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.
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.
Titan Industries declared its results for the third quarter of financial year 2017 (3QFY17). While topline growth was 14.7% YoY, net profit grew by 13.1% YoY during the quarter. Here is our analysis of the results.
Titan Industries declared its results for the second quarter of financial year 2017 (2QFY17). While topline growth was flat, net profit grew by 23.5% YoY during the quarter. Here is our analysis of the results.
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