Titan Industries : BUY

OVER 40% UPSIDE IN 2-YEARS

Titan Industries Ltd (TIL) reported net sales of Rs 65.2 bn (up 40%YoY), EBITDA of Rs 5.8 bn (up 47% YoY) & adj. profit of Rs 4.3 bn (up 70% YoY) for FY11. Reported earnings for Q4FY11 at Rs 838 mn was lower than our estimate due to higher provisioning made (~Rs 250 mn) for employee welfare scheme. Revenue during FY11 was driven by healthy improvement in same-store volume growth across formats, new store rollouts and rise in gold price (up 25%). Greater thrust on large format store and improvement in sales mix towards studded jewellery will remain the key focus area going ahead. We have upgraded our volume growth outlook and consequently our earnings by 7% in FY13E.   The stock trades at 28x 1-yr fw  P/E,  close  to  the  upper  quartile range. While there is little scope for further P/E improvement, we believe the upside will be driven by earnings momentum. At exit multiple of 32x FY13E, we believe the stock can deliver over 40% return in the next 2 years. Thus BUY with 1-year target price of Rs 4750 (upside of 18%).          

Key Highlights: FY11 

• Negative working capital business: By virtue of gold lease from banks (for over 90% of  jewellery inventory) & rising customer advances (6480 mn) under Gold Harvest Scheme (12% of jewellery sales) in FY11 , the jewellery division is now a negative WC biz. Thus overall WC-to sales now at -3% vs. 50% a decade back.  
• Continued improvement in margin profile:  PBIT margin (8.5% in FY11 v/s 7.2% in FY10) for the jewellery segment has improved due  to increase in contribution from (a) higher-margin diamond studded jewellery (40% of jewellery sales in FY11) & (b) improvement in  making charges which is linked to gold prices. Segmental margin (14.5%) of watches also improved by 400 bps in FY11, led by higher production from low cost zone in Uttaranchal & better sales mix (premium brands). As the company drives premiumization through design innovations and a 6% gold price inflation, we estimate overall EBIT margin to improve from 8.4% in FY11E to 8.9% in FY13E.
• Focus on large format stores: The company currently operates 665+ stores (v/s 543 in FY10) & 0.81mn sqft (v/s 0.69mn sqft) of retail space. Jewellery retail space (~ 40% of total) stood at 0.34 mn sqft. 6 Tanishq stores (total 120) were added this fiscal. Tanishq has recenly opened the largest jewllery store  (20,000 sq ft) in Mumbai. This is the 3^rd large format store and  the company intends to further explore larger formats across key tier I cities. We believe this would not only improve execution capability, but also has the potential to increase customer conversion and inventory turns.    
• Break even in eyewear & precison engg on the horizon: At PBIT level, losses have reduced from 400 mn in FY10 to 180 mn in FY11
• Debt retirement: The Company will retire 520 mn of debt in FY12 reducing gross debt to 150 mn (ECB’s) 

Strong same-store sales growth across formats

Jewellery segment (76% revenue) grew by  44% YoY in FY11, led by 18% growth volume and 25% rise in gold price. Same store sales growth in Tanishq stood at 44% in value terms for 9mFY11. We have forecasted 22% CAGR in jewellery volume over the next 2 years, based on 16% increase in retail space. Value growth is estimated at 32% CAGR considering 6% gold price inflation and 4% improvement in sales mix.

Watch segment (20% of revenue) grew by 25% YoY in FY11, which was largely led by volume growth in Titan brand and high end swiss brands.  World of titan stores witnessed a 21% rev growth in 9mFY11, while Helios & Fastrack also grew rapidly. We expect 14% CAGR in watches volume over the next two years, driven by 10% increase in sq ft and 4% same-store sales. Alongside 8% improvement in sales mix, the value growth in time products is estimated at 22% CAGR over FY11E-FY13E.  

Other biz (eyewear & precision engg): 75% YoY value growth. Titan eye+ recorded an  impessive 67% YoY growth.