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Titan Industries (TTAN) - Event Update - Dated - June 11, 2013




Axis Capital Limited


14 Jun 2013





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Titan industries organized an investor call to discuss the impact of the new gold import provisions. Management clarified that gold import for domestic use has to be made with 100% cash margin and that supplier credit is prohibited. Consequently, jewellery retailers cannot source gold on lease/credit and have to purchase gold outright at prevailing prices. Titan will resort to debt to fund the higher working capital. On the back of lower interest income (reduced cash generation) and higher finance cost, we revise downwards our FY14E/FY15E EPS by 3%/6% to Rs 9/11. We also lower our target PE to 20x (20% discount to 1 yr fwd median PE of 25x) from 22x given (a) ROE compression to 35% (42% in FY13) and (b) potential scaling down of expansion plans as capital requirements increase. Maintain SELL with revised TP of Rs 210 (20x FY15E EPS) vs. Rs 243 earlier, implying downside of 11% from CMP of Rs 236. At CMP, the stock trades at 26x FY14E EPS and 23x FY15E EPS. Key highlights from management concall  RBI provisions are meant to curb gold imports, not jewellery demand: As per the management, gold jewellery demand will not be impacted by these provisions. New sourcing norms are for reducing financial demand for gold/imports of a speculative nature. We believe that volume growth will remain modest (15% YoY) in the FY14E (despite decline in prices) as growth in disposable income is subdued and not broad based. However, in the long term, unorganized jewelers could find it difficult to absorb working capital impact and thus incremental demand could shift towards organized players  RoE decline structural: Increased working capital requirements to impact return profile of the business. The management indicated that it is not evaluating alternative methods that could offset the impact from these provisions and that it would abide by all RBI regulations. We expect RoE to decline from 42% in FY13 to 35% in FY14E and 34% in FY15E as working capital requirements increase from 3% to 18% by FY15E  Hedging costs to increase: Given that gold will be purchased in advance on a fixed price basis (cost price fixed on sale under the gold on lease model), the company would need to hedge in commodity futures markets to offset any adverse movement in gold prices. Also, the hedge would be imperfect as the maturity of the futures contract may not exactly coincide with the time of jewellery sale, thus hedging frequency will increase Regards, Hemant Patel (Executive Director – Consumer) Institutional Equity Research Axis Capital Ltd Tel.: + 91 22 4325 1105 Shiv Nanda (Asst VP- consumer) Institutional Equity Research Axis Capital Ltd Tel.: + 91 22 4325 1124

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