We maintain our buy rating on Titan Industries as net cash balance sheet (consistent free cash generation), robust capital-efficiency ratios (over 60% RoCE) and leadership position in its core categories justify the premium multiple.
We arrive at a target price of R320 as we believe that the long-term branded jewellery story remains intact, notwithstanding the near-term challenges posed by the government's policy actions and the regulatory uncertainty around the lease period for direct gold import. Being the undisputed leader, Titan is in a sweet spot to capitalise on the same. The stock trades at 27.2x FY14e and 22x FY15e EPS.
Titan reported mixed performance for Q3FY13. Sales grew 23% to R2,980 crore, in line with estimates. Ebitda margin declined 20 bps to 8.3%, lower than our estimate of 10.2%, while Ebitda grew 20% to R247 crore versus expectations of R304 crore; and adjusted PAT grew 24% to R203 crore versus expectations of R214 crore.
Tightening of the gold lease credit period by MMTC from 180 days to 90 days has resulted in Titan shifting to domestic banks, which continue to provide 180 days lease, though at higher cost, leading to a 30-bps impact on margins. Titan is representing with RBI to seek direct gold import under 180 days lease. If RBI does not relent, Titan will forego the direct import route and continue with domestic banks, resulting in a 30-bps impact on jewellery margins.
The management noted in a conference call that, in January 2013, demand has not been as robust as the festive demand of Q3. We expect delayed margin recovery in watches though the improving volume growth trend augers well. We are positive on new businesses like Fastrack and Titan accessories, given the nascent market and lack of viable brands in these segments.
We conservatively assume that RBI will not give 180 days lease credit permission to Titan and model the impact of higher lease. As a result, our Ebitda estimates for FY14 and FY15 are cut by 4.5-6%. Impact at PAT level is 2.5-3.5%, as we also adjust other income numbers. We now forecast 20-bps uptick in Ebitda margin against our earlier estimate of 80-bps expansion.