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Titan Industries Limited
▼ Underweight
Previous: Neutral
TITN.BO, TTAN IN
Time for a Breather; Risk > Reward - Downgrade to Underweight
Titan has enjoyed an impressive run, doubling in price since July’10 on the back of
healthy revenue and margin growth trends in FY11. While high consumer confidence
levels have certainly been in its favor, management’s initiatives toward continuous
innovation, expanding distribution, and profitability enhancement have supported
healthy earnings growth for the company. We, however, have a few concerns looking
ahead on account of steep increases in diamond jewelry prices, excise levy on branded
jewelry, and competitive challenges. Valuations at 36x FY12E and 29x FY13E P/E
appear stretched to us and we downgrade to Underweight.
All well now, but we see risks to growth and margins going forward. Titan has
seen a 90% increase in diamond procurement prices during the Dec’10-Apr'11
period and the company stated in its annual report that they may sacrifice gross
margins to remain competitive. Given studded jewelry accounts for 28-30% of
jewelry sales and is high margin, moderation in volume off take for this could weigh
on overall margins. Titan’s pursuit of growth is coming at a cost in an incrementally
more competitive environment – for example, there is a change in its diamond
jewelry exchange policy (consumers getting 100% of value now vs. ~80% earlier).
Further excise levy of 1% on branded jewelry will make their products less
competitive vs. regional/local players that could avoid this levy. GoldPlus, the
regional jewelry format is facing increased competitive challenges from local
players and posted a 14% decline in gold jewelry grammage in FY11.
Aggressive store expansion may keep margins in check. Titan is likely to witness
0.23- 0.25mn sq ft of space addition, of which a majority will be for jewelry (c80-
100Ksq ft), followed by watches (c70-80K sq ft) and eyewear (c75-80K sq ft).
Capex for FY12 will likely double as a result.
Downgrade to UW on expensive valuation. Our FY13E EPS and PT are revised
down by 4-6% as we build in lower margin expansion than estimated earlier. We
estimate 27% EPS CAGR over FY11-13E, which is optimistic in our view. While
Titan remains one of the best plays in India on lifestyle spending and consumer
migration toward branded products, current rich valuations of 36x FY12E and 29x
FY13E P/E leave little room for any disappointment we believe. While Q1FY12
earnings could benefit from healthy festive sales and inventory gains, we would
recommend booking profits on any rally on account of this. Our new Mar’12 PT of
Rs200 implies 12% downside potential from current levels.
Excerpts from FY11 Annual Report highlighting risks
around jewelry segment
Some important comments from Titan Industries MD&A section in FY11 annual
report which talk about potential risks to jewelry margins and diamond jewelry
demand.
“Our procurement prices of polished diamonds have increased by around 90%
in April 2011, compared to December 2010. This put a tremendous pressure both
on the overall market and on the competitive position of our brands as the difference
between our prices and our competitors widen on account of these steep
increases."
“We have put in place multiple strategies to deal with this challenge: sacrificing
some gross margin to remain competitive; improving our exchange policy for
increasing our value for money…..”
“March 2011 also saw Excise Duty being levied on branded jewelry, this time to
the extent of 1%.... this is applicable only on brands like Tanishq and not on
house mark shops, which means that any big and reputed independent jeweler can
avoid this.”
“A few big jewelers set up large format stores in some GoldPlus markets,
invested considerably in marketing and discounts and penetrated into the GoldPlus
franchise. In GoldPlus..... the grammage of gold jewellery declined by 14%.”
Risks for jewelry division
“To mitigate the risk of rising diamond prices, dialogues are on with sight holders for
long-term relationships and the company also has started experimentation with
buying large quantities of rough diamonds and processing them directly to start
preparing for backward integration.”
“.. Golden Harvest and Gold Futures schemes to collect advances from customers
for facilitating purchase of Tanishq and Goldplus jewelry. … likely to be hindered
by Government regulations, especially with respect to implementing Know
Your Customer (KYC) norms”
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Titan Industries Limited
▼ Underweight
Previous: Neutral
TITN.BO, TTAN IN
Time for a Breather; Risk > Reward - Downgrade to Underweight
Titan has enjoyed an impressive run, doubling in price since July’10 on the back of
healthy revenue and margin growth trends in FY11. While high consumer confidence
levels have certainly been in its favor, management’s initiatives toward continuous
innovation, expanding distribution, and profitability enhancement have supported
healthy earnings growth for the company. We, however, have a few concerns looking
ahead on account of steep increases in diamond jewelry prices, excise levy on branded
jewelry, and competitive challenges. Valuations at 36x FY12E and 29x FY13E P/E
appear stretched to us and we downgrade to Underweight.
All well now, but we see risks to growth and margins going forward. Titan has
seen a 90% increase in diamond procurement prices during the Dec’10-Apr'11
period and the company stated in its annual report that they may sacrifice gross
margins to remain competitive. Given studded jewelry accounts for 28-30% of
jewelry sales and is high margin, moderation in volume off take for this could weigh
on overall margins. Titan’s pursuit of growth is coming at a cost in an incrementally
more competitive environment – for example, there is a change in its diamond
jewelry exchange policy (consumers getting 100% of value now vs. ~80% earlier).
Further excise levy of 1% on branded jewelry will make their products less
competitive vs. regional/local players that could avoid this levy. GoldPlus, the
regional jewelry format is facing increased competitive challenges from local
players and posted a 14% decline in gold jewelry grammage in FY11.
Aggressive store expansion may keep margins in check. Titan is likely to witness
0.23- 0.25mn sq ft of space addition, of which a majority will be for jewelry (c80-
100Ksq ft), followed by watches (c70-80K sq ft) and eyewear (c75-80K sq ft).
Capex for FY12 will likely double as a result.
Downgrade to UW on expensive valuation. Our FY13E EPS and PT are revised
down by 4-6% as we build in lower margin expansion than estimated earlier. We
estimate 27% EPS CAGR over FY11-13E, which is optimistic in our view. While
Titan remains one of the best plays in India on lifestyle spending and consumer
migration toward branded products, current rich valuations of 36x FY12E and 29x
FY13E P/E leave little room for any disappointment we believe. While Q1FY12
earnings could benefit from healthy festive sales and inventory gains, we would
recommend booking profits on any rally on account of this. Our new Mar’12 PT of
Rs200 implies 12% downside potential from current levels.
Excerpts from FY11 Annual Report highlighting risks
around jewelry segment
Some important comments from Titan Industries MD&A section in FY11 annual
report which talk about potential risks to jewelry margins and diamond jewelry
demand.
“Our procurement prices of polished diamonds have increased by around 90%
in April 2011, compared to December 2010. This put a tremendous pressure both
on the overall market and on the competitive position of our brands as the difference
between our prices and our competitors widen on account of these steep
increases."
“We have put in place multiple strategies to deal with this challenge: sacrificing
some gross margin to remain competitive; improving our exchange policy for
increasing our value for money…..”
“March 2011 also saw Excise Duty being levied on branded jewelry, this time to
the extent of 1%.... this is applicable only on brands like Tanishq and not on
house mark shops, which means that any big and reputed independent jeweler can
avoid this.”
“A few big jewelers set up large format stores in some GoldPlus markets,
invested considerably in marketing and discounts and penetrated into the GoldPlus
franchise. In GoldPlus..... the grammage of gold jewellery declined by 14%.”
Risks for jewelry division
“To mitigate the risk of rising diamond prices, dialogues are on with sight holders for
long-term relationships and the company also has started experimentation with
buying large quantities of rough diamonds and processing them directly to start
preparing for backward integration.”
“.. Golden Harvest and Gold Futures schemes to collect advances from customers
for facilitating purchase of Tanishq and Goldplus jewelry. … likely to be hindered
by Government regulations, especially with respect to implementing Know
Your Customer (KYC) norms”
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