We rate Titan Industries overweight with a target price of R290. Titan is an HSBC Asia Super 10 portfolio stock. We estimate that FY13 PE of 26x, at consensus FY13e EPS, builds in expectations of c8% annual earnings growth (for the next 15 years), which, we think, is not unrealistic.
Titan exploits just c3% of the Indian jewellery market that makes up for 75% of its earnings. An aggressive expansion plan and secular growth trends towards branded jewellery support a structural growth momentum in Titan?s jewellery business.
Hence, we believe PE multiples are unlikely to contract. Even though short-term demand concerns have weighed down on the stock price, long-term attractiveness of the branded jewellery space provides a floor to the valuation as well. Titan offers attractive valuation in this range and, hence, there is limited downside from current levels.
Titan stock performance has been weak recently (-10% in the past two months), as the near-term gold demand outlook has been weak due to sustained high gold price, while the country?s macro outlook, too, has turned discouraging.
While there is a general agreement on attractiveness of the long-term Titan story, near-term concerns pose a question on whether the stock performance has hit the bottom, reflecting the short-term weakness in demand.
India?s gold jewellery demand of 450 tonne is a long-term historical bottom and with continued weakness in FY13, we may close the year with a figure close to 450 tonne. Our base case for Titan assumes -24% grammage decline on per sq ft retail area in FY13, which leads to our EPS estimate of R8.8. Even if we were to assume that grammage sold per sqft declines by a third, this will still translate into an FY13 EPS of around R7.6, which, in our view, is a worst-case scenario.
We are c9% above consensus on FY13e and FY14e operating profits as we believe the new store strategy will help Titan capture more value and increase market share. We expect FY12-14e EPS CAGR of 27%. Key risks are sharp correction in gold price or severe macro slowdown and destructive price competition.
HSBC