Moneycontrol Research
The Indian equity market has seen some healthy correction in high quality names, which provides investors a strong opportunity to reassess their existing portfolio and build-up new positions. After careful assessment of the defensive portfolio’s performance, we are replacing NLC India with Titan.
Why exclude NLC India?
Despite attractive dividend yield and valuations, the market continues to penalise NLC due to lack of growth and declining profitability, which is attributable to lower power generation. We would like to close our call owing to lack of near term visibility.
Why consider Titan?
About the company
Titan, a part of the Tata conglomerate, is among India’s leading home-grown jewellery companies that derives 80-85 percent of its annual revenue from sale of gold, diamond and studded jewellery. Watches and eyewear products are also a part of the company’s product portfolio.
The opportunities
Titan aims to compound its FY18 jewellery revenue (Rs 13,256.9 crore) by over 2.5 times in the next five years. This will be driven by high-value wedding variants, market share gains from unorganised players and store additions in Tanishq.
To facilitate margin accretion, impetus will be laid on increasing the contribution of studded jewellery variants to total sales. About 75-80 percent of new Tanishq outlets will be opened under the franchise route to keep the business asset light, limit capex and derive higher returns on capital invested.
In the watches segment, higher Fastrack activations, product launches, e-commerce sales and improved product presence in large format stores will be pivotal to revenue growth. Consolidation of distributors and stockists, coupled with cost efficiency initiatives, should help improve margins.
Challenges
Titan’s eyewear segment remains a sore point as far as profitability is concerned. Investments in developing omnichannels, promoting prescription eyewear and launching Fastrack lenses will be high in the near term. Returns from this segment, if any, will take time. The management said Q1 FY19, which is typically a weak quarter for jewellery sales, is expected to remain soft. This is on account of declining gold imports, weak consumer offtake and a high base last year (purchases were brought forward from Q2 FY18 to Q1 due to rollout of Goods & Services Tax).
Valuation
Historically, Titan has always traded at a steep premium to its peers such as PC Jeweller and Tribhovandas Bhimji Zaveri (TBZ), and rightly so. We don’t forsee any change in this trend given Titan’s robust fundamentals and brand appeal (trust factor), in addition to the opportunities listed above.
PC Jeweller has been mired in several corporate governance issues for quite some time, thus causing the stock to correct. TBZ’s margins and return ratios are nowhere closer to Titan. From an investment perspective, there is very little to choose besides Titan in the jewellery space.
Notwithstanding a few temporary blips, we remain bullish on Titan’s ability to maintain its premium valuation. The stock has corrected significantly in the past few days too. At 39 times FY20 projected earnings, despite the expensive valuation, we recommend investors to capitalise on the downfall by going long on the counter.
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