Towards clearer horizons

Updated: Apr 21 2014, 05:27am hrs
We expect the gold regulatory framework to be dismantled in 6-12 months: Titan has seen earnings downgrade and de-rating of its valuation multiples due to a series of restrictions on gold imports in 2013. We expect the gradual removal of these restrictions over the next year, as (i) the current account deficit and the currency are in the comfort zone, and (ii) there is consensus among political parties for easing restrictions on gold imports, including the main opposition party (BJP), which is ahead in most opinion polls.

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.

Credit Suisse