Titan Industries - Economic slowdown, higher gold prices steal Titan's shimmer - Reliance Securities

Key highlights of the result

- Net Sales up ~9% yoy: Titan Industries' (TIL) Standalone Net Sales for 1QFY2013 grew ~9% yoy to ~Rs2,206cr (~Rs2,021cr in 1QFY2012), whereas, it declined ~3% qoq (Rs2,282cr in 4QFY2012). The increase in top-line on yoy basis was supported by sales growth in different segments i.e. Watches (up ~14% yoy to ~Rs361cr), Jewellery (up ~8% yoy to Rs1,776cr) and also aided by average realizations. The company has reported weak growth in the Jewellery segment (volumes declined ~21% yoy) due to high gold prices (gold in rupee terms touched its peak of Rs3,067 per gram of 24Kr), which impacted sales, while, Watch segment also reported muted volume growth at ~3% yoy (both the segments were affected due to lesser wedding dates during the quarter). However, the growth in Jewellery segment was owing to the conscious efforts of the management to drive the revenues of the higher-margin Diamond Jewellery business (up ~22% yoy) through multiple activation programs. The company's other businesses i.e. Eyewear, Precision Engineering and Accessories grew 15% to ~Rs90cr. The outlook for Precision Engineering Division remains positive with enhanced interests from overseas clients.

- OPMs up 10bp yoy: Titan reported Standalone EBITDA of ~Rs212cr in 1QFY2013 (up ~10% yoy). EBITDA margin increased 10bp yoy driven by a pickup in Eyewear and Precision Engineering segments, and also due to the reduction in raw material costs (down 38bp yoy), other expenses (down 37 yoy) and effective cost management. On qoq basis, EBITDA margin was higher by 52bp. However, the expansion of Helios stores would continue to pressurize margins in the Watch segment going forward.

- Net Profit grew ~9% yoy: The Standalone Net Profit increased ~9% yoy to ~Rs156cr (~Rs144cr in 1QFY2012), led by the operational performance of the company at the EBITDA levels and reduction in tax rate (down 61bp yoy).

Outlook and Valuation

Titan Industries' 1QFY2013 results were below our expectations. The company has reported weak performance in Jewellery and Watch segments due to slowdown in economy, which negatively impacted discretionary product spending (discretionary products like Watches, Jewellery and Eyewear contribute 96% to the company's total revenues). The management expects to achieve sales growth in range of 15-16% and operating profit of Rs1,000cr for FY12013. Thus, we believe that the company will perform better on top-line and bottom line front going forward.

We expect ~17% CAGR in Net Sales over FY2012-14E to Rs12,205cr. TIL's strong distribution channel (increasing number of retail stores every year in each segment) and high brand equity would support the company's growth. We expect ~19% CAGR in Net Profit over FY2012- 14E, due to decent revenue growth & higher realizations. At the CMP of Rs222, the stock is trading at a P/E of 28.3x and 23.3x its FY2013E and FY2014E EPS respectively. Hence, we recommend Buy on Titan with revised target price of Rs257.

Risks to the view

- High volatility in gold prices could affect the demand for jewellery and gold

- Greater-than-expected slowdown in the Indian economy could affect the demand of the company's products.

Source : Equity Bulls

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