Titan share price gains as analysts believe CaratLane stake purchase to be value accretive
3 min read 21 Aug 2023, 11:19 AM ISTAnalysts believe Titan increasing stake in CaratLane will be value accretive in the medium term as the company is a high-growth business with opportunity to ensure healthy revenue and margin. However, the transaction will also be EPS dilutive in the short-term for Titan.
PremiumTitan Company share price gained nearly a percent on Monday after the watch and jewellery retailer announced to increase its shareholding in CaratLane Trading Private Ltd. to 98.28% from 71.09%.
Titan Company signed a Share Purchase Agreement with the Founder of CaratLane and his family members to acquire all the shares held by them representing 27.18% stake in the company for ₹4,621 crore.
CaratLane is an unlisted private company engaged in the manufacture and sale of jewellery and is a subsidiary of Titan. Titan had first acquired a 62% stake in CaratLane in 2016 for ₹357.24 crore, and had subsequently raised its stake in the omni-channel jewellery retailer.
Read here: Titan Co acquires another 27.18% stake in CaratLane for ₹4,621 crore
Analysts believe Titan increasing stake in CaratLane will be value accretive in the medium term as the company is a high-growth business with opportunity to ensure healthy revenue and margin. However, the transaction will also be EPS dilutive in the short-term for Titan.
The current transaction pegs CaratLane’s valuation at around ₹17,000 crore.
Analysts at Antique Stock Broking believe the acquisition optically appears to be expensive, but it is positive for Titan in the long run as CaratLane will play a critical part in Titan’s ambition to dominate the organized jewelry space in India, especially e-commerce.
“We note that CaratLane is in a sweet spot with the share of online jewelry in India expected to double in the next five years from 5.9% in FY22 to 9.2% in FY27E. Overall, we understand that the acquisition is positive for Titan over the long run," Antique Stock Broking said.
It maintained a ‘Hold’ recommendation on the stock with a target price of ₹3,009 per share.
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Kotak Institutional Equities believes the transaction was overall a good move, even as it would be 2-4% EPS dilutive over FY2024-26E.
“Titan's LT attractiveness comes from low market share (7%) in a large addressable market, wide gap versus competitors and steady investments and progress on multiple fronts (customer base expansion, regional markets, especially successful inroads in TN, wedding segment, international expansion, the high-value segment and omni-channel) that would enable share gains for the foreseeable future," Kotak Institutional Equities said.
It believes any weakness in the stock price, given the likely softness in near-term demand, should be used as an opportunity. The brokerage has an ‘Add’ rating with a target price of ₹3,175 per share.
Analysts at JM Financials believe the transaction could be near-term EPS-dilutive (4%) but is certainly value-accretive.
“Caratlane is a high-quality high-growth business built by Mithun Sacheti from scratch – it has a richer gross margin profile (c.35%) vs Tanishq’s and at steady-state could possibly be clocking a higher operating margin than Tanishq. The stake acquisition has been done at 4.5x FY25E sales which is tad lower vs Titan’s own valuation of c.5x sales. Titan remains a solid discretionary consumption play, in our view, and any volatility in stock price should be used as an opportunity to add to positions," JM Financial said.
Titan has acquired the balance stake in Caratlane at a valuation of 4.5x FY25 sales vs its own valuation of 5x sales. EV-EBITDA of the deal (44x FY25) is c.10% premium to Titan’s as Caratlane is still in a gestating but hyper-growth phase and its operating margin profile is possibly still not reflective of its steady-state potential, it added.
JM Financial has a ‘Buy’ rating on Titan and raised the target price to ₹3,085 per share from ₹3,070 earlier.
Titan shares have rallied over 18% this year so far and the stock has given more than 25% returns in the last one year period.
At 11:15 am, Titan share price was trading 0.41% higher at ₹3,061.80 apiece on the BSE.
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