Titan Industries has had a phenomenal run over the last decade. Its stock price (adjusted) has shot up from the Rs 1.80 levels a decade ago to currently stand at around Rs 185. Its foray into branded gold jewellery has been a masterstroke. The company is now trying to replicate that success in diamond jewellery, eyewear, hip watches and accessories.
Titan’s debt on the books has been clipped from Rs 443 crore in FY02 to a mere Rs 67 crore in FY11. Cash from operations has risen from Rs 44 crore in FY02 to Rs 1,025 crore at the end of FY11, while return on capital employed (RoCE) has jumped from the 10 per cent levels at the beginning of last decade to an average of 42 per cent in the last five years.
There is more competition now but Titan has also become a franchise to reckon with — whether in branded jewellery, watches or even branded eyewear. Its moat is getting wider with each passing year.
Current outlook
Titan’s fortunes are inextricably linked to gold prices. Generally, an increase in the price of bullion is passed on to the consumer. However, this is also the company’s Achilles’ heel. Exorbitant prices act as a deterrent to gold purchases. This year gold is up 39 per cent (y-o-y in Q3FY12). There are concerns regarding Titan’s volume growth and how this could impact its revenue this year and next. Jewellery accounted for 77 per cent of the company’s revenue in FY11.
But Titan has an ace up its sleeve. What damage high gold prices could inflict could be countered by Titan’s expansion of jewellery retail space. The company plans to roll out 1,00,000 sq. ft. in FY12, of which 74,000 sq. ft. has already been added. The remaining is expected to be added by the end of the current financial year. This would increase the company’s jewellery retail space by a third compared to the previous year. Most of this increase in retail space (around 80 per cent) is franchise or semi-franchise based. Unlike other retailers like Pantaloon that got caught in the high floor space and consequently higher debt spiral, Titan’s leverage would remain largely unaffected even as it acquires a nationwide footprint.
The additional floor space could pull up overall volumes even if same-store sales lag. This pattern was evident in the company’s Q2FY12 results. Even though same-store volume growth stood at -3 per cent, overall volume growth was up 3 per cent. Volumes within the Indian jewellery market contracted by 26 per cent during the same period. Margins on watches, which accounted for 19 per cent of FY11 revenue, were affected due to an increase in the cost of components, especially imported inputs. The company resorted to a 5-7 per cent hike in prices in Q2FY12 in a bid to offset that. Further depreciation of the rupee is a potential risk.
Valuation
The premium that Titan’s stock commanded has got eroded owing to concerns about volume growth. There are fears that Titan’s five-year EPS growth of 42 per cent (CAGR) may not be sustainable in future. These concerns have led to a fall in valuations. The stock now trades at a 12-month trailing P/E of 37.8. Such a valuation was last seen in late 2004. The stock is trading at a discount to its five-year median P/E of 42.9 times. However, given its strong franchise, Titan remains an attractive buy. Those with a long-term investment horizon of three to five years may accumulate this stock at its current levels.
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