Volume-led earnings growth to come back
Titan’s jewellery business (which contributes 80% to Ebit—earnings before interest and taxes) is a structural growth story driven by the shift in market share from unorganised players to branded retailers.
The company is in an aggressive expansion phase now which will see a doubling of retail space over FY11-13 in the jewellery business. We believe the volume weakness in the jewellery business has bottomed out and expect volume-led earnings growth to gradually come back to the company as new retail stores start ramping up and jewellery demand in general picks up on a weak base. We expect Titan to post earnings CAGR (compound annual growth rate) of 22% over FY12-15. We initiate coverage with an Outperform rating and a one-year target price of R341.
Compelling structural growth story: Titan’s growth will be driven by the jewellery division. Branded jewellery will remain a high growth market as over 90% of the Indian jewellery market is with the unorganised sector, which is likely to gradually lose share to large organised retailers like Titan. Increasing awareness of quality of jewellery and rising aspiration of buying from branded chains are the key drivers for this growth. Titan has a strong brand image. It is also uniquely positioned for modern and contemporary designs, as compared to wedding and traditional jewellery for its smaller organised peers.
Near-term demand has bottomed out: Demand for jewellery has been very weak in the past four-five quarters with India’s jewellery volumes dropping 20-40% year-on-year. However, we are seeing clear signs of a bottoming out in terms of jewellery demand and are likely to see modest volume growth on a weak base going ahead. Titan’s Q2FY13 jewellery volumes and recent gold import data concur with this view. Many other consumer discretionary segments like apparels have also seen a bottoming out. We do not, however, expect a sharp recovery, but a gradual return of consumers as they get used to the new normal for gold prices.
Given that the tailwind of increasing gold prices will likely dissipate in 2013, we expect the weakness in revenue growth to persist for a few quarters. With Titan doubling retail space over FY11-13, we expect strong volume-led growth with a lag of 12-18 months.
High quality business model, deserves rich valuations: Titan’s ROCE (return on capital employed) has moved up from 26% in FY09 to 50% in FY12, while ROIC (return on invested capital) has moved