Titan Industries - Initiating Coverage - Reliance Securities

Glittering growth story

- High demand - A driver for discretionary segment: Titan industries Ltd. (TIL) is the market leader in the discretionary products segment. Currently the company is engaged in businesses like Jewellery, Time Wear, Eyewear and Precision Engineering. The discretionary segment (watches, jewellery and eyewear) contributes 96% to the company's total revenues. Despite the recent economic meltdown, there has been a continuous and sustained shift in consumer demand pattern from basic necessities to spending on lifestyle products and services (discretionary items). According to McKinsey Global Institute (MGI), discretionary spending will account for 70% of the total consumer spending by 2025. In our opinion, Titan Industries would benefit from this emerging pattern in India and is well-placed to take advantage of this unfolding opportunity.

- Focus on strengthening the Jewellery division: Titan has a market share of ~41% in the jewellery business. The World Gold Council has estimated the size of the Indian gold jewellery market to be ~Rs1 lakh crore. The organized sector controls ~10% of the gold jewellery market, while the unorganized sector accounts for the balance. Going forward, the branded sector will continue to gain market share due to strong advertisement initiatives by the industry, increasing awareness among people, and improving standard of living, which in turn would benefit players like Titan Industries.

- An overall attractive Watch segment: The size of the overall Indian watch market ranges between ~Rs4,000-4,200cr as per the report by Indian Time Wear Industry 2010. We have observed that historically, the watch industry has grown in the range of ~8-10% annually and with only 27% of the Indian population owning a watch, it is an underpenetrated market. As per the report, the Indian watch market is set to more than double in the next five years to ~Rs8,500cr growing at 10-15% every year, driven by India's young population, premium segment of consumers, growing economy, increasing consumerism and strong middle class. Moreover, the expansion of modern retail in India will further fuel the growth for the watch industry.

Outlook and Valuation

TIL is the market leader in the organized segment (both jewellery & watch businesses), strong distribution channel (increasing retail store every year in each segment), high brand equity and good product mix, all of which will help the company to generate good revenue growth with sustained margins. We expect the company to achieve ~29% CAGR in Net Sales over FY2011-13E to Rs10,850cr and Net Profit CAGR of ~31% during FY2011-13E. At the CMP of Rs209, the stock is trading at a P/E of 31x and 24.9x its FY2012E and FY2013E EPS respectively. We initiate coverage on Titan Industries with an Accumulate recommendation and a target price of Rs226.

Risks to the view

* Volatility in the prices of gold would affect the demand for jewellery and gold products in the market.
* Any slowdown in Indian economy would affect the demand of the company's products.

Source : Equity Bulls

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