Titan valuations on higher side; investors need to be cautious

The stock hit an all-time high; tie-up with American watchmaker likely to be a positive in the long term

The stock of Titan Company hit its all-time high on Tuesday at Rs 1,096 apiece before closing at Rs 1,083; 1.4 per cent higher. While the gains came at a time when the broader indices are on an uptrend, investors are positive on Titan given the healthy earnings visibility.

Besides strong operational performance, the strategic alliance of the jewellery major with American watch manufacturing company FTS USA (Fine Timepiece Solutions) LLC, announced on Monday, adds to the earnings outlook. As per Titan, it will supply movement kits and set up of the movement assembly facility for FTS USA under the tie-up. Titan will also provide training to US engineers at the Titan facility besides Titan’s engineers visiting the facility to facilitate the establishment.

While details, such as investments by Titan, which could have a near-term impact on profitability and earnings are not known, an analyst at a domestic research firm, believes the move is positive for Titan in the longer term.

 

The company earns 15-16 per cent of its revenues from the watch segment. The segment saw a 682 basis point year-on-year contraction in operating profit margin to 8.5 per cent in the December 2018 quarter on the back of strong multi-channel campaigns to create awareness about new launches. The management expects the watch division to grow by 20 per cent while operating profit margins are expected to come in at 14-15 going ahead. 

During April-December 2018, Titan’s revenue from watches increased by 17 per cent year-on-year to Rs 1,916.3 crore.

Apart from watches, its key jewellery business is expected to witness healthy growth with high-margin studded jewellery (25 per cent of overall jewellery sales of Titan in Q3), store expansion, new launches and improving brand preference for Tanishq. 

In fact, some analysts also believe that mandatory hallmarking of gold jewellery should help Titan gain market share. The jewellery business accounts for over 80 per cent of the company’s top line. Analysts at Edelweiss expect Titan to clock over 22 per cent growth in the jewellery segment each in FY20 and FY21. This along with operating leverage would propel the company’s overall operating margins.

While the company has been consistent on the growth front, valuations at 52 times FY20 estimated earnings are on the higher side and investors have to be cautious at the current 

juncture.