Maintain ‘buy’ on Titan with a target price of Rs 420 per share. Titan current stock price (FY17 P/E of 29.6x), builds in long term earnings growth expectations of a modest c11%, which in our view are undemanding and revival in jewellery growth will be an immediate catalyst for stock performance.
We use a DCF methodology to derive our target price. For our DCF valuation, we have used a cost of equity of 10.7%, which includes a risk-free rate of 7.7%, market risk premium of 5%, beta of 0.6 and terminal growth of 5%, all unchanged. We have marginally revised our estimates as we increase FY16-18 earnings estimates by c1%.
We reiterate ‘buy’ as risk-reward looks quite favorable at current levels for the expected revival in jewellery growth from Q3 onwards.
Firstly, Q2 will be the last quarter of Golden Harvest scheme (GHS) impact, which is discounted already. Foreclosure of GHS in Q2 last year, impacted the festive quarter of Q3FY15 as well along with poor demand making base quarter of Q3FY16 a benign base. In our view, Titan is making all its effort to spruce up growth in Q3, which can potentially mark a significant inflection point in the growth trajectory and will likely be a catalyst for stock performance.
Secondly, new GHS (deposit of which will be capped to 25% of net worth) is gaining traction and first significant impact in jewellery growth will be seen in Q4, when in excess of Rs 4 billion of new GHS will mature and will give super normal boost to revenue and earnings growth.