Titan Industries Ltd.

Target Price Rs:1,704
CM Price Rs:1,670.00

Titan Industries’ 3QFY10 results were above estimates as net sales grew 30.3% to Rs13.3b (v/s our estimate of Rs12.8b), while adjusted PAT was up by 86% at Rs784m. Gross margins expanded 10bp due to an improved product mix in watches but was partly neutralized by higher sales of lower margin gold jewelry. Lower staff costs (down 100bp) and adspends (down 40bp) drove EBITDA margin expansion of 100bp to 8%. EBITDA grew 49% YoY to Rs1b. Lower interest outgo and a 900bp YoY decline in tax rates resulted in the growth of adjusted PAT.

• Titan watch volumes up 25%, improved sales mix boosts margins: 3QFY10 watch sales increased 24.8% to Rs2.4b and EBIT grew 51% to Rs354m. EBIT margins expanded 260bp to 14.7%. In 3QFY10, Titan volumes increased 25%, Sonata volumes increased 31% and Fastrack volumes increased 33%. Overall watch volumes increased 28% to 2.35m. Strong growth in Titan and Fastrack was a key driver of EBIT margin growth.

• Jewelry volumes up 5%, EBIT margins up 10bp; strong momentum continues in January: Titan’s jewelry business reported a 33.7% increase in sales to Rs10.5b. EBIT increased 36% to Rs742m as margins expanded 10bp. Jewelry volumes increased 5% and gold prices increased by nearly 30%. Jewelry volume growth turned positive after a decline for three quarters.

• Upgrading EPS estimates due to recovery in consumer demand; maintain Neutral: Titan posted a sharp recovery in volumes in its core businesses of watches and jewelry. The current quarter has started on a good note and the company has launched a sales promotion scheme across verticals. We are factoring in an 11% increase in watch volumes and a 15% increase in jewelry volumes over FY10-12. We are upgrading EPS estimates for FY10 to Rs55.1 (Rs45.3 earlier), for FY11 to Rs70.4 (Rs59.4 earlier) and for FY12 to Rs91 (Rs74.5 earlier). We believe Titan continues to be one of the best plays on rising consumerism but valuations at 18.7x FY12E are rich. Maintain Neutral.

Titan watch volumes up 25%, improved sales mix boosts margins 3QFY10 sales increased 24.8% to Rs2.4b and EBIT grew 51% to Rs354m. EBIT margins expanded 260bp to 14.7%. In 3QFY10, Titan volumes increased 25%, Sonata volumes increased 31% and Fastrack volumes increased 33%. Sonata’s growth of ~31% has been disappointing due to a low base in 3QFY09, when its sales had declined. Overall watch volumes increased 28% to 2.35m.

Strong growth in Titan and Fastrack resulted in a rich sales mix that has been a key driver of EBIT margins. Watch volumes were positive due to growth in Fastrack and Titan even as Sonata’s poor show continues. Besides, sluggish demand for a short period (2 weeks) impacted sales volumes. However, there were strong sales during the Diwali season, and the management expects to end the year with double digit sales growth in the watch business. 4QFY10 sales are expected to rule strong due to a low base effect but the sales mix is likely to deteriorate as 4QFY09 had seen a decline in Sonata sales due to inventory de-stocking at the dealer level.

Jewelry volumes up 5%, EBIT margins up 10bp; strong momentum continues in January The jewelry business posted a 33.7% increase in sales to Rs10.5b. EBIT increased 36% to Rs742m as margins expanded 10bp. Jewelry volumes increased 5% and gold prices increased by nearly 30%. Jewelry volume growth has turned positive after a decline for three quarters. Gold jewelry sales volumes soared higher on wedding season demand, especially in the North, but studded jewelry sales were lower. During the second half of December sales picked up significantly as a price correction brought consumers back to stores. Gold lease charges declined 50% to current levels of 3%. January started on a good note due to marriage season in South India. Besides, a Rs800/10gm decline in gold prices increased consumer demand. Some of the lead indicators include a decline in exchange ratios (gold recycling) to just 15%.

Order cancellations lower PE sales by 33%; Titan Eye+ undertakes store restructuring Titan’s precision engineering division posted a loss in the quarter of Rs15m, its fifth consecutive quarter of loss, (2QFY10 loss of Rs40m) as sales plunged 25% from Rs240m to Rs180m. The sales decline was attributed to order cancellations and postponements. The management expects this SBU to break even in 4QFY10. Titan Eye+ reported a 15% increase in sales from Rs190m to Rs220m. Losses were Rs45m. Prescription glasses sales were Rs110m and Fastrack sunglasses contributed another Rs110m. The company plans to end the current year with 80 stores. The SBUs together posted a 6.8% decline in sales to Rs403m and EBIT was 10% lower at Rs61m.

Upgrading EPS estimates due to recovery in consumer demand; Neutral Titan posted a sharp recovery in volumes in its core businesses of watches and jewelry. 4QFY10 has started on a good note and the company is undertaking a sales promotion scheme across verticals. It is targeting sales of US$1b in the current year. Titan plans to increase sales of its studded jewelry in the coming years, which will boost margins (3x higher margins than plain gold jewelry). Titan Eye+ is on track to break even by 2012. We are factoring in an 11% increase in watch volumes and a 15% increase in jewelry volumes over FY10-12. We are upgrading EPS estimates for FY10 to Rs55.1 (Rs45.3 earlier), for FY11 to Rs70.4 (Rs59.4 earlier) and for FY12 to Rs91 (Rs74.5 earlier). We estimate PAT of 28.5% CAGR over FY10-12. We believe Titan continues to be among the best plays on rising consumerism; but valuations at 18.7x FY12E are rich. Maintain Neutral.

Company description
Titan is one of the largest specialty retailers in India. The company is a market leader in watches and a pioneer in the branded jewelry market. The company’s economy segment watch Sonata is the largest selling watch in India. Titan entered the branded jewelry segment in 1996 with the Tanishq brand and continues to be the largest player in this segment.

Key investment arguments

• Titan is a market leader in the organized segment of the domestic watch industry with 60% market share. The branded watch retailing segment is expected post strong growth given that 60% of the watch retailing industry is dominated by the unorganized segment.

• Tanishq, Titan’s branded jewelry brand, is the largest player in the Rs70b branded jewelry market in India. Branded jewelry accounts for less than 10% of the total jewelry market in India and is expected to post 40% CAGR over the next five years.

• Operating margins are expected to expand, as fiscal benefits from units in backward areas and the company’s aggressive cost cutting initiatives yield results.

Key investment risks

• Rise in gold prices would impact volume growth in the jewelry division, impacting margins.

• Longer than expected breakeven period of Titan Eye+ is likely to strain profitability.

Recent developments

• Nil.

Valuation and view

• We are upgrading EPS estimates for FY10 to Rs55.1 (Rs45.3 earlier), for FY11 to Rs70.4 (Rs59.4 earlier) and for FY12 to Rs91 (Rs74.5 earlier). We estimate 28.5% PAT CAGR over FY10-12.

• The stock is trading at 24.2x FY11E and 18.7x FY12E EPS. We maintain Neutral.

Sector view

• We believe specialty retailers are better placed to ward off the impact of the current slowdown. Titan’s ability to generate cash flows to adequately finance expansion plans puts it in a strong position.

Report card

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