Sunday, March 22, 2009

>Titan Industries Ltd. (MERRILL LYNCH)

Management: Mixed impact so far, caution near-term
We met with Bhaskar Bhat, MD, Titan Ind. recently. Here are the key takeaways:

Impact of high gold prices: Plain gold jewelry volumes have come down. Margins are now partly linked to gold price and hence profitability is less impacted than sales. Mgmt believes current high gold prices are not sustainable (contrary to BAS-MLe) as Indian demand (key gold consumer) has dried up. Longer term, if volume growth remains low on high gold prices, they could look at launching lower karat jewelry to improve affordability.

Impact of economic slowdown: Tier-II/III towns have still not seen the impact and have outpaced big cities in growth rates in recent months. Also, youth remains largely immune and hence a focus segment for the company.

Strategies in current challenging environment: 1) More cautious approach to store expansion – cash, profitability and sales priorities in that order, 2) More frequent new collections, 3) A number of new formats being piloted - Helios (up-market watch retailing) and Zoya (designer diamond jewellry) to tap the elite and exclusive Fastrack accessory stores for youth.

4Q likely a difficult quarter for watches. January has been dismal for watch sales growth but February has seen an improvement; outlook for March remains extremely cautious.

4Q likely to see a profit drop, Maintain Underperform
We expect 6% drop in profits in 4Q to Rs568mn driven by single digit volume growth and margin decline on a large base. The stock is trading at 13.5x FY10 P/E implying a 50% premium over the market. We believe the premium is likely to reduce as earnings growth starts to come off. Also, we see downside risk to our and consensus earnings as impact of slowdown gets reflected on performance.

To see full report: TITAN