TITAN INDUSTRIES LTD : WILL GLITTER AGAIN !!!

Scrip Code: 500114 / TITAN

CMP:  Rs. 232.05; Buy at Rs. 230 & Accumulate at every dips.
Short term Target: Rs. 250, 6 month Target – Rs. 285; STOP LOSS – Rs. 207.00; Market Cap: Rs. 20,867.41 Cr; 52 Week High/Low: Rs. 313.35 / Rs. 201.00.

Total Shares: 88,77,86,160 shares; Promoters : 47,10,07,920 shares –53.05 %; Total Public holding : 41,67,78,240 shares – 46.94 %; Book Value: Rs. 24.50; Face Value: Rs. 1.00; EPS: Rs. 8.17; Dividend: 175.00 % ; P/E: 28.40 times; Ind. P/E: 27.46; EV/EBITDA: 17.28

Total Debt: Rs. 5.89 Cr; Enterprise Value: Rs. 19,628.55 Cr.

TITAN INDUSTRIES LTD:  The Company was founded in 1984 and is based in Bengaluru, India. Titan is a joint venture between Tata Group and the Tamil Nadu Industrial Development Corporation (TIDCO). Titan Industries Limited manufactures and retail sale of watches, jewelry, clocks, and eye wear primarily in India and internationally. The company provides its watches under Titan Edge, Titan Raga, Nebula, Sonata, Xylys, Fastrack brands. It also markets international brands, such as Versace, Seiko, Tommy Hilfiger, Hugo Boss, Esprit, Raymond Weil, DKNY, Baume & Mercier and Victorinox 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 eye-wear  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 1,026 retail stores across a carpet area of over 1.3 million sq. ft. spanning over 204 towns. The company has over 364 World of Titan showrooms; over 140 Fastrack stores; 928 after-sales-service centers; It also has approximately 145 Tanishq boutiques and 2 Zoya stores; over 31 Gold Plus stores; and approximately 220 Titan Eye+ stores. The company has two exclusive design studios for watches and Jewellery, 10 manufacturing units. The company also sells its product through departmental stores such as Shoppers stop, Central, Westside, Pantaloons & Reliance retail. Titan Industries Ltd is locally compared with Gitanjali Gems Ltd, Surana Corporation Limited, Shrenuj & company, Rajesh Exports, Shree Ganesh Jewellary House I Ltd, PC Jewellers and globally compared with Citizen Holdings Co Ltd of Japan, Casio Computer Co Ltd of Japan, F&A Aqua Holdings INC of Japan, Guess? INC of USA, Rolex of Switzerland, Omega of Switzerland, Oakley of USA, Timex of USA, Seiko of Japan, TAG Heuer of Switzerland, Patek Philippe of Switzerland, Swatch Group of Europe .  

Investment Rationale:

Titan Industries Ltd is the world’s fifth largest integrated watch manufacturer with a market share of around 65% in the domestic organised watch market and also enjoys market share of around 40% in the organised jewellery retailing market where the company offers gold and diamond jewellery through its popular brands like Tanishq, Gold Plus and Zoya. Recently, RBI tightened the gold import norm and has gradually doubled the import duty on gold from 4% to 6% to the present 8% this year. From now on, all imports of gold for domestic consumption either through banks or nominated agencies or directly is to be made only with 100% cash margin. Credit of any kind from suppliers or bullion banks for import of gold for domestic use is prohibited. This means that jewelers who traditionally used to borrow gold from domestic banks on 180-day credit will no longer be able to do so. Earlier, Titan never used to buy gold with its own money. They used to lease (borrow) gold from domestic banks for 180 days with the risk of gold prices being borne by the bank. This was a fairly effective and profitable method of procuring gold and led to multiple benefits for the company like the cost of leasing gold was a minuscule 3%, almost one-third of what would have been the financing cost of gold procurement. The balance sheets of jewelers like Titan always remained debt-free, as the company only booked payable's which were due to the bank in current liabilities. This also meant that return ratios also looked quite healthy. But, with RBI’s new norms the entire business model of the jewellery business in India will need to undergo a structural change. Profit growth would be impacted as interest income will come down and interest outgo will shoot up, now company will have to use its own funds and consequently its average cost of gold purchase will shoot up from the current 3% to estimated 10%, the debt on the books will rise significantly, need for working capital will increase significantly. However there is a hope of policy reversal once the current account deficit situation eases. Also, the company can use its license to import gold directly, which will lead to savings of around 1% (paid in the form of VAT). Also, in the longer term, smaller players may find it difficult to sustain. Hence, Titan could gain in the form of increased market share and passing on the additional cost to the consumers by hiking prices of around 3% inform of making charges. The company will use MCX gold futures to hedge its exposure. Company will re-evaluate its current expansion plans and may shelve some of them in order to concentrate on changing business scenario. A growing economy, improving lifestyle, Titan continues to get benefited from the shift from unbranded to branded Jewellery. Titan continues to charge an average 22 % of Gold price as its making charge can easily pass on the hiked prices to consumers.

Outlook and Valuation: 

Titan Industries recently stated that it is seeing strong jewellery sales despite government measures to discourage consumption of gold in country. The company gets around 83% of its total net sales from jewellery, which they expect to grow by over 15% on year in April June and over 25% in 2013-14. Titan is most likely to gain market share from other organised & unorganised players as it has the easier access to credit due to years of strong operating performance, healthy balance sheet and most prominently the Tata brand. Although, its RoCE will take a hit, but company’s has the capability to reinvent its business model. Assuming the ban is for a long duration; as gold imported on lease forms only 8% of total gold imported, the company will surely make its way out. Titan does have a licence to import gold directly to the tune of 10 tonnes. This is a one-time licence and not an annual limit. The company’s annual requirement of gold is around 20 tonnes this will not cover the entire need, but still provides an opportunity for it to partly use the facility, at least in FY14. 

It is notably to say here that, since November  2012, the Rupee has fallen 11.92 % as against dollar where as, internationally the gold prices have fallen nearly 28.13 % over the same period. With strident RBI rules the gold demand is expected to take a dip of around 200 tonnes, which can lower further regulatory action from RBI. At the current market price of Rs.232.05, the stock is trading at a PE of 21.17 x FY15E which compares with the sector average of around 27.5 x and mid cap sector at 24-25 x. While the regulation and demand environment will some what impact the stock and will tend it to trade at lower multiples. But still Titan can post Earnings per share (EPS) of Rs. 10.96 for FY15E. It still remains a solid long term play on the growth of the Indian Jewellery sector with proven management track record. It is expected that soon the demand environment will improve and expect the company to keep its growth story in the coming quarters also. One can ‘BUY’ Titan Industries with a short term target price of Rs. 250.00 and for Medium to Long term investment it could be a good buy for the target price of Rs. 285.

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	10,113.00	11,933.00	14,200.20	16,898.30
NET PROFIT (₹ Cr)	725.00	804.00	973.00	1,163.30
EPS (₹)	8.20	9.06	10.96	13.10
PE (x)	25.00	22.60	18.70	15.60
P/BV (x)	9.30	7.00	5.40	3.90
EV/EBITDA (x)	16.90	15.60	13.00	10.80
ROE (%)	37.10	35.30	32.70	29.20
ROCE (%)	48.60	20.40	19.30	18.80

I would buy TITAN INDUSTRIES LTD with a short term price target of ₹ 250.00 and for Medium to Long term target it will be Rs. 285. 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 ₹ 207.00 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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