Titan: Buy or sell?

While some analysts are worried about a high forward P/E of 25 times, others are cheering the Favre Leuba acquisition.

Every now and then, analysts come up with contradictory reports on companies. While it’s easy to broadly project where a sector is headed, forecasting a company’s growth over the medium term is not easy. Perhaps, this is why, more often than not, fund managers seem to get it wrong. Titan is one such company that has divided the analyst community. Given that the stock has run up 200 per cent over the last two years and 13 per cent in a year, some believe it could run out of steam, as it is currently trading at a forward price/earnings (P/E) multiple of 27 times.

The stock’s expensive valuations often trigger a debate among analysts and equity strategists. However, the long-term growth story keeps it at elevated levels. But, over the last week, the stock has corrected 6.5 per cent to Rs 190.6. Citi, which has put a ‘Sell’ call on the company, forecasts 30 per cent yearly growth in revenues as well as earnings over FY11-13, as against a 31 per cent revenue growth and 65 per cent earnings growth over FY09-11. The scope for meaningful positive surprises appears limited. Analysts at Citi believe sharp volatility in gold prices could have an adverse impact on demand, given that gold jewellery/coins contribute 55-60 per cent to the company’s revenues and an estimated 35-40 per cent of the profit mix.

However, the good news is that over the long term, the company’s dependence on gold jewellery will gradually come down, as the share of diamond-studded jewellery and other newer categories like accessories and eye-wear grows faster. In this context, its acquisition of the 293-year-old Swiss watch brand, Favre Leuba, fits in well with its strategy. Titan has entered into a binding agreement with the Swiss company to acquire the Favre Leuba brand for Rs 13.8 crore. The Swiss company has a portfolio of unique and technologically-driven premium offerings, according to Edelweiss Financial Services.

Titan has strong expansion plans to drive sales across all key divisions. It is planning to open 20 new jewellery stores in two years, 200 new watch stores over four years and 150 new ones in the eye-wear segment. Like most consumption stocks, the company’s expensive valuations are debated. However, given the boom in Indian consumerism, the premium remains.