Titan: Will the stock price double in 5 years? - Views on News from Equitymaster

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Titan: Will the stock price double in 5 years?

Aug 24, 2011

One of the most successful stories in the world of equity markets in the past decade has been that of Titan Industries. The stock price has jumped multifold (350%) over the last 5 years. Its net profits grew by 42% CAGR over the same period. This can be attributed to the ability and experience of the management. (Titan Industries is a joint venture between the reputed Tata group of companies and Tamil Nadu Industrial Development Corporation). However, every scrip has its highs and lows. In financial markets, law of averages surely catches up in the long term. Same is the case with Titan. The stock is currently trading at a very high P/E (Price to Earning) of 38 which we feel may not be sustainable for a long time. Let us see why.

At the current market price of Rs 211 (adjusted for recent stock split and bonus issue), Titan scrip is trading at a TTM (Trailing Twelve Month) P/E of 38. This makes it one amongst the very few companies in India which enjoy such a high earnings multiple. It has been observed that earnings multiple of even the best of the scrips comes down to the market P/E levels. The P/E for Sensex is presently 18 (TTM). Thus, Titan also should be able to sustain a P/E of not more than 18-20. A hypothetical example will simplify this further.

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Assume that Titan's present earnings equal Rs 100 at a TTM P/E of 38. This implies a price of Rs 3,800 (38*100). For the stock to double from this level, the price will have to reach Rs 7,600 (3,800*2). As stated earlier Titan can at the most maintain a P/E of 18 (equal to market P/E). Thus, the earnings would grow to Rs 422 implying a CAGR of 33% for the next 5 years. Historically, the company's PAT has been able to grow at a CAGR of 42%. But, this was at a lower base of Rs 736 m only. It might now be extremely difficult to grow at the same rate on a high base of Rs 4,300 m. As a business matures, competition catches up and all distinct advantages are lost.

We may note here that one main reason for Titan doing well has been the success of its jewellery business. Titan is the most popular branded jewellery retailer. But, this business has become more and more competitive in the recent past. As the income levels have risen, the preference for branded jewellery has increased and this has encouraged more players to enter the branded jewellery space. Also, Titan is now trying its hands at too many things. It is exploring all options in lifestyle retailing. While it is good to keep experimenting and innovating, dabbling into too many products may result in the company losing focus. This eventually may prove detrimental to the shareholder wealth.

To conclude, it is not impossible to register a 33% CAGR in earnings going forward given that the company has been able to deliver in the past. But, to achieve such a huge growth in competitive environment that Titan now operates in may prove to be really challenging for the retailer and that too on a high base of Rs 4,300 m.

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5 Responses to "Titan: Will the stock price double in 5 years?"

Saravanan

Jan 3, 2012

I have never seen such a exaggerated title 'Will the stock price double in 5 years? ' in this column and think EM diverse from it own course to a commercial mode. Because there have been no statistics presented to compare it past 10 years history before forecast next 5 years.

The person who knows the Titan for last 15 years can easily foresee next 5 years. When Jewellery business started in earlier 90 , this segment went on huge loss for consecutive years . But Management has gone under a huge metamorphosis at the right time to improve their operational efficiency and brand building. Today Tanishq is the most preferred super premium brand in jewellery segment . The next big move will be eye plus and the management has already focused on Verticle Integration which will augment the CAGR to greater extent.

Like (1)

Manoj K Mondal

Aug 28, 2011

The author is perhaps right that Titan will face increasing competition moving forward. My personal experience in Titan exclusive watch showroom reminds me of public sector mood, portending a feeling that the growth Plateau is not far ahead. On the contrary, the entrepreneurial zeal is visible in eye-care outlets. Perhaps, the move to diversify into newer areas, which is highly synergic, is very timely and will help sustain the growth. Such diversification is simple business management formula from text book. The brand has enormous reliance among customers in India and is slowly increasing global foot prints. I don’t see any major challenge before Titan that would be insurmountable. One exogenous factor may prove serious though. We are on an increasing gold price regime, offering value addition to inventory which directly translates into profit. Reversal of this trend may put stress on profitability. I am sure any serious management must have kept themselves in full preparedness for such eventualities. An enterprise like Titan is not created by accident and I am sure jewels behind its success story will make sure the company lives up to its reputation.

Like (1)

Dpm

Aug 26, 2011

It appears as though someone in your team has made up his mind that Titan is quoting at high PE, which it is, like many other well performing consumer companies with impeccable track-record.
So this 'person' than decides to write 'something' to convey his 'conviction' about high price/pe multiple and cooks around a 'story' to tell.
The 'author' has not made detailed analysis of consumer companies in similar field and then a critical analysis and comparison to 'draw' 'conclusion'.
Surprising to pick Titan when many others like VIP, Jubilant Food or Nestle etc etc would fall in similar category.
The bias is visible in the very first line- Increase in share price is given for 5 years cumulative, whereas increase in profits as per annum.
Havn't come across a more biased report in EM.

Like (1)

Vishal

Aug 25, 2011

Titan has distinct competitive advantages and should continue to demand high PEs like Nestle. In every business it operates it continues to me a market leader. Its cometitors are far behind and will continue to remain behind. Just one example - See at what PE Titan sells and at what PE Gitanjali Gems sells, there is a "Reason" for this and this trend will continue. Ok, another example PSU Banks have been value plays for time immmemorial, but what about HDFC Bank - has it fallen to Bank sector PEs? So don't compare apples and oranges. Ups and and dows are part of every company, but Titan is Sachin and rest others in this segments are nothing comapred to it.

Like (1)

R Sathyamurthy

Aug 25, 2011

Dear Sir,

While the viewpoint is interesting, it is only partially correct.

You have not factored in the new business segments (such as Titan Eye Care) that Titan has embarked on recently. I am a customer of Titan Eye Care and know first hand that they have positioned themselves as a premium brand in that segment.

I do think Titan has yet exhausted its geographical expansion in India.

Thus, Titan can grow at the same pace for another five years, is my humble view and so, Titan can double from the current levels, especially if you factor the market excesses.

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