Titan Industries has had a tough September '11 quarter, struggling with rising input costs and a consumer who was no longer keen on discretionary purchases. As established its brands and presence may be, Titan is not invulnerable to consumers pushing back purchases under the weight of high interest costs and inflation.

Revenue growth in the September '11 quarter came in at 37 per cent, a step down from the 40 per cent plus growth of the quarters before.

Though this growth is not low, the stock's valuation demands strong expansion. At Rs 217, the stock trades at 38 times trailing 12-month earnings. A slowing of its rapid growth, weakening consumer sentiment, a falling rupee compensating for the correction in gold and diamond prices indicate that Titan could see a growth moderation in the quarters ahead.

The stock has had a stellar performance over the past three years, and upside from current levels may be limited.

Investors can book profits in their holdings in the stock. The stock's price has multiplied over five times from our first buy recommendation in March '09.

Strong presence

Titan has a clutch of strong brands in its primary segments of jewellery and watches. In the jewellery segment, it has brands such as Tanishq, GoldPlus and Zoya. The watches segment includes brands such as Titan, Sonata, Raga and Fastrack. Besides, it markets international brands such as Xylus. Titan's product lines straddle multiple price points; Zoop, for instance, is a low-cost children's brand while Raga is a premium women's watch brand. It has further moved into other Asian markets such as Vietnam.

It has an extensive distribution network combining own stores and dealers. In the nascent branded jewellery, watch and eyewear space, it has a first-mover advantage.

Its low debt protects it from high interest costs plaguing other players. Funding expansion is unlikely to be difficult.

Consumption slowing

However, if the spendthrift consumer turns cautious, no amount of established presence can push sales. The potential of the Indian consumer has benefited consumer stocks so far. However, the middle-class segment, which forms a hefty chunk of demand, is susceptible to price rises and can put off discretionary purchases. Over the past few quarters, the rising cost of living has chewed away a good part of disposable income.

From food to apparel, consumers are shelling out higher amounts. With inflation continuing to be high, a strong recovery in spending may be far off. Rising monthly instalments on loans, arising from rising interest rates too pose a threat to consumer spends.

The jewellery segment, which contributes about three-quarters of Titan's revenue, also has to contend with high product prices. Gold prices have been rising steadily over the past three years, up 36 per cent in the past year alone.

In the face of slowing gold demand, Titan increased its diamond product lines in FY-09 and FY-10, which gave sales a boost. However, with a 25 per cent rise in polished diamond prices over the year, this strategy may be challenged too.

International gold prices have cooled off by about 11 per cent since they peaked in June, while polished diamond prices declined about 9 per cent in the September quarter. The benefit from such a fall, however, has not trickled to domestic prices due to a falling rupee.

Titan's volume (Grammage) growth in the jewellery segment in the September '11 quarter for Titan was just 3 per cent. In the watches segment, a recent round of price hikes of 6 to 7 per cent could serve as a dampener on demand. Same-store sales growth for Titan's eyewear division declined 19 per cent, though this was because of a shift in the ‘discount offer' period.

The high growth rate that Titan Industries had been clocking has shown signs of slowing down in the latest numbers. Revenues grew 37 per cent for the September '11 quarter over the year-ago period. Net profit growth for the September '11 quarter came in at 16 per cent, against the 60 per cent plus growth of the earlier quarters.

The stress on margins has been evident from the March '11 quarter and has had a full impact on profits in the September '11 quarter.

For instance, rough diamond prices are up more than 40 per cent in the past year. As a proportion to sales, input costs in the September '11 quarter stood at 74 per cent against the 72 per cent in the September '10 quarter.

Overall operating margins stood at 10.4 per cent, down from the 11.8 per cent in the September '10 quarter.

The watches division, which traditionally offers better margins than the jewellery segment, was hit by a depreciating rupee and higher material prices. This resulted in the operating margins for the segment dropping to 16.1 per cent in the September '11 quarter against the 21 per cent in the same period the year before.

Net margins for the September '11 quarter fell to 7 per cent from the 8.3 per cent in the same quarter last year. With negligible debt on books, interest costs do not affect margins. A mix of dealerships and own stores to expand retail network further keeps fixed costs in check.

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