Tuesday, February 17, 2009

Titan Industries Ltd. Initiating Coverage; Stop watch; SELL; Target: Rs671



Titan Industries Ltd (TIL) is likely to face challenging times ahead on account of the weakening macro economic indicators affecting its watch business, rising gold prices slowing its jewellery market share gains and its new business initiatives straining cash flows. We expect TIL's watch business to report a 1.6% and 5.7% decline in revenues and EBIDTA respectively in FY10E, revival thereafter. We believe that it will be difficult for TIL's jewellery division to garner market share at a similar pace as in the past, owing to rising gold prices and falling demand (3.6% in FY11E against 2.9% in FY08). Their new business initiatives (Precision engineering and Eyewear) are still in investment phase, thereby denting TIL's cash flows and EBITDA. We expect moderation in growth with net revenue, EBITDA & adjusted net profit of TIL to grow at a CAGR of 16.0%, 12.8% & 7.7% respectively during FY08-11E and intermediate decline in FY10E. We expect a 630 bps and 1660 bps contraction in ROCE and ROE to 26.7% and 25.4% by FY11E. TIL is currently trading at PER of 21.3x FY10E and EV/EBITDA of 13.3x FY10E- higher than its long-term average PER of 18.1x and EV/EBITDA of 10.1x. The above valuations are rich especially in wake of moderation of growth and declining return ratios, recommend a SELL with a price target of Rs 671.

 

Global Cues

After a trading holiday on Monday the US mkts opened on a weak note on Tuesday amidst the uncertainty on bailout plans for Auto majors. The worries on large scale job cuts from the auto industry kept the mkts under panic. The Dow came precariously close to its Nov 08 lows missing the low by just a few points.

The sovereign CDS of Japan saw an unprecedented down move yesterday after the declaration that Japan economy is shrinking at a fast pace. The CDS of Japan moved from 70 bps to a whopping 120 bps as result most of world currencies went into a tailspin. As a corollary Gold saw a huge jump scaling upto $970 per troy ounce.

However the Asian mkts did not tumble following the steep fall in Dow perhaps because they have already seen a cut on Monday. Asian mkts are currently trading with a cut of 1 to 1.5% while SGX is trading down by 30 odd points.


Our Markets:

Following up on previous day's loss our mkts continued there down move yesterday. Nifty came close to important technical levels but on back of some short covering during the later half the mkt recovered to close off the day's low but still in red. Thus in last two days we have seen a substantial fall.

For today the global cues are strongly negative with Dow touching Nov lows & staying put just at that level. However the two softening factors are that the Asian mkts have not collapsed & secondly we have already fallen for past two days. Therefore we may not see the similar kind of meltdown but surely we will expect to start the day with a gap down by about atleast 1-1.5%. We may see some recovery after the initial fall.

An important point to note for all investors in equities as an asset class is the unprecedented movement in Gold. Yesterday it has seen large up move which is a clear indication that risk aversion is still very high. The huge amounts of bail out packages, deepening recessions across the planet are increasing concerns over the inflation raising its head once again. Consequently it has become almost consensus that currencies will go down further especially dollar & therefore gold will keep scaling new highs. This simply means that equities as an asset class will remain under pressure. We expect the pressure on Rupee to continue in near term mainly due to burgeoning fiscal deficit & slower than expected recovery in manufacturing sector.


Actionable idea

: We believe sugar demand supply dynamics are in favor of sugar manufacturers. As reported in newspapers, to overcome the shortfall in supply & maintain price line, the government will be allowing imports of raw sugar with a condition to re-export that over a period of next two years. We believe Renuka Sugars will be a biggest beneficiary of such a move as it has a large refining capacity. We would advice initiating a buy on this stock for a gain of 10-15% from purchase price. Please keep a stop loss of 5% from your purchase price.

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