Buy Titan Company, target Rs 1,190: ICICI Direct

ICICI Direct has given a buy recommendation on Titan Company with a target price of Rs 1,190.

Shares of Titan Company traded Rs 1,019.8 around 1:20 pm on 8 August, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale by the brokerage

First half (H1) of FY20 to remain muted; recovery from H2 onwards

As guided by the management in its pre-quarterly update, Titan reported moderate overall revenue growth of 15.7 per cent year-on-year (YoY) to Rs 5,151.1 crore (well below their internal target of 20 per cent growth).

A significant surge in gold prices, weak consumer sentiments dented demand for the jewellery space (mainly in June).

With the jewellery division reporting revenue growth of 14 per cent in Q1FY20 and a muted Q2FY20, the company may fall short of achieving the 22 per cent growth guidance for FY20.

However, the management expects festive demand and green shoots to drive revenue growth from H2FY20 onwards.

Adjusting for the impact of Ind-AS 116 and expense incurred towards the biennial Business Associates Meet (BAM), Ebitda margins stayed constant YoY at nearly 10.9 per cent. Reported PAT grew 11 per cent YoY to Rs 364.7 crore.

Higher gold prices to subdue near term demand

The jewellery division reported subdued revenue growth of 14 per cent YoY to Rs 4,164.1 crore (grammage growth 6 per cent YoY), with like to like sales growth of 10 per cent.

A sudden surge in gold prices and slowdown in consumption impacted consumer demand significantly. The share of studded ratio was in line with previous year at 25 per cent.

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The management highlighted that jewellery revenues in second half of June witnessed a decline. The same trend has persisted in July with August also expected to be muted.

For H2FY20, the management is targeting revenue growth in excess of 20 per cent on the back of higher wedding dates and festive season.

However, the lower revenue growth in H1FY20 is unlikely to be recouped in H2FY20.

The management has maintained its store addition plan of nearly 70 Tanishq stores despite slower pace of addition in Q1FY20 (12 stores) and visibility of nearly 15 stores in Q2FY20. Ebit margins for the jewellery segment stayed flattish YoY at 10.5 per cent.

TCS order provides uptick for watches segment

Revenue from watches segment grew 20 per cent YoY to Rs 716.1 crore on back of one time large institutional order from TCS (nearly Rs 56 crore).

Adjusting for it, revenue growth came in at 11 per cent.

Ebit margins for the watches division declined 170 bps YoY to 16.6 per cent, primarily due to BAM expense. The division added two World of Titan, three Fastrack and five Helios stores in Q1FY20.

Valuation & outlook

“Given the recent headwinds, we revise our revenue and earnings estimates downwards for FY20 and FY21E,” said the brokerage.

A sustained increase in gold prices and weak consumer sentiments can lead to postponement of purchase, which may defer the revenue growth recovery in the near term.

Titan has consistently displayed its ability to gain market share amid a tough industry scenario.

Enriched jewellery portfolio with launch of new collections (wedding space) and sustained investment in brand building is enabling better than industry revenue growth.

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“We model revenue and earnings CAGR of 17 per cent and 24 per cent, respectively, in FY19-21E. We maintain our buy rating on the stock with a target price of Rs 1,190 at 49 times FY21E earnings per share (EPS) (earlier target price of Rs 1,250),” said the brokerage.


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