We maintain ‘Neutral’ on Titan with a target price of Rs 240 per share. We believe regulatory storms need to subside for stock outperformance. The stock trades at 27.6x FY14e (estimates) and 24.2x FY15e EPS (earnings per share) . We are cutting our earnings estimates by 3% to factor in the soft underlying demand. We are now building in EPS growth of just 3% in FY14 and 14.2% in FY15. Our estimates are 8-10% lower than consensus.
Titan remains a core long-term play on rising lifestyle spending, underpinned by favourable demographics, and will be a key beneficiary on account of its dominant positioning in jewellery and watches, as also the Tata brand heritage. We remain believers in Titan's long-term attractive franchise, which is supported by favorable demographics, shift towards the branded segment, its excellent execution track record and high quality management.
However, near-term stock performance will be a function of regulatory actions. While media articles suggest that the government/central bank are contemplating reversal of some of their regulatory actions, the timing and extent of these is unclear.
Demand for jewellery, watches sluggish: According to the management, underlying demand remains weak in both jewellery and watches. A weak macro environment, slowdown in discretionary consumption, sticky inflation and poor consumer sentiment are impacting footfalls. The management indicated that while the festive season was sub-par, wedding demand too appears weak. Despite higher number of wedding days, jewellery demand has not recovered.
Regulatory constraints stifling: Over the last six months, the government has introduced various measures to dampen gold consumption to stem a deterioration in the current account deficit. Amongst the key measures it has taken are: (i) increase in customs duty on gold to 10%, (ii) introduction of 20:80 scheme for gold imports, requiring 20% of imported gold to be used for exports, and (iii) ban on gold-on-lease. Media reports indicate that there has been a sharp increase in gold smuggling, given the attractive arbitrage of 10% customs duty.
Recent media reports suggest that the government is contemplating removal of some of its restrictions. Implementation of the 20:80 scheme has tightened gold supply, resulting in a widening of the premium on legitimate gold to 7-8%. This premium of nearly R2,000 per 10 gram puts Titan at a disadvantage, as smaller local players are able to procure gold illegally at lower prices.
Besides, the ban on gold-on-lease has impacted financing of gold inventory. Titan is now procuring gold on