Titan Industries shares recouped some of the losses suffered from the CLSA rating downgrade on Wednesday. However, analysts still refrain from advising a "buy" on the jewellery and watch maker saying valuations still remain stretched.
At 14:25hrs, the stock was up 6.4% at Rs 223.45, and is quoting ex-split and ex-bonus today.
Titan had announced a bonus share issue in the ratio of one equity share of every one held in the company, and a sub-division of one equity share of Rs 10 face value into ten equity shares of Rs 1.
The move was seen as an effort to improve liquidity of its shares in the stock market and make them affordable to small investors, especially after the share price soared to record levels.
But some analysts say valuations still remain stretched. Titan Industries is trading at 40x forward earnings, said an analyst at a domestic brokerage who didn’t wish to be named. "The stock would be a good buy only if it falls below Rs 200," he said.
Analysts are cautious on the stock not only because valuations seem unattractive, but operationally too there are a lot of headwinds blowing this fiscal.
The stock was till recently a darling of Dalal Street. Its share price doubled in the last one year on the back of strong earnings, coupled with expectations of strong growth in its watch and jewellery business. Inclusion of the stock in the MSCI Index and the announcement of a bonus also boosted Titan’s share price to record high of Rs 4,754.95 on June 14.
The stock cracked on Wednesday after CLSA downgraded the stock and advised investors to "sell".
"We believe that the sharp rerating the stock has seen over the past year is unlikely to sustain as revenue growth moderates, earnings upgrades come to an end and risks of earnings cuts come to the fore," the brokerage said.
Diamond prices have shot up 50% in the last 6 months, thus making high margin studded jewellery expensive. Titan has bet on increasing contribution from studded jewellery to boost its overall margins. But CLSA said rising prices could lead to stagnation in studded jewellery sales and that may imply "a more modest margin improvement trajectory."
Kotak Securities too has maintained a "reduce" rating on Titan shares. The rise in diamond prices would be "significantly negative" for Titan in the second half of FY12 as consumer uptrading to diamonds and the resultant mix improvement in jewellery business may not continue. That will mean margin improvement is again limited as typically studded jewellery margins are 2-3x higher than gold.
Further, a recent CBDT (Central Board of Direct Taxes) notification to quote PAN numbers for the purchase of gold or jewellery worth Rs 5 lakh or more could also be incrementally negative for organized players like Titan, Kotak warned in a report this week.
A lower GDP growth rate could also impact watch sales in the near term, it said.
Source: http://www.moneycontrol.com
Neeraj Rajgarhia
Summer Intern - Technical Analyst
DENIP Consultants Pvt. Ltd.
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