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UBS Investment Research
Titan Industries
Negative sentiment, good time to buy
„ Event: decline in gold prices
Spot gold prices have declined by 9% over the past one week—from $1,819.6/oz
on 14 September to $1,656.8/oz on 23 September. Titan fell ~8% on this
commodity price decline as the stock priced in a contraction of segmental gold
jewellery margins, which are linked to gold price. However, we believe this is
unwarranted.
„ Impact: Q3 volume growth expected to be good
We believe the volume upswing due to the decline in gold price will not be
apparent in Q2FY12 as spot gold is up ~40% YoY in the July-September 2011
period. Titan’s management has also guided for a muted volume growth for
Q2FY12E. We believe volume growth will be better in Q3FY12 as the festive
season buying and the buying on the gold price dip comes in post Q2.
„ Action: EPS sensitivity to decline in margin
While we believe short-term gold price fluctuations do not have an impact on
quarterly earnings for the jewellery business, we conducted a sensitivity analysis..
According to our analysis, a 1% increase/decrease in gold jewellery margin will
result in a ~3.7% increase/decrease in our EPS estimates, all else remaining the
same. We do not believe we need to change our estimates for now. We maintain
our volume and earnings estimates for FY12E.
„ Valuation: maintain price target of Rs250.00
We derive our price target using DCF methodology and explicitly forecast longterm valuation drivers with UBS’s VCAM tool. We assume a WACC of 11.2%
and an intermediate growth rate of 17%. We believe Titan will sustain its premium
due to the rise in discretionary consumption and its strong brand equity across
categories.
Q 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
Q 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
Negative sentiment, good time to buy
„ Event: decline in gold prices
Spot gold prices have declined by 9% over the past one week—from $1,819.6/oz
on 14 September to $1,656.8/oz on 23 September. Titan fell ~8% on this
commodity price decline as the stock priced in a contraction of segmental gold
jewellery margins, which are linked to gold price. However, we believe this is
unwarranted.
„ Impact: Q3 volume growth expected to be good
We believe the volume upswing due to the decline in gold price will not be
apparent in Q2FY12 as spot gold is up ~40% YoY in the July-September 2011
period. Titan’s management has also guided for a muted volume growth for
Q2FY12E. We believe volume growth will be better in Q3FY12 as the festive
season buying and the buying on the gold price dip comes in post Q2.
„ Action: EPS sensitivity to decline in margin
While we believe short-term gold price fluctuations do not have an impact on
quarterly earnings for the jewellery business, we conducted a sensitivity analysis..
According to our analysis, a 1% increase/decrease in gold jewellery margin will
result in a ~3.7% increase/decrease in our EPS estimates, all else remaining the
same. We do not believe we need to change our estimates for now. We maintain
our volume and earnings estimates for FY12E.
„ Valuation: maintain price target of Rs250.00
We derive our price target using DCF methodology and explicitly forecast longterm valuation drivers with UBS’s VCAM tool. We assume a WACC of 11.2%
and an intermediate growth rate of 17%. We believe Titan will sustain its premium
due to the rise in discretionary consumption and its strong brand equity across
categories.
Q 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
Q 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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