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UBS Investment Research
First Read: Titan Industries
G old lease cost could go up
Event: Slower Q2FY12E, gold leasing cost
With tighter liquidity concerns, there is a possibility of risk premium going up
pushing up gold leasing costs. As gold prices are up 23% from 30th June, the
management has been guiding for lower volume growth compared to Q1FY12
growth as the inflationary impact of gold prices hits consumption. Management
still expects the festival season in Q3 to be strong despite gold inflation.
Impact: EPS sensitivity to gold lease cost
The cost of gold leasing going up is a business risk for Titan as the company does
not take gold inventory on its books. In 2008 the cost of gold leasing went up to
~7%; the cost is ~3% presently. A 1% increase in gold leasing cost reduces our
EPS estimates by ~3.7% all other things remaining the same.
Action: Volatile in the short term - strong in the long term
Titan grew gold volumes ~40% in Q1; we have a 18% jewellery volume growth
expectation for FY12E - some moderation for Q2 is not considered a concern.
Tanishq strategy of gold leasing is the key reason for the high returns generated
and high corporate governance standards; while a credit squeeze would affect
margins in the short term, in our view the long term sustainability of the business
remains intact.
Valuation: Maintain PT of Rs 250.00
We derive our price target using UBS’s VCAM tool, assuming a WACC of 11.2%,
intermediate growth rate of 17.0%. Titan would trade at 22x EV EBITDA FY13E
at our price target. We believe Titan will sustain its premium due to the rise in
discretionary consumption and the strong brand equity across categories.
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
First Read: Titan Industries
G old lease cost could go up
Event: Slower Q2FY12E, gold leasing cost
With tighter liquidity concerns, there is a possibility of risk premium going up
pushing up gold leasing costs. As gold prices are up 23% from 30th June, the
management has been guiding for lower volume growth compared to Q1FY12
growth as the inflationary impact of gold prices hits consumption. Management
still expects the festival season in Q3 to be strong despite gold inflation.
Impact: EPS sensitivity to gold lease cost
The cost of gold leasing going up is a business risk for Titan as the company does
not take gold inventory on its books. In 2008 the cost of gold leasing went up to
~7%; the cost is ~3% presently. A 1% increase in gold leasing cost reduces our
EPS estimates by ~3.7% all other things remaining the same.
Action: Volatile in the short term - strong in the long term
Titan grew gold volumes ~40% in Q1; we have a 18% jewellery volume growth
expectation for FY12E - some moderation for Q2 is not considered a concern.
Tanishq strategy of gold leasing is the key reason for the high returns generated
and high corporate governance standards; while a credit squeeze would affect
margins in the short term, in our view the long term sustainability of the business
remains intact.
Valuation: Maintain PT of Rs 250.00
We derive our price target using UBS’s VCAM tool, assuming a WACC of 11.2%,
intermediate growth rate of 17.0%. Titan would trade at 22x EV EBITDA FY13E
at our price target. We believe Titan will sustain its premium due to the rise in
discretionary consumption and the strong brand equity across categories.
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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