We believe volume growth will be good in Q3 FY12 as festive season buying begins. After management guidance for muted volume growth in Q2FY12 due to higher gold prices, we expect a healthy growth in gold jewellery volumes in Q3FY12. We think the key potential risk to the share price is the weakness in the underlying commodity (gold) as the stock is perceived as a gold play, though Titan Industries does not have gold in its inventory.
Titan?s ROE (return on equity) improved from 6% in FY02 to 42% in FY11 as the company continued to expand its jewellery business and improve scale. Better asset turnover also contributed to the increase in ROE. Net margin improved from 1.4% in FY02 to 6.6% in FY11 with the high-margin jewellery business increasing in the mix. For every 1% increase in jewellery net profit margin, we estimate a 3.7% increase in PAT (profit after tax) for the company.
With consumers upgrading, we expect Titan?s strategy of focusing on the premium segment?with Helios as a pan-India premium watch retailer and Tanishq?s new strategy of setting up six to eight super-premium company-owned stores?to result in better margins, as margins are higher in the premium segment.
Valuation: Maintain Buy rating with a price target of R250. We derive our price target from a DCF(discounted cash flow)-based methodology and forecast long-term valuation drivers using UBS?s VCAM (value creation analysis model) tool. We assume a WACC (weighted average cost of capital) of 11.2% and an intermediate growth rate of 17%.
We believe the key risks that could affect the luxury wear sector include continued upward movement of down- stream petrochemical products and higher agri-commodity-based raw material costs and the inability of branded consumer companies to pass on price increases in an increasingly competitive market. The sector enjoys low corporate tax rates because of factory locations in areas that are designated as tax benefit zones; any change in this law could affect earnings.
Titan Industries is a diversified specialty retailer in India with exposure to the watch, jewellery and eyewear segments. It began operations as a watch company, diversifying into the jewellery business in 1995 and the eyewear business in 2007. Watches contributed 22%, jewellery 75%, and eyewear 2% of its revenue in FY10. The company operates around 0.7m sqf of retail space. Its brands include Sonata, Titan, Fastrack, Xylus in watches; Tanishq, GoldPlus and Zoya in jewellery; and Titan Eye+ in its eyewear division.
?UBS Investment Research