>TITAN INDUSTRIES (EDELWEISS)

■ Jewellery business likely to bounce back in H2FY10
Volumes in Titan’s jewellery business declined significantly (~11%) in H1FY10. Given the uptick in discretionary spending and lower base for H2FY09 volume growth is likely to bounce back in H2FY10. Gold prices have been inching up since the past few quarters and consumers are now getting accustomed to the fact that the commodity has entered a high price regime.

■ Expansion plans on track
Titan expects to end the year with 300 World of Titan outlets (currently 276), 119 Tanishq outlets (currently 116), and 25 Fastrack outlets (currently 16). Titan eye will go for a brand building campaign to increase awareness. TIL aspires to be a USD 2.5 bn company in the next five years. On the retail front, the company is gearing up to take its multi-brand watch boutique Helios to more cities outside Bangalore. It is also planning to set up two large-format exclusive outlets in Mumbai and Kolkata.

WORST IS BEHIND

■ Sales mix to aid margin expansion
TIL’s studded jewellery volumes have jumped 100% in the past 2.5 years, yet sales in value terms have dropped from 33% of total jewellery to 30%. This was due to much higher increase in gold prices. The company’s margins are related to value addition and thus making charges for studded jewellery are about 2.5x that of plain gold jewellery, which in turn are 2.5x that on gold coins. Currently, 30% of total sales are from studded jewellery, 50% from plain gold, 16% from gold coins, and 4% from others.

■ Outlook and valuations: Neutral; upgrade to ‘HOLD’
We expect the watch and eye wear divisions to see an uptick due to higher discretionary spending and improving consumer sentiment. At CMP of INR 1,352, the stock looks fairly valued at P/E of 29.4x FY10E and 24.5x FY11E. We believe worst is behind for the company and thus upgrade the stock to ‘HOLD’, and rate it ‘Sector performer’ on relative return basis.

To read the report: TITAN INDUSTRIES