Titan Industries is the world’s sixth largest and India’s largest manufacturer and retailer of watches and jewellery, which accounts for 35% and 60% of its overall revenues, respectively.
We believe that the niche segments in which Titan Industries operates, viz., watches, jewellery and eyewear have tremendous growth potential. Further, with Titan being an early entrant in all the three segments has the first-mover advantage.
The company is well poised to capture substantial share of the eyewear pie, while maintaining its dominance in the watches and jewellery segments.
Since Titan’s growth is driven by franchisee model, we believe execution will not be big risk factor for Titan compared to other retailiers in the industry.
Nonetheless, there exist few concerns associated with the niche segments in which the company operates, biggest of them being availability of skilled front-end manpower.
However, we believe that Titan would be able to attract and retain talent due to its brand presence and legacy of the Tata group in India.
Over the years, Titan has consistently posted robust RoE and RoCE, which has also been the highest in Industry.
Sound track record
Titan has consistently delivered RoE of 35% and above, and we estimate it to maintain RoE of 35.3% and 34.6% in FY2009E and FY2010E respectively, as well on account of high asset-turnover ratio.
Titan has a history of operating at a leverage below 1, which has given it tremendous RoCE. Titan’s D/E ratio fell from 0.74x in FY2007 to 0.47x in FY2008, thereby resulting in RoCE spurting to 32.7% in FY2008 from 30.1% in FY2007.
We estimate Titan to deliver RoCE of 33.1% and 31.7% in FY2009E and FY2010E, respectively.
Although we are positive on the company’s future growth prospects owing to its scalable business model that would deliver robust Return Ratios, we believe that at 17.7x FY2010E Earnings and 5.4x FY2010E P/BV, the stock discounts the same fairly well.
On comparative basis also, Titan is richly valued vis-à-vis its peers. We initiate coverage on the company with a NEUTRAL recommendation.