NTPC: SAFER & BEST PICK IN POWER SECTOR !!!

Scrip Code: 532555 / NTPC

CMP:  Rs. 129.85; Buy at current levels and Accumulate at every dipps. Medium to Long term Target: Rs. 170.00; STOP LOSS – Rs. 119.45; Market Cap: Rs. 1,07,067.35 Cr; 52 Week High/Low: Rs. 175.50 / Rs. 126.55

Total Shares: 824,54,64,400 shares; Promoters: 618,40,98,300 shares – 75.00 %; Total Public holding: 206,13,66,100 shares – 25.00 %; Book Value: Rs. 88.89; Face Value: Rs. 10.00; EPS: Rs. 15.30; Dividend: 40.00 %; P/E: 8.48 times; Ind. P/E: 11.74; EV/EBITDA: 6.68

Total Debt: Rs. 47,338.33 Cr; Enterprise Value: Rs. 1,38,260.04 Cr.

NTPC INDIA LTD: The Company was founded in 1975 and is based in New Delhi, India. NTPC Limited engages in the generation, distribution, and sale of bulk power to state power utilities in India. It generates power from coal, gas, hydro, and liquid fuel sources. The company also undertakes consultancy and turnkey project contracts that comprise engineering, project management, construction management, and operation and maintenance of power plants. In addition, it engages in the oil and gas exploration, and coal mining activities. The Company’s other business includes providing consultancy, project management and supervision, oil and gas exploration, and coal mining. The Company has nearly completed execution two projects: Lata Tapovan hydro electric project (171 mega-watts (MW)), located in Chamoli District of Uttarakhand and Rammam Hydro Electric Project, Stage III (120 MW) located in Darjeeling District of West Bengal and West Sikkim District of Sikkim. The company has approximately 39,174 Megawatts of installed capacity. Company had five subsidiaries: NTPC Electric Supply Company Limited, NTPC Vidyut Vyapar Nigam Limited, NTPC Hydro Limited, Kanti Bijlee Utpadan Nigam Limited and Bhartiya Rail Bijlee Company Limited. NTPC is locally compared with Adani Power Ltd; TATA Power Ltd; Reliance Power Ltd; GVK Power and Infra; Jaiprakash Power ventures; Gujarat Industries Power Company Ltd; PTC India Ltd and CESC Ltd and globally its is compared with Aboitiz Power Corp of US; Abu Dhabi National Energy Co of UAE; Beijing Jingneng Thermal Power Co Ltd of China; Boguchanskaya GES OAO of Russia; Duke Energy International Geracao Paranapanema SA of Brazil; Eden Energy Ltd from Australia;  Electric Power development Co., Ltd of Japan; The Chuqoku Electric Power Company Incorporation of Japan; Hokkaido Electric Power Company Incorporated of Japan.

Investment Rationale:

NTPC has been allocated four coal mines by the Ministry of Coal (MOC) with an aggregate reserve of 2bn tonnes. Two of these mines are in Chhattisgarh and two are in Orissa. A total of 14 mines were allocated with estimated reserves of 8bn tonnes & production capacity of 159mt p.a that should support 32000WMs. The previously, NTPC had been allocated six coal blocks, namely Pakri‐Barwadih, Chatti‐Bariatu, Kerandari, Dulanga, Talaipalli and Chatti‐Bariatu (S), the production pegged from these mines was to the tune of 73m tonnes p.a (or 11000MWs) and the mining was to start in 2010. In 2012, three of the blocks, namely, Chatti Bariatu, Chatti Bariatu (S) and Kerandari were de-allocated on the grounds of a substantial delay in development. Subsequently, they were reallocated to NTPC. The company is yet to start producing from these mines and the total expenditure incurred on mine development till March 2013 was to the tune of Rs. 1200 Cr which is 10% of the total cost. NTPC, however, is expected to start production from its Pakri‐ Barwadih mine from FY14E. The first year production will be close to 2m tonne, which is then expected to scale up to 40m tonnes by the end of 2017. Even if the production ramps up from Pakri‐Barwadih, the Koderma‐Hazaribagh‐Banadag‐ Shivpuri‐Tori railway line, which will carry the output, is getting delayed. However, once these mines get operationalised, the company will earn regulated returns on their investments too. NTPC’s wholly owned subsidiary NTPC Vidyut Vyapar Nigam Ltd has bagged a contract to supply 300Mw round the clock power to Kerala State Electricity Board. The Power Purchase Agreement between NTPC Vidyut Vyapar Nigam Ltd and Kerala state State Electricity Board is estimated to be around 7 billion units of power supply sourced by the former from Chhattisgarh during the contract period. NTPC reported Q1FY14 Revenue at Rs. 15,383 Cr a decline of 3% yoy and EBITDA improved by 15.4% yoy to Rs. 4064.40 Cr due to lower fule expenses. Company reported its PAT which declined 2.6% yoy to Rs. 2,326.3 Cr. However, NTPC has added 500MW in Q1FY14 and expects to add about 1.87 GW in FY14  .  

Outlook and Valuation:

NTPC is targeting captive mining of about 37mmt by FY17 in a bid to secure its fuel supply position. Production at Pakri Barwadih mine (15 million tonnes, located in Jharkhand) is expected to commence in FY14. Even though NTPC imports 6% of its coal requirements, the full pass-through of costs insulates the company from the risks of a depreciating INR. Further, even as the 28% of its borrowings are in foreign currency, complete pass-through provides relief here too. A strong balance sheet provides comfort, its current cash holding is around Rs 70,000 Cr and leverage low at 0.7x. NTPC has outlined 10GW of capacity addition over FY14-FY17, lending strong visibility to growth. The company looks better placed to achieve it commissioning schedules as compared to its private power producers who are still struggling with their capacity addition plans. The company is targeting coal imports of around 16 mmt in FY14, of which orders have already been placed for 7mmt. Further, the project for an inland waterway at Farakka of 2,100 MW is expected to become operational in Q1 of FY14. NTPC has recently signed two models Fuel Supply Agreement with Coal India and expects to sign another FSA for 9 GW capacity for which coal were supplied through MOU’s earlier. NTPC can have PAT CAGR of around 6% over FY13-FY16. At the CMP of Rs. 129.85, the stock is trading at a P/E of 10.47 x FY2014E and 10.06 x FY2015E respectively. Earnings per share (EPS) of company for FY14E and FY15E are seen at Rs. 12.40 and Rs. 12.90 respectively, in my view the Fair Value of NTPC comes at Rs. 170 valuing Standalone Company at Rs. 155/share and valuing its subsidiaries & JV’s at Rs. 15/share and valuing OTSS bonds at Rs. 8/share. One can buy at current levels and accumulate NTPC  at every dips with a target price for Medium to Long term investment of Rs. 170.00 which represents 30% upwards from CMP Rs. 130.00.

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	65,673.90	72,004.00	74,753.70	80,434.10
NET PROFIT (₹ Cr)	9,493.30	10,238.80	10,623.60	11,225.60
EPS (₹)	11.50	12.40	12.90	13.60
PE (x)	12.40	11.50	11.10	10.50
P/BV (x)	1.50	1.40	1.30	1.20
EV/EBITDA (x)	8.60	8.90	9.20	9.00
ROE (%)	12.40	12.30	11.90	11.70
ROCE (%)	7.80	6.30	5.50	5.80

I would buy NTPC LTD with a price target of ₹ 170.00 for Medium to Long term target. 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 ₹ 119.45 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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VA TECH WABAG LTD: BEST STOCK TO OWN !!!

Scrip Code: 533269 / WABAG

CMP:  Rs. 442.45; Buy at Rs. 435 - 440 levels.
Short term Target: Rs. 480, 6 month Target – Rs. 550; STOP LOSS – Rs. 407.05; Market Cap: Rs. 1,174.51 Cr; 52 Week High/Low: Rs. 588. / Rs. 370

Total Shares: 2,65,45,772 shares; Promoters : 82,04,360 shares –30.91 %; Total Public holding : 1,83,41,412 shares – 69.09 %; Book Value: Rs. 154.77; Face Value: Rs. 2.00; EPS: Rs. 33.95; Dividend: 300 % ; P/E: 13.03 times; Ind. P/E: 11.50; EV/EBITDA: 6.56.

Total Debt: 82.19 Cr; Enterprise Value: Rs. 1,015.18 Cr.

VA Tech Wabag LTD: VA Tech WABAG Limited was incorporated in 1995 and is headquartered in Chennai, India. The company was formerly known as Balcke Durr and Wabag Technologies Limited and changed its name to VA Tech Wabag Limited in April 2000. Va Tech Wabag Limited provides solutions in the water treatment industry. The company offers life cycle solutions, including conceptualization, design, engineering, procurement, supply, installation, construction, and operations and maintenance (O&M) services. The Company has four business units: Municipal Business Group, Industrial Water Business Group, International Business Group and Operation and Maintenance Business. It provides a range of engineering, procurement and construction, and operation & maintenance (O&M) solutions for sewage treatment; drinking and industrial process water treatment; effluents treatment; and sludge treatment, desalination, and reuse for institutional clients, including municipal corporations, and companies in the infrastructure sector. The company operates primarily in India, Middle East and North Africa, central and eastern Europe, China, and south East Asia. It has overseas subsidiaries in Austria, Switzerland, Germany, Czech Republic, Romania, Macao, Algeria, Tunisia, Egypt and Turkey.  It has a joint venture agreement with Zawawi Trading Company LLC in Oman. The company came with an Initial Public Offer in September 2010 with 9.5 lakhs shares at the issue price of Rs. 1310/ share raising Rs. 475 Cr. On August 2011 the company declared the sub division of shares from the face value of Rs. 5 to the face value of Rs. 2.00. VA Tech WABAG is locally compared with Eco Recycling Limited and Ion Exchange, A2Z Maintainace and globally compared with Veolia Environment of France, Suez Environment of France, ITT Corporation of USA, United Utilities of UK, Severn Trent of UK, Thames Water of UK, American Water Works Company of USA, Nalco Company Water treatment of USA, GE Water of USA, Kurita Water Industries of Japan, Takeei Corporation of Japan, Daiseki Co.Ltd of Japan 

   

Investment Rationale:

VA Tech Wabag Ltd (WABAG) is an established EPC player in water management space. It offers complete life cycle solutions from project design to installation to operation & maintenance. WABAG is multinational player with presence in India, MENA region, Central & Eastern Europe, China and South East Asia. Majority of its revenues comes from various municipalities. The company runs an asset-light business model by outsourcing the capital-intensive construction business and focusing on delivering the optimum water technology solution. The company owns more than 100 process and product patents and has research centres in Austria, Switzerland and India. The WABAG brand has been in existence since 1924 and has executed projects across 17 countries. The urban share of total population in India is 31% as against 45% for Indonesia and 78% for Mexico, thus highlighting the significant room for upside in these regions. With rising urbanisation from 5,161 cities in 2001 to 7,935 cities in 2011 and the decades of negligence in water supply - sanitation is creating urgent need for up-gradation of the water and sanitation sector. Recognizing the potential growth in urbanisation, the government had launched the JNNURM in 2006 (which ended in 2012) and followed by the new improved JNNURM for the period 2012-32, this will help the company as it’s a market leader. Recently, the JV of VA Tech Wabag Ltd won a Rs. 344 Cr order from the Manila Water Co in the Philippines for design and construction of 100 million litre a day sewage treatment plant, this JV is with a local civil construction company & will also operate the plant for two years, this project is funded by the World Bank and Va Tech holds major shares in the JV. The Tamil Nadu government has announced four more desalination projects, giving fillip to the desalination business, of which two projects are for Chennai city. Of the remaining two, one is an expansion project of 150 MLD of the Nemili Desalination plant in Chennai, set up and operated by WABAG. The Nemili project is to be tendered shortly. The land required is already acquired and in possession. The other Chennai project is for 200 MLD, expandable to 400 MLD, for which detailed project report work has been initiated. The tender may be called in fourth quarter of FY14. The water and waste-water sector continues to be an attractive investment portfolio due to various factors such as urbanization, industrialization and population explosion. The growth of the water market in the Asia Pacific region is driven by growing population densities. In the Middle East, the driver is scarcity, while massive government spending will boost the Chinese market. Sea water desalination will attract investments to augment the installed capacity from 66 million cubic metres (m3) per day to 120 million m3 per day by 2016. The global water market is estimated to be around US$ 400 billion.

Outlook and Valuation:

WABAG is a global technological leader in the entire water treatment field managed by professionals and technocrats. The company has a unique business model with strong in-house research. The company has an excellent system for efficient equipment procurement, better engineering & designs. The company also enjoys higher margin due to close monitoring and cost control. VAW's order intake has increased from Rs. 680 Cr in FY09 to Rs. 2200 Cr in FY13. The company's improving credentials, expanding reference list and ability to take larger jobs is driving growth in the order intake. The company has teamed up with Sumitomo for taking Desalination projects in the MENA region. The company has already announced a major order win in consortium with Sumitomo. In the current fiscal, the company has guided for order intake of Rs. 2600 Cr – Rs. 2700 Cr. Company’s revenues are expected to grow at a CAGR of 16% over the period of FY13- FY15E, with the share of Operation & Maintenance is expected to increase in the overall revenue and expect it to account for nearly 18% of revenues in FY14 as against 14% in FY12. Margins in the international business are around 3% but there are scope for improvement on account of fixed cost leverage and strategic outsourcing of design work to low cost centres. ROE is expected to expand from 12.2% in FY12 to 15.4% in FY15, which should support valuations. At its CMP of Rs.442.45, the stock trades at 10.79x FY14E EPS of Rs. 41 and 9.61 X FY15E EPS of Rs. 46. One can buy VA TECH WABAG Ltd with a target price of Rs. 450.00 for Medium to Long term investment. 

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	1,443.50	1,618.90	1,867.50	2,091.07
NET PROFIT (₹ Cr)	73.70	89.70	108.60	122.24
EPS (₹)	27.80	33.80	41.00	46.00
PE (x)	16.80	13.80	11.40	10.10
P/BV (x)	1.90	1.70	1.60	1.40
EV/EBITDA (x)	7.40	6.10	5.10	5.10
ROE (%)	12.20	13.30	14.40	13.50
ROCE (%)	18.05	16.46	18.67	19.10

I would buy VA TECH WABAG LTD with a price target of ₹ 550 for Medium to Long term target. 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 ₹ 407.05 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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NMDC : SHOULD NOT MISS, GRAB THIS !!!

Scrip Code: 526371 / NMDC

CMP:  Rs. 107.10; Accumulate at Rs. 100 - 105.00 levels.

Short term Target: Rs. 115, Medium to Long term Target – Rs. 140; STOP LOSS – Rs. 98.53; Market Cap: Rs. 42,462.10 Cr; 52 Week High/Low: Rs. 202.80 / Rs. 98.70

Total Shares: 396,47,16,000 shares; Promoters : 317,19,46,580 shares –80.01 %; Total Public holding : 79,27,69,420 shares – 19.99 %; Book Value: Rs. 77.56; Face Value: Rs. 1.00; EPS: Rs. 16.00; Dividend: 450.00 % ; P/E: 6.99 times; Ind. P/E: 14.92; EV/EBITDA: 4.09.

Total Debt: NIL; Enterprise Value: Rs. 39,363.75 Cr.

National Mineral Development Corporation LTD:  The Company was founded on November 15, 1958 and is based in Hyderabad, India. It was formerly known as National Mineral Development Corporation ltd and changed its name to NMDC in August 2007. NMDC limited is an iron ore producer & exporter, operating in Chhattisgarh & Karnataka. It engages in the exploration and production of various minerals in India and internationally. It explores for iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite & beach sand. The company also focuses on coal and gold properties, as well as platinum group of elements and bauxite. It has iron ore deposits in Bailadila Chhattisgarh, Iron ore mines at Donimalai Karnataka; diamond mines at Panna Madhya Pradesh; magnesite mines at Jammu; & Arki lime stone project in Himachal Pradesh. In addition, the company involves in investing in the development of renewable energy resources, which include wind mill projects of approximately 10.5 MW capacities at Karnataka. On December 10, 2010, NMDC announced a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn tonne steel plant in Karnataka. This JV will have captive coking coal mine in Russia, while it will have an iron ore mining subsidiary in India. On September 2011, NMDC purchased a 50 % stake in Australian-based Legacy Iron Ore (Legacy) as a cornerstone investor for Rs. 92 Cr. On December 12, 2011 the company incorporated NMDC POWER LTD as is wholly owned subsidiary. NMDC supplied 2.6916 Cr tons of iron ore to domestic industries & had exported 3.85 lakhs tons of iron ore. Its sponge iron production was at 37,260 tons and Diamond production was 18,043.44 Carats during the ended on March 31, 2012. NMDC is locally compared with Sesea Goa Limited, Orissa Mineral Development Corporation Ltd, Gujarat Minerals Development Ltd, Sterlite Industries, Moil Ltd, Godawari Power & Ispat Limited and globally with China Vanadium Titano- Magnetite Mining Company Limited of China, Atlas Iron Ltd of Australia, Gindalbie Metals Ltd of Australia, Mount Gibson Iron Ltd of Australia, Ferrexpo Plc of UK and with MMX Mineracao e Metalicos Sa of brazil and with Cliffs Natural Resources Incorporation of USA.

Investment Rationale:

NMDC is India’s largest iron ore producer which is 20% of total production of India with a capacity of 36 mn tonne. The company operates high-grade iron ore mines at Kirandul and Bacheli in Chhattisgarh and Donimalai in Karnataka. Company’s mine life is of currently of average 38 years. NMDC has recently in the month of June signed a Memorandum of understanding with Mosi Oa Tunya Development Company of Zimbabwe for the participation in mineral projects. This MoU will provide exclusivity to NMDC for participation in mineral projects at Zimbabwe. NMDC plans to develop minerals assets overseas to secure raw materials for the steel industry. MOSI an organisation, ministry of tourism and hospitality, Government of Zimbabwe has invited NMDC as strategic partner to invest in the exploration and development of iron ore, coal, gold and chrome tenements. The management of NMDC believes that this MOU is a significant step towards ensuring augmentation of NMDC’s mineral reserves and globalisation of its operations. NMDC is one of the lowest cost producers of iron ore on account of its highly mechanized mines, high-grade iron ore mines and logistical efficiencies. Further, NMDC does not have to face issues of high employee costs as a percentage of net sales. Its staff costs/net sales ratio is the lowest amongst other PSUs. NMDC aims to ramp up its production capacity to 48mn tonne by FY2015 from current capacity of 32mn tonne through increased exploration of its existing mines and development of new mines at Deposit 11B and Deposit 13 in Bailadila and Kumaraswany, respectively which are situated at Karnataka. Given its past proven track record, it seems that company’s iron ore production capacity can increase to 40mn tonne by FY2015 as compared against its target of 48mn tonne. Although sales volumes declined 3.9% yoy in FY2013, a CAGR of 8.8 % in sales growth can be expected over FY2013-15E. The Management intends to diversify its operations by moving downstream through establishing steel plants and pellet plants. Accordingly, the company aims to build an integrated 3mn tonne steel plant in Jagdalpur, Chhattisgarh. Land acquisition for the same is nearly complete, which gives comfort as land acquisition is & has been a major bottleneck to green-field projects in recent times. So this steel project is not likely to be value accretive to NMDC in the initial period of operations.

Outlook and Valuation:

NMDC Ltd announced its iron ore production at 6.82 million tonne (mt) in April-June, this was flat on year as rains affected mining operations in June. NMDC has its mines in Chhattisgarh and Karnataka. Company's iron ore output in April was 2.44 mt, in May it was 2.45 mt and in June it was 1.93 mt. The company aims to produce 30-32 mt of iron ore in 2013-14 as against 27 mt a year ago. NMDC has fallen off about 40% over last one year and is now trading at market capitalization of about Rs. 40,000 Cr. The company is debt free with Rs. 20,000 Cr of cash and generating about Rs. 6000 Cr of net profit annually. The company talks about volume growth of about 15% for FY14 and maintain a 40% dividend payouts with a chance of it going upward based on the capex spending. Due to the rupee devaluation the effect of fall in International price of iron ore wont impact much the company. NMDC has guided for a sales volume of 30- 32 mt for FY14, higher than its earlier indication of 27- 28 mtpa. Volume form Karnataka has been pegged at 9- 10 mtpa including 4.5- 5 mt each from Donimalai and Kumaraswamy. The management has clarified that Donimalai would continue to produce at a rate of 4.5- 5 mtpa in near to medium term and they have requested the CEC and the IBM in this regard. In that case, the company would not be in a hurry to ramp up Kumaraswamy to 7 mtpa immediately. The management also indicated that the Q1FY14 sales volume would be more than Q1FY13 (6.86 mt), as it has already achieved a volume of around 5.3 mt during April and May. As per the management, the average rake availability per day at present has been 17, as against 14.7 in FY13 and 18.4 during Q4FY13. The company expects if this run rate continues it can evacuate about 23 mtpa through rail. By road, the company is likely to transport around 5 mtpa and around 2.5 mt is likely to be exported. NMDC believes, at the present scenario there may not be further price cuts. Even if it has to take, it won’t be significant. Employee costs revision is meanwhile due since April1, 2012, however the company has been making provision of about 15% every quarter. Over the past five years, NMDC has traded at an average EV/EBITDA of 13.0 x, as compared to its current valuation of 3.3x FY2015E EV/EBITDA. A strong balance sheet, presence in sellers’ market i.e. iron ore, low cost of production, high-grade mines, long mine life and a High dividend yield of nearly 6% at CMP make NMDC an attractive but at current levels. Valuing the stock at 5 x FY2015E EV/EBITDA, a fair value of NMDC comes at Rs. 140 and recommend to Accumulate on dips. In my view NMDC could report EPS in FY14E & FY15E of Rs. 16.20 sh and Rs. 17.60 / sh, respectively. One could buy NMDC for a short term target of Rs. 115 and for medium to long term target will be Rs. 140

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	11,261.50	10,704.30	10,461.00	11,892.00
NET PROFIT (₹ Cr)	7,316.70	6,342.40	6,441.00	6,971.00
EPS (₹)	18.50	16.00	16.20	17.60
PE (x)	5.60	6.50	7.20	6.70
P/BV (x)	1.70	1.50	1.50	1.30
EV/EBITDA (x)	2.30	2.70	3.70	3.20
ROE (%)	33.50	24.40	22.10	21.40
ROCE (%)	49.30	36.30	25.10	25.90

I would buy NMDC LTD for the shorter term with a price target of ₹ 115.00 & for Medium to Long term my target would be Rs. 140. 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 ₹ 98.53 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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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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