There’s a bit of bad news for investors in Titan Industries Ltd. “Titan’s cash flows to return ratios may be adversely impacted with RBI’s (Reserve Bank of India’s) recent gold-leasing norms that cap the lease period to 90 days through the direct gold import route—and also on procurement through MMTC,” Citi Research analysts wrote last week. The firm currently enjoys a lease period of 180 days. However, some analysts say the new reduced lease period may not be implemented. Hope springs eternal.
What about the operating environment? Well, gold prices continue to remain very high, which is important to Titan, as it derives a major portion of its revenue from the jewellery business. In the first half of the fiscal year, the jewellery business accounted for as much as 77% of the total revenue and for four-fifths of the earnings before interest and taxes (Ebit).
While Titan’s jewellery revenue growth was lacklustre for the last two quarters, it’s important to note that the division’s profitability was stronger in the September quarter. Jewellery business Ebit registered a strong growth of 35% on a year-on-year basis in the September quarter compared with about 9% Ebit growth in the June quarter.
On the other hand, the watch business disappointed in the September quarter. Of course, the festival season in the current quarter should lead to an improvement in consumer confidence and boost performance.
The Titan stock has done well on the bourses and outperformed the BSE Sensex this year.
At the current market price, it trades at about 27 times estimated earnings for the next fiscal year. Valuations appear to be on the higher side. The company maintains that after two quarters of sluggish performance, business in general is seeing a pickup. Of course, a good number of wedding dates this quarter should translate into better quarterly performance this time around. But what happens to consumer sentiment beyond this quarter would be more material.
“Our target price is rolled to Rs. 275 on 27 times Mar14E earnings per share (versus 25 times Sept13E). The multiple is raised in line with the sector and at a slight premium to history—perhaps more than appropriate given the underlying sentiment and potential B/S (balance sheet) risks. Titan is a good consumption play; however, high expectations and valuations (about 30 times one-year forward P/E) prevent us from being more constructive,” Citi said.