Titan continues to surprise with a strong operating performance on a structural high growth trajectory for consumer discretionary spending. Sales growth of 34% YoY was 5% below our estimate on lower jewellery sales, which was more than offset by a sharper-than-expected rise of 200 bp in margin. Consumers continue to uptrade in both watches and jewellery, which is leading to this margin surge. We raise our estimates for FY11-12e by 15% to factor in this surprise and a higher margin trajectory, and raise our PO (price objective) to Rs 3,650 (Rs 3,200) accordingly. Maintain Buy.
We believe Titan?s watch business is moving to a higher growth trajectory, both in terms of sales and margins. The September quarter had sales growth of 21% YoY and a margin gain of 160 bp (basis point) on an already all-time-high base. This trend is led by a changing outlook towards watches, which are now seen as accessories, not just time-telling devices, leading to multiple-watch ownership and up-trading.
Jewellery sales growth of 37% YoY was strong, but 9% below our expectations. This was led by volume growth of 17%, which was lower than recent trends, as the surge in gold prices during the quarter could have hurt. However, the margin surge continued, with a 210 bp gain led by a shift of consumers toward higher margin studded jewellery.
Titan is currently trading at 22x(times) FY12e, in line with the sector average. . However, given EPS CAGR (earnings per share/ compound annual growth rate) of 60% over FY11-12e, we believe there is a case for further re-rating of the stock to capture much higher earnings growth potential. Our PO of Rs 3,650 is based on 24xFY12e, in line with its last five-year average and at 10% premium to the sector.
Titan Industries, a Tata Group company, has a strong brand franchise and a wide distribution network of 300+ exclusive outlets. The company has made a foray into prescription eyewear. We expect Titan to continue re-rating based on strong earnings growth.
Discretionary spending revival is running ahead of expectations. That should provide support to both jewellery and watch sales. Also, mix improvement is seen across both categories, which should continue to drive up the margins. We expect Titan to have significantly higher earnings growth vs consumer staples. Hence the current discount to staples appears unjustified and we expect Titan to rerate to a premium to the FMCG sector.