CMP* (Rs) 369 Market Cap. (Rs bn) 328 Free Float (%) 47 Shares O/S (mn) 888 Titan Company Back to Value Zone Validate Rating Upgrade Titan Company delivered decent performance in 2QFY17 despite reporting flattish revenue due to sharp fall in gold jewellery sales and weak exports of watches. Its Revenue, EBITDA & PAT stood at Rs26.4bn (down 0.7% yoy), Rs2.6bn (up 42%) & Rs1.8bn (up 23.5% yoy), respectively. EBITDA grew robustly owing to increased share of studded jewellery and higher gross margins on plain gold jewellery. We peg Titan s Revenue & Earnings to see 11.4% & 17.7% CAGR, respectively through FY16-18E. Titan s stock price has corrected by 13% since our last downgrade, while benchmark indices fell by only 3%. We believe that stock has bottomed out at current levels and with consumers gradually accepting PAN disclosure norms, success of new jewellery collections and likely clarity on GST structure, we remain positive on medium term prospects of the Company, going forward. Considering these factors and rolling over target multiple to Sep 18, we revise our recommendation on the stock to from REDUCE with an upwardly revised Target Price of Rs428 (from Rs383). Stagnant Top-line Jewellery growth but Margins Accelerate With the average gold prices rising by 21% yoy in 2QFY17, the demand for plain gold jewellery remained soft with Titan reporting gold grammage decline of 32%, for which jewellery sales remained flat at Rs19.9bn. However, segmental EBIT margins improved 490bps to 11% primarily due to two factors. Titan s studded jewellery promotions ran in 2QFY17 vs. 1QFY16, which aided its overall margin profile. Further, margins from plain gold jewellery business were also higher with increasing gold prices, as the making charges are benchmarked to gold prices. Its Management apprised about encouraging response the Company received for its new collections. Promotional sales of studded jewellery were 51% higher in 2QFY17 than last year s promotion. Headwinds Remain in Other Businesses Revenue from Watches Division dipped 5% yoy to Rs5.2bn due to sharp fall in export sales, while segmental EBIT margins fell by 280bps to 12.3% in 2QFY17. Eyewear sales grew by modest 6.6% yoy due to decline in sunglasses revenues, while prescription eyewear sales remained firm. Segmental margins dipped by 280bps to 2.1%. Outlook & Valuation We expect Titan to post revenues of Rs120.1bn & Rs138.6bn and PAT of Rs7.3bn & Rs9.8bn in FY17E & FY18E, respectively. Based on expected EPS of Rs11, the stock currently trades at P/E multiple of 33.5x FY18E earnings. Considering sharp fall in the stock since our last rating downgrade and rolling over of target multiples to Sep 18 along with increased visibility of the jewellery biz, we revise our recommendation on the stock to from REDUCE with an upwardly revised Target Price of Rs428. Share price (%) 1 mth 3 mth 12 mth Absolute performance (9.6) (9.9) 5.7 Relative to Nifty (5.8) (8.5) 0.8 Shareholding Pattern (%) Jun'16 Sept'16 Promoter 53.1 53.1 Public 47.0 47.0 1 Year Stock Price Performance 450 430 410 390 370 350 330 310 Note: * CMP as on November 04, 2016. Nov-15 Dec-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Key Financials (Rs mn) FY15 FY16 FY17E FY18E Sales 117,910 111,769 120,091 138,585 EBITDA 10,412 8,579 11,443 13,626 Net profit 8,231 7,058 7,265 9,777 EPS Rs) 9.3 8.0 9.3 11.0 DPS (Rs) 2.3 2.2 2.8 3.0 P/E (x) 39.8 46.4 39.8 33.5 P/B (x) 10.6 9.3 8.2 7.0 EV/EBITDA (x) 31.3 38.1 28.1 23.4 ROE (%) 29.3 21.4 21.9 22.5 Dividend yield (%) 0.6 0.6 0.7 0.8 Source: Company, RSec Research Research Analyst: Sameer Deshmukh Contact: 022 33201327 Email: sameer.deshmukh@relianceada.com 1
Risks to the View ff ff Heightened regulatory oversight Delay in recovery in consumer demand Exhibit 1: Result summary (Rs mn) 2QFY17 2QFY16 % yoy 1QFY17 % qoq 1HFY17 1HFY16 % yoy Net Sales 26,364 26,546 (0.7) 27,825 (5.2) 54,189 53,414 1.5 Consumption of RM 18,036 19,774 (8.8) 19,745 (8.7) 37,781 39,051 (3.3) (% of Sales) 68.4 74.5 71.0 69.7 73.1 Staff Costs 1,816 1,804 0.7 1,919 (5.4) 3,735 3,563 4.8 (% of Sales) 6.9 6.8 6.9 6.9 6.7 Advertising 981 896 9.4 1,027 (4.5) 2,008 2,186 (8.1) (% of Sales) 3.7 3.4 3.7 3.7 4.1 Other Expenses 2,928 2,243 30.5 2,376 23.2 5,303 4,788 10.8 (% of Sales) 11.1 8.4 8.5 9.8 9.0 Total Expenditure 23,760 24,717 (3.9) 25,067 (5.2) 48,827 49,588 (1.5) Operating Profit 2,604 1,829 42.3 2,759 (5.6) 5,363 3,826 40.2 OPM 9.9 6.9 9.9 9.9 7.2 Depreciation 260 240 8.2 261 (0.5) 520 469 11.0 EBIT 2,345 1,589 47.5 2,498 (6.1) 4,842 3,358 44.2 Interest 117 87 34.4 88 33.2 205 205 (0.2) Other Income 277 326 (15.2) 297 (6.8) 573 721 (20.5) PBT 2,504 1,829 36.9 2,706 (7.5) 5,210 3,873 34.5 (% of Sales) 9.5 6.9 9.7 9.6 7.3 Provision for Taxation 667 365 82.5 471 41.6 1,137 895 27.1 (% of PBT) 26.6 20.0 17.4 21.8 23.1 PAT (recurring) 1,837 1,463 25.6 2,236 (17.8) 4,073 2,978 36.8 Extr. Income/(Expense) (30) - - (999) - Reported PAT 1,808 1,463 23.5 2,236 (19.1) 3,075 2,978 3.2 PATM 6.9 5.5 8.0 5.7 5.6 Equity shares (mn) 888 888 888 888 888 EPS (Rs) 2.1 1.6 25.6 2.5 (17.8) 4.6 3.4 36.8 Source: Company, RSec Research 2
Profit & Loss Statement Y/E March (Rs mn) FY15 FY16 FY17E FY18E Net Sales 117,910 111,769 120,091 138,585 Total operating income 117,910 111,769 120,091 138,585 % chg 8.0 (5.2) 7.4 15.4 Total Expenditure 107,499 103,190 108,648 124,959 Cost of Materials 87,536 81,888 86,266 99,840 Advertising Exp (Incl Promotion) 3,821 4,287 4,606 5,004 Personnel 6,257 6,812 7,357 8,313 Others 9,885 10,204 10,419 11,801 EBITDA 10,412 8,579 11,443 13,626 % chg (0.7) (17.6) 33.4 19.1 (% of Net Sales) 8.8 7.7 9.5 9.8 Depreciation& Amortisation 874 969 1,073 1,187 EBIT 9,538 7,610 10,371 12,439 % chg (3.0) (20.2) 36.3 19.9 (% of Net Sales) 8.1 6.8 8.6 9.0 Interest & other Charges 807 423 445 512 Other Income 1,828 1,520 1,353 1,467 (% of PBT) 17.3 17.5 12.0 11.0 Recurring PBT 10,559 8,706 11,279 13,393 % chg 3.9 (17.5) 29.5 18.7 PBT (reported) 10,559 8,706 11,279 13,393 Tax 2,328 1,648 3,045 3,616 (% of PBT) 22.0 18.9 27.0 27.0 PAT (recurring) 8,231 7,058 8,234 9,777 % chg 11.1 (14.2) 16.7 18.7 (% of Net Sales) 7.0 6.3 6.9 7.1 Basic EPS (Rs) 9.3 8.0 9.3 11.0 Fully Diluted EPS (Rs) 9.3 8.0 9.3 11.0 % chg 11.1 (14.2) 16.7 18.7 3
Balance Sheet Y/E March (Rs mn) FY15 FY16 FY17E FY18E Share capital 888 888 888 888 Reserves 30,032 34,258 39,167 45,849 Net worth 30,920 35,146 40,055 46,737 Total borrowings 998 1,131 831 531 Total liabilities 31,918 36,277 40,886 47,267 Gross block 12,534 14,031 15,531 17,191 Less: Acc. depreciation 5,702 6,345 7,417 8,605 Net block 6,832 7,686 8,113 8,586 CWIP 549 1,061 549 549 Deferred tax 197 239 239 239 Investments 326 740 740 740 Current assets 50,818 54,040 63,136 73,956 Inventories 40,474 44,422 47,730 55,080 Debtors 1,874 1,951 1,807 2,085 Cash 2,102 1,117 6,562 8,670 Loans and advances 6,368 6,549 7,037 8,121 Current liabilities 22,483 25,585 27,489 31,723 Provisions 4,322 1,904 4,402 5,080 Net current assets 24,013 26,551 31,244 37,153 Total assets 31,918 36,277 40,886 47,267 Cash Flow Statement Y/E March (Rs mn) FY15 FY16 FY17E FY18E Net profit 8,231 7,058 7,265 9,777 Depn and w/o 874 969 1,073 1,187 Deferred tax (103) (43) 0 0 Change in working cap (4,149) (3,523) 752 (3,801) Operating cash flow 4,853 4,462 9,090 7,164 Capital expenditure (1,724) (2,008) (989) (1,500) Investments/ Acquisition (61) (414) 0 0 Investing cash flow (1,784) (2,421) (989) (1,500) Free cash 3,129 2,454 8,101 5,664 Dividend (2,373) (2,270) (2,837) (3,095) Fresh equity 0 0 0 0 Debt/Preference shares (7,065) 133 (300) (300) Financing cash flow (9,438) (2,137) (3,137) (3,395) Others (418) (889) 482 (160) Net change in cash (6,788) (986) 5,446 2,108 Opening cash 8,889 2,102 1,117 6,562 Closing cash 2,102 1,117 6,562 8,670 4
Key Ratios Y/E March FY15 FY16 FY17E FY18E Valuation Ratio (x) P/E (on FDEPS) 39.8 46.4 39.8 33.5 P/CEPS 36.0 40.8 39.3 29.9 P/BV 10.6 9.3 8.2 7.0 Dividend yield (%) 0.6 0.6 0.7 0.8 EV/Sales 2.8 2.9 2.7 2.3 EV/EBITDA 31.3 38.1 28.1 23.4 Per Share Data (Rs) EPS (Basic) 9.3 8.0 9.3 11.0 Core EPS 9.3 8.0 9.3 11.0 Cash EPS 10.3 9.0 9.4 12.4 DPS 2.3 2.2 2.8 3.0 Book Value 34.8 39.6 45.1 52.6 Returns (%) RoCE 27.1 21.6 22.2 23.1 RoE 29.3 21.4 21.9 22.5 Turnover ratios (x) Asset Turnover (Gross Block) 3.6 3.3 3.1 - Inventory / Sales (days) 169 198 202 201 Receivables (days) 6 6 5 5 Payables (days) 68 82 84 84 Working capital cycle (ex-cash) (days) 107 122 123 123 5
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