GST glitter for Titan but demand key
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After touching an annual closing high of Rs551.85 on 5 June, the Titan Co. Ltd stock has given up some of those gains. The euphoria that led the stock to soar last week was the fact that the goods and services tax (GST) rate on gold jewellery was decided at 3%, lower than expectations of a 5% rate.
But despite the recent decline in the share price, the stock still trades at about 44.7 times estimated earnings for this fiscal year, which is pretty stretched.
Analysts believe that the 3% rate will help Titan gain market share (currently at about 5%) from the unorganized sector over the medium term. That’s because as compliance levels under the GST regime increase, it is expected to reduce the price differential vis-à-vis unorganized firms. According to IIFL Institutional Equities, the resultant reduction in price differential should aid market share gains and drive 20% FY17-20 earnings per share compound annual growth rate.
Further, the 3% rate is similar to the current rate and should not materially disrupt consumer behaviour, pointed out analysts from IIFL Institutional Equities in a note on 5 June.
The way GST implementation takes place and the implications on the unorganized sector will be key things to watch for. A good measure to evaluate the progress would be to track the market share gains the company makes.
But what is paramount really is demand, and things have been good for Titan on that front. It has had two good quarters in a row. In fact, the jewellery segment, which is the company’s main revenue contributor, had performed even better in the recently ended March quarter than the December one, which was the demonetisation quarter. The good run may well continue this quarter too. Analysts say a higher number of wedding days will support performance for the June quarter. New launches are expected to help.
The Titan stock has appreciated as much as 42% in the last one year suggesting that most of the positives are factored into the price at these levels. As mentioned earlier, valuations are expensive. Needless to say, if the anticipated gains from GST aren’t as big as forecast, investors will be disappointed. According to Bloomberg, 16 analysts have a “buy” rating on the Titan stock, eight have a “hold” rating and a equal number have a “sell” rating.