Upgrade Titan Company to ‘add’ with TP at Rs 1,250

Tanishq revenues have recovered to 90% of pre-Covid levels — significantly ahead of consensus expectations — likely drivers are boost to volumes due to (somewhat) stable gold prices, consumers have (likely) started accepting higher gold prices and expect further inflation and market share gains (liquidity challenges for smaller competitors).  Upside trigger is gold price correction or volatility leading to surge in volumes (recall the 67% volume growth in Q1FY14). That said, introduction of fixed making charges, even though a small proportion currently, is something that we will watch carefully. Profitability under pressure (in FY21) from inferior studded share is adequately priced in (stock down 12% in last one year). Upgrade to ‘add’.

Largely stable gold prices (after a steep rise) could drive revenue growth, gold price volatility may lead to volume surge: We note that after a steep rise, if gold price suddenly corrects, volume growth recovers — case in point being 67% volume growth in Q1FY14 after gold price fell 6%. We believe that this trend is driven by consumers getting used to a high gold price and therefore the rush to buy post correction.

Market share gains could further accelerate: Regional unorganised jewellers have been under pressure driven by liquidity constraints and funding issues and limited ability to sell through digital channels. This, in our opinion, provides the leading organised jewellers, including Titan, with a market share gain opportunity.

There are challenges though. However, we do see risk to near-term performance from significant deterioration in studded share (management commentary that revenue mix is at 23-25% rather than the usual c.30%). The longer-term risk, in our opinion, is the potential shift to fixed price making charge to a large proportion of the portfolio – this could significantly limit Tanishq’s price increase lever.

Valuation and risks. We increase our FY22 earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 14 / 13 / 16 (%) over FY20-22E. Upgrade to ADD (from Hold) with a DCF-based revised target price of Rs1,250 (was Rs1,100). At our target price, the stock will trade at 49x P/E multiple Sep-22E. Key downside risk is potential shift to fixed making charges that could limit long-term benefits from operating leverage.