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Thursday, October 13, 2011


Scrip Code: 500114 TITAN
CMP:  Rs. 220.00; Buy at Rs.200 - 215 levels. Short term Target - Rs. 240;
6 month Target – Rs. 285; STOP LOSS – Rs. 184.00; Market Cap: Rs. 19,531.29 cr; 52 Week High/Low: Rs. 237.75 / Rs. 140.00.
Total Shares: 88,77,86,160 shares; Promoters : 47,32,67,660 shares –53.31 %; Total Public holding : 41,45,18,500 shares – 46.69 %; Book Value: Rs. 13.01; Face Value: Rs. 1.00; EPS: Rs. 5.55; Div: 250 % ; P/E: 39.59 times; Ind. P/E: 42.76; EV/EBITDA: 46.25
Total Debt: Rs. 1455.96 cr; Enterprise Value: Rs. 20,987.25 cr.

TITAN INDUSTRIES LTD:  The Company was founded in 1984 and is based in Bengaluru, India. Titan Industries Limited manufactures and sells in retail watches, jewelry, clocks, and eye wear primarily in India and internationally. The company provides its watches under its brand names Titan Edge, Titan Raga, Nebula, Sonata, Xylys, Fastrack. It also markets brands, such as Tommy Hilfiger, Hugo Boss, and FCUK under a licensed agreement. It also offers jewelry under the Tanishq and Goldplus brand names, as well as operates a chain of luxury jewelry boutiques under the Zoya brand. In addition, the company provides sunglasses under its Fastrack brand; and prescription eyewear, such as lenses and contact lenses. It sells frames, sunglasses, and accessories of proprietary brands and other premium brands, as well as provides optometry services. Further, the company provides precision engineering components and sub-assemblies, machine building and automation solutions, tooling solutions, and electronic sub-assemblies for use various industries, in aerospace, automotive, oil and gas, engineering, hydraulics, solar, and medical instruments. It operates approximately 665 retail stores, including approximately 311 World of Titan showrooms; approximately 124 Tanishq boutiques and Zoya stores; approximately 29 Gold Plus stores; and approximately 150 Titan Eye+ stores. The company also sells its product through departmental stores such as Shoppers stop, Central, Westside, Pantaloons & Reliance retail.  

Investment Rationale: Titan plans to aggressively expand its mass market jewellery franchisee – Goldplus. The company also plans to launch lower price jewellery using a diamond-like material – Diamantine to cater to the aspiring middle-class consumer. Titan has also tied up with Muthoot Finance to offer a new scheme — Swarna Samridhi — in the Andhra Pradesh market. Under the scheme, customers have to pay 20 % of the actual price during purchase while the remaining is to be paid through installments to Muthoot Finance. These installments can be paid between 12 - 24 months, with an 11.5 % interest rate. Customers will be given a 30-day interest-free period to repay the loan amount. Once this model stabilises it will be taken to other parts of the country as well. Also Titan is planning to enter the Indonesian market in six months through a distribution tie-up. This is in line with the company’s strategy to expand into one new country each year. Price hikes in watches and eyewear segment will protect its margins, Titan is planning to take a price hike to the extent of 4 % to mitigate the impact of input cost increases. Titan buys some of its watches and eyewear products from China. China has steadily raised labour costs over the last three years. Hence, the company will need to take price hikes to pass on the impact of the same in order to protect its margins. In Watches, Titan targets Rs. 3,500 Cr turnover by FY15E (Rs. 1,250 Cr in FY11) to be driven by network expansion, introduction of new designs as well as shift towards branded segment. Titan aspires to expand the category in Eye-wear and Accessories (currently 177 stores) segment by getting into new sub-categories. It’s targeting FY13E beak-even and believes potential margins can be higher than Watches. It intends to enter new life-style categories in medium to long term.

Outlook and Valuation:
A growing economy, increasing Per Capita income & improving lifestyle helps Titan to get continuous benefit from the shift of consumer preference from unbranded to branded jewellery. Notwithstanding the higher Gold prices, Titan continues to charge an average 22 % of Gold price as its making charge. Titan has not experienced any impact on account of government regulation regarding PAN card (for any purchase of above Rs.5 Lakhs in Jewellery, PAN number is mandatory) as its ticket size is far lower at Rs. 30-50k. As there is no specific reason to rise in Diamond prices (which are up 90% in 6 months), management expects to pass on any correction in Diamond prices to consumers. Titan sources its Diamonds from India and doesn’t hedge. Titan enjoys 10 % premium on Diamond compared to its competitors in normal scenario. Studded jewellery sales were 23 % of Jewellery revenues in 1QFY12. Titan targets 40 % by FY14E. As per Titan’s research, wedding jewellery buyer prefers larger store owing to availability of wide range of designs. Also, the service levels in large format stores are better. From Titan’s viewpoint, large format stores not only help increase sales/sq ft but also increase its market share and build a better brand image. As per management, large format stores are used as brand positioning tool. After opening a large format stores in Mumbai and Pune, 2 more are in pipeline in Hyderabad and Kolkata. As per management, large format stores take less than 2 years to break-even. Chennai store is expected to achieve its breakeven in less than 18 months. Currently out of 124 Tanishq stores - 90 are Franchisee stores. All large format stores are company owned stores. Titan offers 9 % of sales as margins to Franchisee partners in Jewellery segment. Titan also aims to tap into youth segment so as to create a loyal customer base for future. It believes Youth segment has high potential and needs to be lured via innovative designs and price points. Given the rising gold prices and anticipated potential impact on its volumes, in the medium term Titan aims to work around the price points by offering lower caratage jewellery (18c, 14c etc) and creating more opportunities of purchase. Titan’s distribution network is its biggest competitor advantage. Titan has a vision to establish Eyewear as “Function + Style” product. 25m pieces market is growing at 20-25 % per annum & unbranded market constitutes sizable chunk of the opportunity. With the market size of around Rs. 2,500 Cr this segment is highly fragmented with no national brand. Currently in Eye-wear, Titan has a network of 177 stores (90 owned) and offers 35 % of its sales as franchisee fees. Management believes that potential margins in Eyewear segment are higher than Watches. It expects margins to converge with Watch margins in 3-4 years time. At the current market price of Rs.220.00, the stock is trading at 33.33 x FY12E and 26.50 x FY13E respectively. Earnings per share (EPS) of the company for FY12E and FY13E are seen at Rs. 6.60 and Rs. 8.30 respectively. It is expected that the company will keep its growth story intact in the coming quarters also. TITAN Q2 RESULTS ARE ON 24th OCTOBER 2011. One could BUY TITAN INDUSTRIES with a target price of Rs. 285.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 240.00 

SALES (Rs. Crs) 4,677.20 6,533.00 8,533.00 10,356.80
NET PROFIT (Rs. Crs) 251.30 433.10 585.10 732.80
EPS (Rs.) 2.80 4.90 6.60 8.30
PE (x) 71.70 41.60 30.80 24.60
P/BV (x) 24.60 17.40 12.10 9.00
ROCE (%) 39.00 49.00 46.30 41.90
RONW (%) 35.10 46.00 44.50 40.90

I would buy TITAN INDUSTRIES LTD with a price target of Rs. 285 for the 6 month target for short term players target should be Rs. 240. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 184.00 on every purchase.

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