We believe Titan’s discretionary categories will likely see a greater impact from the GDP decline, and hence further cut our FY20-23 EPS by 7-10% (FY21/22 EPS down 40%/33% since February).
We see significant impact to Titan’s earnings growth over the next couple of years with our macro team lowering FY21 India GDP growth forecast to -0.4%.
We believe Titan’s discretionary categories will likely see a greater impact from the GDP decline, and hence further cut our FY20-23 EPS by 7-10% (FY21/22 EPS down 40%/33% since February). Consequently, we cut our 12 month target price to Rs 738 (from Rs 803), implying 21% downside (vs -10% average for our coverage) and downgrade Titan to sell from neutral.
Key reasons for our downgrade is only 35% of jewellery demand, mainly wedding-related, is relatively resilient. However, the discretionary portion of Titan’s jewellery sales (~65%) and its watches business are likely to see a more sustained impact on demand. Slower store adds across Titan’s categories due to impact of social distancing, weak demand and potential cashflow challenges at franchisee partners. Lower returns due to weak sales growth. We also expect lower margins for Titan as it faces negative operating leverage with relatively low gross margins. Valuation looks demanding with Titan trading at FY22P/E of 49X against FY20-22E EPS CAGR of 7.0% compared to our coverage average of 42X and 11.2% respectively.
Risk-reward skewed to downside: Our bear case valuation implies -49% downside from current levels vs +12% upside in our bull case.
Our bear case assumes a sharper impact on footfalls in the near term and weaker market growth. Although we assume 200bps market share gain over the next four years in our bear case, we believe it will not be sufficient to offset the negative impact of the declining market.
Our bull case assumes a sharp recovery in demand once the nationwide lockdown is lifted. We forecast FY20-23E EPS CAGR of 12%/0%/27% in our base/bear/bull case.