Titan: Golden opportunity

Focus on high-end market likely to help the company boost margins.

If there were an appropriate tagline for Titan on Wednesday, it would probably say: ‘We also make watches’. Even as the growth in its same-store watch sales continues to be in double digits, the company is fast evolving into a lifestyle company, with a sharp focus on premium accessories. While on the one hand it is planning to enter new categories in accessories like silver watches, on the other it plans to expand its existing footprint in the jewellery business with Tanishq.

However, a segment of analysts has reservations about the company’s ability to grow Tanishq sales, thanks to the sharp rise in gold prices. But Edelweiss Capital maintains that Titan has historically had a positive correlation with gold prices, primarily on account of a gradual increase in margins. Also, a gradual upside in gold has little impact on demand, it says. Having said this, it cannot be denied that jewellery volumes across retailers have slowed over the past two months. But analysts expect volume growth to inch up in the second half of 2011-12, thanks to the onset of the festive season and the recent correction in gold prices.

What will help the company beat the demand scenario is its focus on the wedding market. So far, it has targeted the Rs 30,000-50,000 bracket; but now, with its large-format stores, Tanishq plans to increase its same-store sales through selling higher grammage per square foot that can increase to offset decline in gold prices, if any.

Analysts maintain the company is targeting sales of Rs 3,500 crore from watches by 2014-15, which will be driven by network expansion, introduction of new designs, as well as a shift towards the branded segment. Titan aspires to expand the category in eyewear and accessories (currently 177 stores) by getting into new sub-categories. A report by Prabhudas Lilladher says: “The company is targeting FY13 breakeven and believes potential margins can be higher than in watches. It intends to enter new lifestyle categories in the medium to long term.” What analysts like is the company’s shift in focus to high-end studded and gold jewellery and prescription-driven eyewear, not merely sunglasses.

So far, the big concern has been expensive valuation. However, in this uncertain market, defensives continue to rule. Titan continues to remain the top pick of most brokerages. The stock is trading at 32.1x FY12 and 24.9x FY13 earnings per share.