Stock Fundamentals

Set to sparkle

Anand Kalyanaraman | Updated on January 24, 2018 Published on February 08, 2015




Improved gold supply and healthy demand should keep the market leader ticking

From our buy recommendations in February and July last year, the stock of leading jeweller Titan Company has rallied more than 80 per cent and 27 per cent. A few factors helped. Primarily, the relaxation in gold import restrictions by the new Government has improved supplies.

More players were given the permission to import gold. Credit purchases of gold were allowed again. Also, the 80:20 rule requiring export of at least a fifth of the imported gold was scrapped. This provided relief to jewellers, especially for players such as Titan that do not export jewellery. Improved supplies reduced domestic price premiums on the yellow metal.

Good show

This, coupled with declining inflation and an uptick in consumer sentiment, helped Titan’s jewellery business recover from the lows of the December 2013 quarter when profit fell 19 per cent year-on-year. In the recent December quarter, profit grew more than 15 per cent.

This was thanks to a good show (25 per cent volume growth) by the jewellery business which contributes nearly four-fifth to Titan’s revenue and bottom line.

This more than offset the weakness in the other major segment — watches — which saw a 4 per cent drop in volumes. For the nine months ended December 31, 2014, Titan’s revenue grew 16 per cent year-on-year while its profit increased 9 per cent. It continued expanding and added 94 stores across divisions so far this fiscal. A strong balance sheet with low debt should support further expansion.

Healthy prospects

Titan has done commendably in a tough period over the last year and a half. Jewellery volumes have grown 13 per cent so far in 2014-15. With the worst — regulatory tightening and tepid demand conditions — likely behind it, prospects seem good.

The jewellery business should continue doing well as economic conditions improve. The ongoing shift towards organised players along with Titan’s market leadership and strong brand presence bode well for the company. The launch of a new gold savings scheme for customers, after the voluntary suspension last year to comply with the new Companies Act, should add to volume growth.

There could be benefits on the cost front, too. Though credit purchases of gold have been allowed by the Government, lack of clarity has meant that the customs authorities still require cash payments on gold imports for domestic consumption.

A resolution of this matter, when it happens, would fully restore the gold-on-lease model. Under this, payments for gold purchased by jewellers are settled within an agreed credit period based on the price at which it is sold to end-users.

This would mean lower interest and hedging costs. Meanwhile, Titan has been able to get some gold on credit from the deposit schemes of SBI.

The watches segment did not fare well in the December quarter due to a damp festival season and competition from online players. But the segment’s volumes in the nine months ended December 2014 were 5 per cent higher than the year-ago period.

The company’s strategy of having a presence through physical brick-and-mortar stores as well as online markets should help sustain volume growth.

Thanks to the strong rally over the past year, the Titan stock, at ₹416, now trades at about 45 times its trailing 12-month earnings. This is near the upper end of its valuation band (25-48 times) over the past three years.

But given the company’s good growth prospects and scope for earnings expansion, there may be further upside to the stock.

Investors with a two-to-three year horizon can consider buying the stock.

Published on February 08, 2015
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