Stock Review: Titan Industries

A 165 per cent rise over the last one year has made the stock expensive at the current level

The phenomenal run-up of the Bombay Stock Exchange consumer durable index, which touched its 52-week high on Wednesday at 6,477 (up 81 per cent in the last one year), can be attributed to jewellery and watch player Titan Industries. The company has 40.5 per cent weight in the index and has gained 165 per cent in the last one year.

While the company's robust growth (standalone sales and net profit rose at a compounded annual rate of 31 per cent and 38.5 per cent, respectively, during 2007-10), stable operating margins and superior return profile justify the past bullish trend, higher base effect will start showing soon.

Going ahead, sales are likely to grow at a compounded annual rate of 25 per cent during 2010-12. However, much will depend on global gold prices, which have been hitting record high levels, courtesy developed economies' uncertain growth prospects.

The pricey yellow metal has hit Titan's low margin jewellery business, which accounted for 77 per cent of net sales in 200910. Volumes declined in four of the past 10 quarters between March 2008 and June 2010 and posted a single digit growth in two of them. Gold prices jumped almost 50 per cent during the period.

Titan trades at 30.5 times FY12 estimated average price to earnings PE multiple, which is at the higher end of its one year forward PE band range of 16-32 times and much above the five-year median PE of 25 times.

However, analysts say the downside should be limited, as growth drivers for the company – higher consumer spending, strong brand loyalty and a large market share among the organised players – are intact. There are new businesses like eyewear and new formats such as GoldPlus (new mass market jewellery) and Titan One (small format watch store) that will contribute, though over the longer term.