Buy Titan Industries: GEPL

Titan Industries is Rakesh Jhunjhunwala’s “crown jewel” stock and he has bought tons of it since he spotted it at Rs. 65.

GEPL has now initiated coverage on the Titan stock and exhorted investors to buy it at the CMP of Rs. 225 for a target price of Rs. 270. This is what they say:

Titan Industries Ltd.
Glittering gains ahead

Investment Rationale

Strong expansion plans to capture the favourable demographic changes

The consumer discretionary industry is expected to witness a boom in the coming years due to the demographic changes like a) rising income levels along, b) stronger GDP growth which should drive demand, c) changing consumption habits, d) large youth population, e) high working-women ratio, and f) growth in middle class population and rising urbanisation. We believe, Titan Industries (Titan) is best poised to take advantage of the changing trends due to its rapid store expansions. Titan has seen its store grow from 372 in FY08 to 827 in FY12P and with an eye on growth the company expects to add another 450+ stores (340 in watches; 70 in jewellery; and 50 in eyewear) in the next two years. We hence expect a sharp increase in the wallet share of discretionary household spending and luxury products in the coming years.

Leasing gold franchisee model to aid margins in the jewellery segment

Titan is the market leader in the `100 bn organised jewellery market which itself accounts for a mere 10% of the entire jewellery market and hence offers plenty of room for growth. Given a) the strong corporate lineage, b) design innovations, c) continuous introduction of new collections, and d) presence across the value chain with new store plans, we expect Titan to garner a greater share in organised segment.

The company has adopted a facility to procure gold on lease basis. As per this facility, Tanishq leases gold from foreign banks and pays rent on it from the purchase date till the time it is purchased by a customer. This helps them hedge against the currency and gold price fluctuations. Moreover, a majority of their store additions (40 in FY13E) would be through the franchisee model which should curtail employee and rental cost. The improved product mix and linking of making charges to gold prices should further aid margins.

Focus on store and sales growth intact in watches segment

Titan has a 25% volume share and a 45% value share in the Indian watch industry due to its presence across the entire value chain at various price points. Besides its own brands like Zoop, Raga, Fastrack etc, the company is also the licensed vendor of Hugo Boss, Tommy Hilfiger and FCUK all of which fall under the premium and luxury category.

Titan has witnessed a 15.7% sales CAGR in the watches segment in the last 5 years and we expect the pace of growth to be higher in the coming years driven by its strategy to a) target the urban youth and women, b) capture the up trading potential in the premium watches, c) create market for multi-ownership via new collections, and d) increase its product range of Sonata.

Turnaround of the eyewear and PED division

Titan has recently witnessed a turnaround its eyewear and PED division and though this division accounts for mere ~5-6% of the total revenues, we expect the turnaround in these division to be beneficial for the company given the strong margins the PED and eyewear business command.

Valuation

At the CMP of `225, the stock is trading at P/E of 26.5x its FY13E and 20.7x its FY14E EPS. We expect Titan’s revenues and PAT to witness a 24.6% and 26.5% CAGR respectively in FY12PFY14E driven by aggressive expansion plans in jewellery, watches and eyewear markets. We forecast margin accretion due to rising share of premium products in the overall product mix and decline in losses in the eyewear segment. We believe there is good potential upside in the stock and initiate coverage with a BUY rating and target price of `270 per share (24.9x FY14E EPS).