Despite the Union Budget proposing an increase in duties on gold and jewellery, the stock of Titan Industries closed in the positive zone on Monday and is up nearly a per cent since Thursday’s close. However, its closest peers, Rajesh Exports and Gitanjali Gems, have lost between two and four per cent value, while the Sensex is down 2.3 per cent. This is mainly because Titan’s business mix is more diversified (presence in jewellery, watches, eyewear and precision engineering) than its peers, which operate predominantly in gold, diamond and jewellery. More, Titan’s long-term strategy of expanding into new segments will help reduce the impact of volatility of gold and watches’ raw material prices on earnings.
While Titan has outperformed the Sensex in 2011, as well as 2012, at current levels of Rs 235, it trades at a PE of 28 times FY13 estimated earnings (higher than its five-year historic average of 25 times), and factors in medium-term positives, leaving little room for any disappointments (in terms of a meaningful decline in volume growth), going ahead. Says Puneet Jain, analyst, Goldman Sachs’ in his report last month, “High return and growth potential are factored into valuation and the stock (then around Rs 225) offers balanced risk-reward.”
Thus, investors with a one- to two-year perspective could consider it on declines. While not many analysts track Rajesh Exports and Gitanjali Gems, Prime Broking analysts last month came out with a buy rating on Gitanjali with a target price of Rs 532, Bloomberg data shows.
| ALL IS WELL, SO FAR | |||
| In Rs crore | Titan Industries | Gitanjali Gems | Rajesh Exports |
| Net sales * | 6,558 | 9,289 | 17,009 |
| Y-o-Y change (%) | 38.2 | 32.1 | 17.3 |
| Operating profit * | 599 | 618 | 511 |
| Y-o-Y change (%) | 25.0 | 26.7 | 68.6 |
| Net profit * | 455 | 384 | 317 |
| Y-o-Y change (%) | 31.3 | 47.7 | 60.9 |
| FY12 E | |||
| Net sales | 8,707 | 12,508 | NA |
| Y-o-Y change (%) | 33.5 | 32.3 | |
| Net profit | 592.0 | 485.0 | |
| Y-o-Y change (%) | 37.6 | 43.1 | |
| for the 9 months ended Dec 2011; E: Estimates Source: Company, analyst reports, Bloomberg | |||
Impact on industry’s volumes
The Budget proposes doubling of customs duty on standard and non-standard gold to four per cent and 10 per cent, respectively, one per cent central excise duty on 30 per cent of the invoice value on all forms of jewellery (including unbranded and unorganised players) and doubling of excise duty on refined gold to three per cent, which are likely to negatively impact volumes. Says Rajesh Mehta, chairman, Rajesh Exports, “The increase in customs and excise duty would mean an increase of about Rs 825 per 10gm on the current prices of gold. The measures initiated would only end up increasing the price of gold and gold jewellery in India.” Pankaj Pandey, head of research, ICICI Direct, says, “The increase in customs duty will negatively impact demand for gold (as this will be fully passed on to customers).”
Care Ratings in its Budget impact analysis report says though Gitanjali and Titan will pass on the increased duty, purchasing power of consumers (hence, sales volumes) will be impacted due to already high prices of these products and high inflation. However, Mehul Choksi, chairman and managing director, Gitanjali Gems begs to differ. “The hike in duty on gold imports and excise duty will have nominal impact on prices and not affect jewellery demand, which has remained strong despite a 32 per cent increase in gold prices over one year,” he points out. Nevertheless, both Mehta and Choksi feel the government should ensure illegal imports are not encouraged due to the duty hike.
Failure on this front would impact the business of organised players. For now, investors should monitor the impact of duties on volume growth, which remained subdued in September 2011 (a mere three per cent growth) and December 2011 quarter (decline of five per cent despite festive/wedding season) in case of Titan, thanks to high and volatile gold prices. Any impact on volume growth would negate the benefits arising out of a hike in excise duty on unbranded jewellery.
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Diversification advantage
Amid upside risk to gold prices and threat to volume growth, Titan’s long-term strategy of diversifying beyond jewellery (60 per cent of total revenues) and watches augurs well. Having entered the eyewear business in April 2007, it plans to more-than-double its current 204 stores in 22 states to 500 in a couple of years and expects to breakeven in FY14 at the operating profit level. Further, after introducing accessories like belts, bags and wallets, Titan plans to enter segments like motorcycle helmets, bicycles, footwear and apparel under its flagship watch brand, Fastrack, besides taking the brand into emerging markets, like Brazil, China and Vietnam, among others. These should further help improve its revenue mix and risk profile. While Titan is in line with its target of achieving 30 per cent growth (in sales and profit) for FY12 and should achieve 25 per cent revenue growth in FY13, headwinds for demand conditions (tapering top line growth, especially for jewellery business) and margins (especially in the watches segment due to expansion of the Helios brand and rupee depreciation) cannot be ignored.
While Gitanjali Gems, too, has diversified into watches, eyewear and clothing, among others, its contribution is relatively small. India-based jewellery accounted for 32.6 per cent of its Rs 9,456-crore sales in FY11, while diamonds consituted nearly 47 per cent and international jewellery 20 per cent. Until it is able to establish strong brands and sustain profitable growth in the new segments, a re-rating is unlikely (current FY13 PE is about six times) and the market is likely to reward the stock in line with the growth in its core diamond and jewellery business.