Titan’s Q3FY18 results were marginally below our and the consensus expectations, which is a departure from the trend which has prevailed in the past 4-5 quarters. However, having said that, we believe that while growth was impacted due to one-off factors, the growth story remains intact from a medium-term perspective. Growth of the jewellery business has picked up significantly as the government’s drive against black money picked up pace over the past 12 months. We believe Titan’s Q3 earnings reflect the steady and continued movement from the unorganised to the organised segment following recent macro events like demonetisation and the implementation of GST. Therefore, we assume 30% y-o-y revenue growth in FY18F for Titan.
A structural shift — regulatory environment is easing, demand is greater and Titan should benefit
The regulatory overhang affecting Titan for the past three years appears to be largely over, in our view, and we see tailwinds in the near future that should help the company to deliver strong earnings growth. Reviving urban consumer demand, combined with the government’s drive to curb black money, will be the key factors driving growth in future, in our view.
Valuation at 43.2x FY20 P/E is expensive, in our view
We acknowledge the current positive momentum for Titan, given the recovery of urban demand and benefit of the shift from unorganised to organised players, and therefore assign a target P/E of 42x—the peak cycle multiple for the stock. However, we advise investors to note that Titan has had a strong 149% run-up over the past 12 months, and we believe that most of the positives are now factored in. We prefer Nestle India (NEST IN, Buy) and Future Retail (FRETAIL IN, Buy), which offer stable earnings growth at cheaper valuation multiples. For Titan, we retain our Neutral rating, with a target price of Rs 809, implying 2.6% downside from the current level.
Q3FY18 results: Growth momentum continues
Titan’s Q3FY18 results were marginally below our forecast and Bloomberg consensus expectations, which is a departure from the trend which has prevailed over the past 4-5 quarters. However, having said that, we believe that growth was impacted due to buying advancement to Q2FY18 by franchisees in anticipation of the festive season. We also believe that the growth story remains intact from a medium-term perspective. Growth of the jewellery business has picked up significantly ever since the government’s drive against black money picked up pace 12 months ago. We believe Titan’s Q3 earnings reflect the steady and continued movement from the unorganised to the organised segment following recent macro events.The key catalysts for the growth momentum to continue into FY19F will likely be: (i) a pick-up in urban consumption; (ii) continued buoyancy in discretionary demand; and (iii) a continued shift from the unorganised to the organised sector in the jewellery business.
What do the results mean?
The numbers adjusted for one-off factors were quite strong. Management has reiterated that Nov ’17 and Dec ’17 witnessed growth of 30% in revenue terms for the jewellery business and momentum has continued into January ’18. We believe this is a great sign for the things to come and believe that the strong growth trajectory (adjusted for the high base) should persist.