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1 48 MAXIMUS SECURITIES LTD Titan Inds Ltd Target Price: 205 (SELL) Highlights: Net sales witnessed 25% growth to Rs 2440 crores for the quarter ended December Revenues from Jewellery business witnessed 25% growth to Rs 1986 crores contributing 81% to total sales. The growth is slower due to high gold prices and slowdown in economy. High gold prices coupled with significant volatility affected gold volumes. The watches business grew by 17% to Rs 383 crore while other business (including corporate) witnessed 70% growth to Rs 96 crores. The overall growth has been aided by the strength of brands despite the economic slowdown and the resultant decline in consumer demand. OPM has declined by 125 bps to 8.7% due to rise in advertising cost, other expenditure and employee cost. The net profit was up by 19% to Rs 164 crores. Gold prices during the quarter have softened 8% from its high in preceding quarter; however the demand has not gained much of momentum. The gold volume growth has been only 3% for the company. The stress on margins has been evident from the March '11 quarter and had a full impact on profits in the September '11 quarter. The company is currently facing a significant gross margin pressure in watches segment. Financial Summary: Date: 14 th March 2012 Valuations: In the year to come we expect sales to rise aggressively, however profit margin will be under pressure on account of higher acquisition cost of holding inventory. Titan got the advantage of rising gold prices in the previous year and hence one saw a big improvement in the bottom line and stock price. However we do not see a repeat performance in the current scenario of falling gold prices. We therefore maintain a Sell recommendation with a target price of 205.

2 Business Profile: Titan Industries Limited is engaged in manufacturing of watches, jewellery, precision engineering and Eyewear. As of March 31, 2011, the Company had 311 World of Titan stores. The Company sells its products through departmental stores, such as Shoppers Stop, Central, Lifestyle, Westside, Pantaloons and Reliance Retail. During the fiscal year ended March 31, 2011, the Company launched collection of watches, such as Purple by Titan, an offering of fashion watches; Raga Aqua, a new collection whose evocative designs were inspired by the oceans and seas; Tycoon by Titan, a new collection of gold look watches; and new products in the automatic watches range, which cater to premium consumers. As of March 31, 2011, the Company had 120 Tanishq stores, 29 Gold Plus stores and two Zoya stores in jewellery division. The Company had approximately150 exclusive eyewear stores. Business Verticals Titan has a clutch of strong brands in its primary segments of jewellery and watches. In the jewellery segment, it has brands such as Tanishq, GoldPlus and Zoya. The watches segment includes brands such as Titan, Sonata, Raga and Fastrack. Besides, it markets international brands such as Xylus. Titan's product lines straddle multiple price points; Zoop, for instance, is a low-cost children's brand while Raga is a premium women's watch brand. It has further moved into other Asian markets such as Vietnam. It has an extensive distribution network combining own stores and dealers. In the nascent branded jewellery, watch and eyewear space, it has a first-mover advantage.

3 Highlights Dampened Consumer Sentiment The continuous depreciating INR, unaffordable gold prices, high inflation, rising interest rates has dampened consumer sentiment for discretionary products. Also, high base and rising competition in eyewear business (facing stiff competition from Reliance s Vision Express), worsening economic condition are one of the key concerns for the company. Adverse impact on realization The watch segment registered sales growth of 17% y-o-y led by volume growth of 11% and negative price mix. Faster growth for low price brands- Zoop, Sonata and Fastrack had an adverse impact on realization growth. Besides, higher input costs (aggravated by rupee depreciation) led to gross margin erosion of 400 bps y-o-y. Investments in formats such as Helios and Fastrack further weighed on EBIT margins which declined 590 bps Y-o-Y. Margin under pressure The stress on margins has been evident from the March '11 quarter and had a full impact on profits in the September '11 quarter. The company is currently facing a significant gross margin pressure in watches segment. Watches EBIT margin declined 520 bps to 16.1% due to (1) input cost inflation not neutralized by price increases and (2) incubation costs of Helios venture. The watches business continues to witness lower footfalls and higher conversions. Input cost inflation (on watch movements and components which are typically imported from Switzerland, Japan etc.) has impacted watches and eyewear margins during Q2FY12. Strong Relation with gold prices: With regards to gold, there is a very strong co-relation between the price of gold and the performance of Titan industries. The jewellery business is the key driver of Titan s overall profitability. Jewellery making charges are linked directly to the gold price. So, margins could come down if gold prices fall. Now that gold prices have started to correct and the management is trying to spur demand through attractive discounts, margins will be range bound and could even fall in next 24 months. Weakening Rupee The company has sizeable imports from both China and Switzerland. With the rupee weakening to all time lows, margins are likely to take severe hit. The weak rupee is also offsetting the decline in international gold prices.

4 Slowdown in jewellery division The jewellery division registered 25% Y-o-Y revenue growth down from 45% in previous quarter. The volume growth declined 5% due to high volatility in gold prices and slowdown in consumer demand. Sales growth in Tanishq was lower by 5% while it declined sharply by 31% QoQ in Gold Plus. A falling rupee compensating for the correction in gold and diamond prices indicate that Titan could see a growth moderation in the quarters ahead. The PBIT margin from Jewellery business was down by 50 bps to 9%, it would be difficult to increase margins beyond FY11 levels. In the face of slowing gold demand, Titan increased its diamond product lines in FY-09 and FY- 10, which gave sales a boost. However, with a 25 per cent rise in polished diamond prices over the year, this strategy was unable to fulfill the desired revenue. Rising Competition and Advertising expense Tanishq is currently facing stiff competition from other national brands, such as Nakshatra, Orra and Asmi, and foreign brands as well. To remain competitive across segments, the management has indicated, in its annual report, that it is willing to sacrifice margins. Besides, jewellery sales could be dampened by the requirement of producing the PAN card for transactions of over Rs 5 lakh. Titan's mass-market offering, Gold Plus, showed a volume decline of 14 per cent in FY-11. The management also reported a decline in footfalls in jewellery and watches segment. The company reduced advertising burden to maintain margins at 9 per cent, but with competition abounding and strategies to push sales in the face of subdued demand, promotion costs may see some rise. The advertising cost for 9MFY12 has been around 15 crores. Sustained Losses in new initiatives New initiative like precision engineering and Eye+ division are proving to be a drain on profitability. Due to slowdown in consumption, these divisions are unlikely to turn around in the next couple of years. Prolonged losses in these divisions will impact overall profitability of the company. Helios Business model The management expects margin to be impacted by losses on Helios stores. The company had started retailing competing brands like Helios at its new chain. Titan currently stocks over 30 international brands including Movado, Fossil and Seiko, ranging from Rs 15,000 to Rs 2 lakh a piece. This is not only creating conflict of interest but there is hardly any pan India presence for these brands, therefore failing the strategy of the company.

5 Sell Argument The price of gold has been continuously sliding since the recent peak of $1900 achieved on 5 th Sept 2011.The fall has been 12.7% as of the current price of $1680. As the US economy strengthens we anticipate a continued fall in the price of the precious metal. We expect it to hit $1500 by end of September. In the light of this falling prices Titan would be carrying inventory of the previous metal which would have been acquired at much higher than current prevailing rates. Forcing them to take and hit on margins over the next 2-3 quarters. In our opinion the stock is a Sell with a short term target price of 205.

6 Quarterly Analysis: Net sales witnessed 25% growth to Rs 2440 crores for the quarter ended December Revenues from Jewellery business witnessed 25% growth to Rs 1986 crores contributing 81% to total sales. The growth is slower due to high gold prices and slowdown in economy. High gold prices coupled with significant volatility affected gold volumes. The watches business grew by 17% to Rs 383 crore while other business (including corporate) witnessed 70% growth to Rs 96 crores. The overall growth has been aided by the strength of brands despite the economic slowdown and the resultant decline in consumer demand. OPM has declined by 125 bps to 8.7% due to rise in advertising cost, other expenditure and employee cost. The net profit was up by 19% to Rs 164 crores. Yearly Analysis: Net sales increased by 40% to Rs 6,533 crore for the year ended March Operating profit margins expanded by 60 basis points to 9% resulting in operating profit to increase by 49% to Rs 590 crore. Due to decrease in interest cost by 68% to Rs 8 crore and depreciation by the 42% to Rs 35 crore, PBT was up by 87% to Rs 603 crore. After accounting tax of Rs 167 crore and prior period adjustments of Rs 3 crore, net profit was up 72% to Rs 433 crore.

7 Financials

8 Notes

9 Institutional Team Mrs. Megha Vazkar Head of Institutional Dealing megha@maximussecurities.com Equities Anupam Laha Dealer - Equities anupam@maximussecurities.com Inderjeet Kaur Samir Patel Kiran Pakale Dealer - Equities Dealer - Equities Dealer - Equities Equity Research Sakshi Vohra Research Analyst sakshi@maximussecurities.com Ritesh Bhagwati Research Analyst ritesh@maximussecurities.com Registered Office MAXIMUS SECURITIES LTD. Sterling Centre, 1st Floor, Opp. Divine Child High School, Andheri-Kurla Road, Andheri (East) Mumbai Fax: DISCLAIMER This information has been compiled from the sources believed to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. This is not an offer to sell or solicitation to buy any securities. Whilst all reasonable care has been taken to ensure that the facts stated are fair and accurate and the opinions given are fair and reasonable, Maximus Securities Ltd., its directors, officers or employees shall not in any way be responsible for the actions taken on the basis of its contents.