Market share gains emerging as another growth driver for Titan

Rising formalisation of industry could aid market share gains and support stock's valuations

After witnessing continued weakness in demand for two of its key businesses- jewellery and watches in early FY17, Titan Company (Titan) has some reason to cheer. One, its core business of jewellery (about 83 per cent of revenues) is witnessing market share gains, thanks to demonetisation which has hit operations of the unorganised sector much severely than that of the organised sector. Given the structural changes happening in the jewellery business, organised players such as Titan, PC Jeweller, amongst others should see further gains market share. The implementation of goods and services tax or GST would also help to take this trend forward as it will increase the level of compliance required by the unorganised players. This will create a level playing field between them and the organised players. Given the government's stance that spending on gold and jewellery is an unproductive use of capital, market share gains will be a key factor that could drive future growth for players such as Titan, believe analysts. Titan's leadership position coupled with continued focus on new jewellery collections as well as on high-margin wedding jewellery will enable it to tap into this opportunity efficiently.

Analysts believe that there is potential to expand through acquisitions in the jewellery segment, and Titan is better placed than peers. "Titan's valuation premium could be leveraged to drive inorganic growth and may present an opportunity for shareholder value creation," believe analysts at Morgan Stanley Research.

Titan's other key business, watches (13 per cent of revenues) has been facing slowdown but performed better in the latest December quarter. Here too the company is focusing on new launches and foraying into higher-end segments such as smart watches to revive growth. While the success of these steps will take some time to be visible, analysts believe this segment could post 7-8 per cent growth over the next two years.

In this backdrop, most analysts are positive on Titan. As per Bloomberg consensus estimates, its revenues and earnings are slated to grow at a healthy clip of 13 per cent and 18 per cent, respectively over the next couple of years.

This is expected to drive Titan's return on equity ratio to 23 per cent in FY18 from 21 per cent in FY16. Thus, though valuations of 38 times FY18 estimated earnings appear full, the above mentioned fundamental catalysts and expectations of high earnings growth could support these valuations. A tax rate of over 4-5 per cent on jewellery under the GST regime and slowdown in jewellery demand are key down-side risk for the industry.