We downgrade Titan Industries shares to ?neutral? from ?buy? as we believe the near-term concerns over falling gold prices and the uncertain demand environment will likely mean earnings growth could be much more tepid than what consensus is building in.
We are 10% below consensus on FY14f earnings estimate and believe that over the next couple of months, there will be a meaningful correction to consensus earnings estimates. While FY14f is going to be a tough year for Titan, the long-term dynamics for the organised jewellery retail business remains strong with the possibility of gaining market share. We look for the near-term uncertainty to dissipate and cut our target price to Rs 250 from Rs 321.
Titan trades at 21.7x FY15f earnings (Rs 11.4) against the sector average of 24x. While the stock trades at a discount to the sector average, we believe it is justified as we expect that Titan will deliver an average ~15% earnings growth over the next couple of years versus the sector average of ~18%. We factor in a lower valuation multiple of 22x to account for the potential slower growth. Uncertainty around both gold prices and the demand environment means the stock price is likely to remain range-bound in the near term and trade at lower than long-term multiples.
The sharp fall in gold prices is a key variable for Titan. Gold prices have corrected significantly in the past one month or so and are down 10% in rupee terms. The spot price is ~12% down from the average FY13 prices.
We believe that sensitivity of earnings is fairly high to gold prices. One of the key reasons for a strong 44% earnings growth recorded by Titan between FY08-11 was rising gold prices which pushed both realisation and Ebit margins in the jewellery business up. Now, with gold coming under pressure, we believe that current consensus estimates may potentially come under pressure.
This has a significant impact on Titan?s jewellery segment sales growth. Gold prices are a significant determinant of the top-line growth for Titan?s jewellery segment. Since gold prices are a pass-through for the company, they contribute to the realisation impact in the jewellery segment.
