Titan: Return ratios to improve on easing of norms

Analysts claim it is the cheapest consumer discretionary stock, based on the FY17 earnings

The past few years have not been good for consumption, especially discretionary consumption. That of jewellery has been hit the most, with the government attempting to cut gold import. High import duties and other restrictions made jewellery more expensive, which dragged down demand. However, demand has been suppressed for so long that analysts expect it to bounce back strongly. Titan is expected to benefit from this once urban consumption revives. The stock is up 7.4 per cent over three months, compared to the five per cent rise clocked by the Sensex.

While the fourth quarter is not expected to be strong  for Titan, analysts maintain their optimistic view over the longer term. In the near-term, Titan faces a challenge from competitors offering better returns on gold accumulation schemes compared to its own Golden Harvest. IIFL Institutional Securities says lower take-up in Golden Harvest and muted gold prices would weigh on near-term sales growth. IIFL expects Titan to exit FY15 with sales growth of 12 per cent, substantially lower than the 24 per cent compounded annual rate over FY10-14.

On the upside, recent regulatory developments are expected to improve the  return ratios. Analysts are unanimous on one thing and that is the easing of regulatory environment. The government had withdrawn the 80:20 scheme in November last year and the Reserve Bank of India recently allowed banks to offer gold metal loans, which will ease pressure on working capital needs of companies such as Titan. Motilal Oswal Securities says: “With nominated banks now being allowed to offer gold on lease facility, it will simplify the hedging operations for Titan as gold on lease is a low cost natural hedge mechanism for jewellers and also lowers the working capital investment.”

Unlike IIFL, many other analysts believe the wedding season in the March quarter would have given a boost to jewellery sales, especially diamond jewellery. With the increased availability of gold on lease, analysts expect its return ratios to improve sharply, which would help improve its discounted valuations. Titan trades at a nine per cent discount to consumer staples on a one-year forward price/earnings (PE) ratio. Before the regulatory headwinds, the stock used to command a 14 per cent premium. IIFL says Titan is the cheapest stock in the consumer discretionary space based on the FY17 PE multiple and, as a result, it is an attractive buy.