>TITAN INDUSTRIES:— Rising gold prices have driven Titan’s earnings

44% of Titan’s stock price is ‘excess’ earnings boosted by gold inflation. Our illustrative calculation suggests that Titan’s earnings would have been 44% lower in FY2012E (adjusted EPS of ~Rs3.6 in FY2012E versus the ‘normal’ EPS of ~Rs6.5) had gold prices remained broadly stable over FY2005-12E. While there are few limitations to our exercise, what remains a fact is that Titan (and the jewelry industry) has benefitted due to inflationary gold prices as making charges are mostly a percentage of gold price. Our long-term positive view on Titan’s business model stays as it stands to benefit disproportionately from consumer conversion to the organized sector.



Going beneath the glitter—rising gold prices have driven Titan’s earnings
Exhibit 1 gives an illustrative calculation to understand the impact of inflation in gold commodity
prices on Titan’s earnings. Stripping-off the gold commodity inflation for the period FY2005-12E, we arrive at an EPS of ~Rs2.8 for FY2012E (versus ‘normal’ EPS of Rs6.5). However, if we consider gold inflation to be equal to general inflation in the economy, the adjusted EPS for FY2012E works out to Rs3.6, i.e. ~Rs103 (44% of current stock price) is ‘excess’ earnings boosted by gold commodity inflation, in our view.

■ Between FY2005 and FY2012, Titan’s jewelry sales have increased at a CAGR of ~46% and
gold prices have increased at a CAGR of 23% (in Rupee terms). Volume growth in terms of
number of pieces sold increased at ~22% CAGR during the period.


■ For the purpose of our calculation (in Exhibit 1) we assume that gold prices remained flat and
jewelry sales growth was entirely driven by volume growth. The reason for assuming flat gold
prices is that the company imposes making charges as a percentage of gold price, hence any
increase in gold prices leads to increase in absolute earnings for the company.


■ On the basis of the above assumption, we find that the company’s earnings would have been
lower by 40% on an average had gold prices remained stable.


■ Key assumptions – (1) TTAN’s ‘price increase’/gold inflation is equal to the general inflation in the economy, (2) we have considered a further 1% per annum increase in pricing essentially to capture the mix improvement/higher tonnage purchases by customers, and (3) we have also
considered the actual volume growth (in terms of number of pieces).



Few limitations to this exercise are as follows:
■ This calculation may not take into account the impact of mix improvement on sales and earnings in its entirety – there has been a steady trend of consumers shifting to diamond/studded jewelry from gold. Companies also encourage this as margins are higher in the former. Typically plain gold jewelry has gross margin of ~8%, designer gold jewelry has ~14%, and studded jewelry (including diamonds) has ~30%.


■ To calculate volume growth, it would have been more appropriate to consider tonnage growth rather than number of pieces sold. However, the company does not report sales in tons and that’s a key constraint.


■ We have calculated sales growth as a function of volume growth + pricing growth + a modest 1% per annum increase in pricing essentially to capture the mix improvement/higher tonnage purchases by customers.


Our long-term positive view on Titan’s business opportunity is intact
We have an ADD rating with target price of Rs260 on Titan. Our EPS estimates for FY2013E
and FY2014E is Rs7.9 and Rs9.8 respectively. Our long-term positive view is intact as:


■ Any sustained correction in gold prices will likely help induce higher volume growth. Further, 
as Titan leases gold instead of buying gold, there will be minimal inventory loss (possibly to the extent of gold used in some of the studded jewelry lying in the books beyond the 180-day period – the maximum possible under the gold lease scheme). 


■ Rising activity in the organized jewelry market will help grow the market and with Titan having the first mover advantage will likely benefit disproportionately – the organized jewelry market forms ~4% of the total jewelry retail market and is growing faster than the overall jewelry market. As per industry sources, the branded jewelry market is expected to grow at a CAGR of >40% over the next four-five years given changing lifestyles and higher marketing investments by organized players.


■ Budget 2013 has created a level-playing field for all jewelry companies by not differentiating between organized and unorganized players – Budget 2013 has widened the ambit of excise duty on branded jewelry to include unbranded jewelry as well.


■ Recent commentary by the management suggests that as compared to 2QFY12 and 3QFY12, there has been an improvement in footfalls in 4QFY12 (January and February).


■ We are believers in the long-term opportunity for Titan, (1) likely higher discretionary spends, (2) penetration and consumption-led growth, (3) mix improvement in favor of diamond and studded jewelry is a positive as it enjoys higher margins and reduces the vulnerability of the company to volatility in gold prices. Key downside risk is continuing volatility in gold prices and further deterioration in consumer demand.


RISH TRADER