17 April 2013
Update |Sector: Retail
Titan Industries
CMP: INR244
TP: INR 320
BUY
Gold price falls sharply; Takeaways from Jewellery management
interactions; Sensitivity analysis
(TTAN IN, CMP INR244, Mkt cap USD4b, TP INR320, 31% upside, Buy)
We interacted with Jewellery sector managements to gauge the impact of sharp
price correction in gold price on demand for jewellery. We also present the
sensitivity of our FY14 and FY15 estimates for Titan to the gold price fall.
‐
Gold prices have corrected 12% in last week due to host of macro issues
(Potential liquidation of Cyprus Gold reserves, strength in US dollar etc).
Organized Jewellery players have not yet been tested for a deflationary Gold
pricing scenario. Ever since Organized Jewellery started gaining strength in India,
Gold prices have been in an uptrend barring few instances of moderate
correction.
‐
Our discussions with various listed Jewellery players as well as industry
participants suggest likely spike in Gold demand in the immediate term owing to
sharp price correction. If prices stabilize here, we believe wedding season
buying can be preponed. However, elevated volatility (on the downside) in Gold
prices can act as deterrent as customers can defer the purchase.
‐
Investment demand to come down sharply as it feeds on bullish trend in Gold
price. However, given the low margins that it commands, it has very little
implications for Titan.
‐
Since Titan avails Gold‐on‐lease facility, mark to market impact on inventory will
be negligible, if any.
‐
Sensitivity:
Ceterus paribus,
our sensitivity for Titan suggests 15‐16% EPS
downgrade for FY14 and FY15 assuming 10% average price decline for FY14
(base case
‐
10% price growth, 15% volume growth in FY14). Assuming higher
volume growth (20% volume growth in FY14 instead of 15%) on account of Gold
price decline – EPS downgrade will be restricted to 12‐13%. Titan has expanded
retail space by 50% in the last 15 months. Assuming 10% Gold price correction
for FY14, Titan’s Jewellery volumes need to grow 40% to meet our existing
estimates.
‐
Subdued macro‐environment for discretionary consumption and regulatory
uncertainty around a) inclusion of jewellery in PMLA and b) RBI working group
recommendations on linking of Gold leasing rate to base rate are other
concerns/overhang for the stock.
‐
Valuation and view: Titan has corrected ~21% from recent peak on account of
regulatory concerns. While long term prospects for Organized Jewellery remains
attractive, near term headwinds can constrain the premium valuations enjoyed
by Titan. We have a BUY rating on Titan. Performance of Jewellery volumes and
any clarity on regulatory issues will be key catalysts to watch out.
Sharp correction in Gold price; Organized trade untested
‐
Gold prices have corrected 12% in past few days owing to various macro issues –
e.g. potential liquidation of Cyprus Gold reserves, strength in US dollar,
breakdown of certain technical levels etc.
‐
Ever since organized jewellery started gaining strength in India – its business
model is untested for a sharp decline/crash in Gold prices.
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Titan Industries
Steady uptrend in Gold prices has helped traditional/un‐organized trade as most
of these players do not hedge Gold inventory – thus deriving gain from uptrend
in prices.
Takeaways from interaction with Jewellery sector managements and industry
participants
‐
Jewellery volumes can see immediate spike due to pent up demand. Prices have
now corrected ~22% from the Nov‐12 peak.
‐
Jewellery buying pertaining to imminent wedding season can be preponed.
‐
However, we believe elevated volatility can act as deterrent for customers.
‐
Investment demand can see sharp downtick as it typically feeds on uptrend in
Gold price. We note that Investment demand formed ~35% of annual Gold
demand in India in CY12 (23% in CY09)
Lower gold prices can provide some cushion for working capital pertaining to
new store roll out in the future. Even though organized trade is now largely
using Gold‐on‐Lease facility, reduced Gold prices can lower the Letter of Credit
required for availing this scheme (typically jewellery is required to furnish 110%
of Leasing requirement as LOC).
Investment demand constitute ~35% of annual Gold consumption
‐
….driven by rising Gold price regime
Sensitivity for Titan’s FY14 estimates: 15‐16% EPS downgrade for 10% Gold price
deflation (vs. our existing base case of 10% inflation)
a) Currently our base case assumption for Titan is 15% and 12% Jewellery volume
growth for FY14 and FY15, respectively, led by aggressive space expansion
undertaken in the recent past (Jewellery space up 50% in 15 months).
b) Pricing assumption is 10% each for FY14 and FY15.
c) We present sensitivity of FY14 price and volume assumptions and have kept
FY15 assumption of 10% price growth and 12% volume growth unchanged in all
scenarios.
d)
We have not factored in any potential change in Jewellery revenue mix.
17 April 2013
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Titan Industries
Base case assumptions
e) Ceteris paribus – 10% Gold price deflation (vs. our base case of 10% inflation)
can lead to 15‐16% EPS downgrade for FY14 and FY15, respectively (23‐24% for
20% Gold price deflation).
f) Assuming a slightly higher volume growth of 20% (as against 15% in base) post
the Gold price decline – EPS downgrade works out to 12‐13% FY14 and FY15 (16‐
17% for 20% Gold price deflation).
EPS sensitivity table
Base case assumptions
10% price decline + 15/20% volume growth
17 April 2013
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Titan Industries
20% price decline + 15/20% volume growth
:
Valuation and view: Head‐winds persist; continued Gold price volatility can crimp
valuations
‐
Apart from the Gold price volatility, subdued macro‐environment for
discretionary consumption and regulatory uncertainty around a) inclusion of
jewellery in PMLA and b) RBI working group recommendations on linking of
Gold leasing rate to base rate are other concerns/overhang for the stock.
‐
Titan has corrected ~21% from recent peak on account of regulatory concerns.
While long term prospects for Organized Jewellery remains attractive, near term
headwinds can constrain the premium valuations enjoyed by Titan. We have a
BUY rating on Titan.
17 April 2013
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Titan Industries
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