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Tepid Diwali sales hit price targets for Jhunjhunwala’s biggest stock bet

Post Q2 earnings, most analysts have cut their FY20 earnings forecast for Titan.

Updated: Nov 06, 2019, 01.32 PM IST
NEW DELHI: High gold prices took the sheen off jewellery buying in the Diwali season, forcing Titan Company to lower its revenue guidance for the second half of this financial year to 11-13 per cent from 20 per cent projected earlier.

Indian jewellery businesses do bulk of their business during festivals and the spring wedding season.

The Tata Group posted poor numbers for the second quarter; profit grew at a tepid pace of 1.8 per cent to Rs 314 crore on a marginal drop in sales.

The festive season of 33 days leading up to Diwali saw muted jewellery demand growth at 10 per cent for Titan, which faces the risk of further cuts in earnings estimates for the next quarter, as an early festive season may have pushed some buying to previous quarter.

Analysts said discretionary jewellery purchases, which contribute a meaningful share of Titan’s Tanishq volume, are likely to remain subdued till customer gets adjusted to the new gold price at Rs 38,000-40,000 per 10 gm.

This adjustment process may take 2-3 quarters, Phillip Capital said in a note.

Post Q2 earnings, most analysts have cut their FY20 earnings forecast for Titan by 4-10 per cent. Price targets for the stock too have been lowered accordingly, as the firm’s jewellery segment performed better than its peers. Long-term investors may look to add the stock on every decline, they said.

Among foreign brokerages, Goldman Sachs has maintained a ‘neutral’ rating on the stock, with a revised price target of Rs 1,083 against Rs 1,108 earlier.

Credit Suisse’s price target of Rs 1,110 factors in an 8-10 per cent cut in FY20-22 earnings estimates. Besides, Phillip Capital has cut price target on the stock to Rs 1,125 from Rs 1,165.

CLSA has even downgraded the stock to ‘sell’ rating with a fresh price target of Rs 1,025. UBS was the most bullish among all: it has maintained a ‘buy’ call on the stock, but revised the price target lower to Rs 1,525 from Rs 1,600 earlier.

Publicly available data with Reuters suggests a number of ‘outperform’ recommendations of brokerages on the stock have fallen to ‘nine’ from 17 three months ago. Brokerages recommending ‘hold’ rating on the stock have climbed to 10 from just 4 one month ago and 3 just three months ago.

Ace investor Rakesh Jhunjhunwala’s holding in the stock declined to 5.10 per cent at the end of September quarter from 5.75 per cent at the end of June quarter. However, his wife Rekha Rakesh Jhunjhunwala raised her stake in the jewellery maker to 1.40 per cent from 1.30 per cent QoQ.

Despite Wednesday’s 8 per cent intraday slide in the stock, the duo still holds Rs 5,340 crore worth of Titan shares, their biggest individual stock investment.

“There are risks to meeting the lowered 11-13 per cent growth guidance for H2. The third quarter will be very challenging, as the festive season was early this year. Some primary sales to franchisees would have been pushed to Q2 in FY20. There is a Rs 200 crore institutional order on the Q3FY20 base. Also, H2 has a relatively larger base for margins in the jewellery business,” Credit Suisse said in a note.

Phillip Capital noted that Tanishq plans to set up only 60 stores in FY20 against 70 stores envisaged earlier. It expects the stock to remain sideways in the absence of any meaningful trigger for sales revival.

“We would turn constructive on the stock if it undergoes time correction or further corrects from current level, as long-term drivers remain intact, including increasing consumer shift to organised jewellery, aggression in the highly lucrative wedding jewellery market, increasing traction on the revised gold exchange programme, and continued traction for Titan’s Golden Harvest Scheme,” it said.

UBS said the stock could still be a long-term bet.

“Our top-down model indicates that Titan can grow market share in the wedding segment in the addressable market from about 6.1 per cent in FY19E to about 12.1 per cent in FY23E. Tanishq’s overall market share for this consumer segment is likely to grow from about 13.5 per cent in FY19E to about 20.5 per cent by FY23E. In our view, it is a compelling market share accretion and this is key to our Buy thesis on the stock,” the brokerage said.

It feels any price correction post Q2 earnings would be a further opportunity to buy the stock.
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