Titan: Shining bright despite regulatory hurdles

High growth in wedding jewellery segment is the key revenue driver

Brokerages remain bullish on Titan Company, despite an increase in compliance cost — the latest being an application of the Prevention of Money Laundering Act (PMLA) to the gems and jewellery sector.

Analysts believe the company would benefit from a transition to the organised sector from the unorganised one, besides higher volumes from key segments such as wedding jewellery.

Aided by a gold exchange scheme and the shift to organised players, the company was able to post a revenue growth of15 per cent in FY17, against a flat figure for the jewellery sector. Given the strong growth and market share gains, the stock has more than doubled since the announcement of demonetisation in November last year.

Most brokerages consider the wedding jewellery segment as a growth opportunity for the company. While wedding jewellery constitutes over half of the market, for Titan it is less than a fifth of its sales.

The company, according to analysts at Credit Suisse, has significantly improved its product and price offerings over the past couple of years. It now provides customised jewellery for 13 major communities in the country and offers attractive discounts on wedding orders. They expect a wedding and high-value diamond jewellery to grow at 30-35 per cent.

Ambit Capital, too, believes the company would report superior growth, led by an increased market share in wedding jewellery. The proportion of wedding jewellery to the company’s sales is expected to increase to 23 per cent by FY21, from 18 per cent.

Growth is expected to be more volume-driven than gold price-driven as was the case during FY08-13. Unlike adornment jewellery (where it is the market leader), which has lower ticket size and is discretionary in nature, the wedding jewellery segment is inelastic and has a higher ticket size. An increased presence in this segment will be a key revenue driver for the company.

However, in the near term, compliance burden will increase due to PMLA. There was a cash limit of Rs 200,000 in jewellery transactions, above which producing PAN (permanent account number) card details were made mandatory. Now, with the jewellery space under (PMLA), it effectively reduces this limit to Rs 50,000, say analysts at Morgan Stanley. They estimate that 30 per cent of the Titan’s overall jewellery sales involve cash transactions.

Given the growth triggers, analysts at Ambit say valuations at 43 times of the firm’s FY19 earnings estimates are not expensive. They believe the company would see a revenue and earnings growth of 23-29 per cent over the FY17-21 period.