS, 15%
discount to three-year average v/s our earlier ascribed P/E multiple of 26x).
Implementation of PMLA, with a lower threshold of INR50k, and changes in gold deposit
scheme remain the key risk factors.

Titan-Falling gold prices leading to demand surge; Gauging earnings impact :: JPMorgan

 Gold prices are trending down again. After recovering from mid April
fall, gold prices have started to trend down again and are now closing the
lows seen during April. This has raised fresh investor concerns regarding
consumer demand in falling gold price environment. There is a risk that
consumers may choose to postpone their purchases hoping for a better
purchase price in future or may not find gold as an attractive investment tool
any longer. So far though, volume offtake seems to have held up well for
jewelery retailers. In the past, periods of falling gold prices have triggered
sharp uptick in volumes and jewelery retailers have benefited in terms of
overall increase in sales. Data over the last decade (refer Fig 4 inside)
suggests that a substantial correction in gold prices has typically led to an
increase in gold imports. Also, there seems to be baseline support to India
gold import volume at average 850-900 tonnes as seen over past six years.
Please refer to Bharat Iyer’s note India’s Gold Obsession - Not Easy to
Wish Away for more color.
 Gold price sensitivity for Titan's earnings. We have built in various
scenarios for gold price and volume change for gold jewellery for Titan. We
keep diamond jewellery/watch/eyewear sales assumptions constant.
Assuming gold price decline from -5% to -15% for FY14 and volume
change varying between +10% and +30%, we estimate Titan's FY14E EPS
would be affected by +2 to -8%. Please refer to Table 1 inside for details.
 Falling gold price is more detrimental to unorganised players that
largely have unhedged exposure to gold prices. Organised players like Titan
follow gold on lease model and are hedged on gold prices to a large extent.
Making charges for Titan are also variable (linked to gold prices) vs fixed
charges for unorganised and some regional players. In the scenario of
falling gold prices, the gap between making charges for Titan and other
players narrows. The recent RBI notification restricting gold imports via
consignment route would also affect unorganised players more adversely
than organised players that source gold on lease basis as per our discussions
with various industry players.
Margin impact. As lower gold prices trigger higher purchases of gold
jewellery vs diamond jewellery (which is witnessing slower offtake in recent
months) we expect margins to be affected adversely on account of
unfavorable product mix. However absolute EBIT growth for jewellery may
still be healthy owing to strong sales growth

Titan Industries: Buy :: Business Line

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.

Queries on Titan, Gruh Finance, Brigade, Aanjaneya Lifecare, Kesoram Industries, NMDC, ::Business Line

Technicals- Titan, Gruh Finance, Brigade, Aanjaneya Lifecare, Kesoram Industries, NMDC, ::Business Line

Titan Industries -Dolat Capital

Net Sales at ` 30bn up 17% v/s our estimate of ` 28.7bn. Gross margin declined
by 40bps YoY to 23.1%. EBITDA at ` 2.8bn up 32.8% as EBITDA margins
expanded by 64bps to 9.4% (our estimate of 10.2%). Advertising cost to sales
ratio stood at 3.6% down 133bps YoY and down 70bps QoQ. PAT at ` 2bn up
24% v/s our estimate of ` 2bn.
Key Takeaways of the conference call
􀁺 Gold volume growth stood at 12% which was negative in Q1 and Q2 at (-
21%) and (-11%) respectively. Revenue grew by 27% on back of festive,
marriage season and space addition. Space addition during the quarter stood
at 55000 sq ft and total space at the end of quarter was 504,000 sq ft across
143 stores.
􀁺 Studded share declined during the quarter to 22% v/s 32% in Q2FY13 mainly
on account of marriage season. It has initiated the discount scheme of upto
20% off in diamond jewellery from Jan 2013 which would improve the mix for
Q4FY13. The company has a target to improve the share of diamond jewellery
to 40% in the coming years.
􀁺 Watches segment margin is expected to improve in the coming quarters.
The margin impact was largely on account of rupee depreciation.
􀁺 The company has presented its response with respect to the linking of gold
on loan with the base rate and believes that they have a strong case. Only
50tons of c.900-1000tons imports is utilized for gold loan.
􀁺 Currently the company is entering into gold loan with domestic bank which
has result in a 20-25bps increase in its interest cost.

QUERY CORNER - Hindustan Zinc, Sterlite Industries, Titan, Yes Bank, JK Bank, Moser Baer :: Business Line