Titan: all that glitters is not gold2 min read . Updated: 24 Dec 2015, 02:51 AM IST
A bigger worry for Titan is the fact that underlying demand has been quite weak for some time now
Shares of Titan Co. Ltd slipped and then gained last week after the government made it mandatory to quote the permanent account number (PAN) for all transactions above ₹ 2 lakh. Initially, investors thought this will hurt jewellery sales, and Titan’s shares fell around 3%. Later, on Friday, they recovered most of those losses, after the company said that it won’t be impacted much.
First, according to the company, such large-value transactions account for less than 10% of the jewellery division’s revenue. Its average transaction size in the jewellery business is ₹ 65,000. Besides, it is not that the entire portion of the high-value business is at risk due to this development. This is because Titan says it is already compliant with the PAN requirement for transactions over ₹ 5 lakh.
In short, some impact can be expected, although it may not be very material. Besides, the ₹ 2 lakh limit is higher than the ₹ 1 lakh limit the finance minister had spoken of in the budget speech, which means the latest announcement has come as a bit of a relief.
A bigger worry for Titan is the fact that underlying demand has been quite weak for some time now. The festival season this time around, which has generally been good for many retailers, has been an exception. In fact, citing demand concerns, analysts from Nomura cut their estimates last week. “We cut FY16F/FY17F/FY18F earnings by 13.4%/10.2%/2.9%, respectively, on the back of a 9-11% cut in our revenue estimates, mainly owing to the continued slowdown in demand and rising competition among both organized and unorganized companies," wrote Nomura analysts in a note to clients.
The brokerage forecast flat earnings growth for FY16F and ~20% growth in FY17F and FY18F. Note that despite the 5% correction in prices this year, Titan trades at 39 times FY16 earnings, far higher than the rate at which earnings is expected to grow.
The outlook on the watches business, too, isn’t great, thanks to stiff competition. Watch volumes declined in three out of the last four quarters, and were flat in the September quarter. E-commerce has brought to the fore another source of competition, and is a threat to volumes. Titan appears to be losing market share, according to Nomura’s analysts.
In the near term, December quarter results are expected to be good, backed by festival season sales, and the March quarter will include some impact of the new Golden Harvest Scheme. But the company’s shares more than capture all that optimism. In fact, if there are no visible signs of a meaningful revival in demand, there are good reasons for investors to continue exiting the Titan counter.