Titan Industries - New regulations to change financial model... - ICICIdirect

We met the management of Titan Industries (Titan) to understand the company's strategy to deal with the recent regulatory changes. The management has expressed concern over the recent changes and confirmed that it would need to resort to bank borrowings to fund working capital. This, in turn, will lead to higher costs (both financing and hedging) and, thereby, depress the return ratios. To deal with this, the company plans to a) stock more fast moving jewellery items, b) pass on increased costs to end users and c) de-risk its business model and launch new products in the lifestyle segment. As of now, Titan does not plan to alter its store addition plans unless gold availability becomes an issue. While the financial model of the company will be impacted owing to the regulatory changes, we believe Titan is relatively better placed as compared to its peers. In our opinion, the recent correction is overdone and we thereby upgrade Titan Industries to BUY with a reduced target price of Rs. 250 (earlier Rs. 300).

New regulations will mean inventory risk, resorting to bank borrowings

Before the recent regulatory mayhem, Titan obtained its gold on lease and, hence, was not susceptible to inventory risk. However, it will now resort to hedging, thereby raising costs. Also, Titan will have to resort to bank borrowings due to suspension of availability of gold on lease.

Venturing into newer segments to fuel growth

While jewellery will still continue to have a dominant share in Titan's revenues, the company is attempting to de-risk its business and is venturing into lifestyle related segments like fragrances and helmets.

Earnings, multiple downgrade; concerns priced in; upgrade to BUY

Even in the current regulatory framework, we believe Titan is better placed than its peers to deal with the current situation. We have reduced our earnings estimates downwards to factor in the changes (increased costs) and also downgraded the valuation multiple one notch to 23.0x FY15E EPS (owing to a compression in return ratios). However, in our opinion, the recent correction prices in the negatives. We, therefore, upgrade Titan Industries to BUY with a reduced target price of Rs. 250.

Source : Equity Bulls

Keywords