Jewellery could see an early pickup in demand on urban sentiment improvement: Consumer durables (a good indicator of discretionary demand) has had its worst decline in 20 years in 9MFY14 at about 16%, the only second instance of a decline in 20 years. Categories such as jewellery, which have pent-up demand, could see an early recovery if urban consumer sentiment improves. Titan, in the midst of a slowdown, has doubled its jewellery retail space in the past three years, and a pickup should accelerate the ramp-up of these newer stores in the system. The company is an early-cycle-recovery play among Indian stocks, based on our recent report, ECS + EVF > Beta.
Watches, new businesses could also see a turnaround: Titans watch business had weak revenue growth and a sharp reduction in margins due to the weakness in discretionary consumption. Also, the company has incubated a number of new businesses such as eyewear, Helios, perfumes, and accessories, which are in the ramp-up mode. Titan could also potentially enter into more JVs with global brands like the one with Mont Blanc.
We upgrade our rating to Outperform from Neutral: We value Titan at a price-to-earnings (P/E) ratio of 27x, in line with its average P/E ratio since 2005, as the regulatory overhang on the stock should dissipate. We also believe the earnings-downgrade cycle has bottomed out. We increase our target price to R310 from R250.