Titan: Return ratios to improve on easing of norms

The last few years have not been good for consumption, especially discretionary consumption. And consumption of jewelry has worst been hit, as the government attempted to cut gold imports. High import duties and restrictions on gold imports made Indian jewelry more expensive, which dragged down demand. But demand which has been suppressed for so long that analysts expect it to bounce back very strongly. Titan is expected to benefit from this once urban consumption revives. The stock is up 7.4% over three months compared to the 5% rise clocked by the Sensex.

While the fourth quarter is not expected to be a strong one for Titan, analysts maintain their optimistic view over the longer term. In the near-term, Titan faces challenge from competitors who are offering better returns on the gold accumulation schemes compared to its own Golden Harvest. IIFL Institutional Securities says lower take up in Golden Harvest schemes and muted gold prices would weigh on near-term sales growth. IIFL expects Titan to exit FY15 with a sales growth of 12%, which is substantially lower than the 24% CAGR over FY10-14.

On the upside, recent regulatory developments are expected to improve the company's return ratios. Analysts are unanimous on one thing and that is the easing of regulatory environment. The government has withdrawn 80:20 scheme in November last year and the Reserve Bank has recently allowed banks to offer gold metal loans, which will ease pressure on working capital needs of companies like Titan. Motilal Oswal Securities says: "With nominated banks now being allowed to offer gold on lease facility, it will simplify the hedging operations for Titan as gold on lease is a low cost natural hedge mechanism for jewelers and also lowers the working capital investment."

Unlike IIFL, many other analysts believe that the wedding season in the March quarter would have given a boost to jewelry sales, especially diamond jewellery. With the increased availability of gold-on-lease, analysts expect its return ratios to improve sharply, which would help improve its discounted valuations.

Currently, Titan trades at a 9% discount to consumer staples on a one year forward price/earnings ratio. Before the regulatory headwinds, the stock used to command a 14% premium. IIFL says Titan is the cheapest stock in the consumer discretionary space based on FY17 PE multiple and as a result it is an attractive buy.