ICICI Securities, a domestic brokerage, has maintained its “Add” rating on Titan, despite the irrational competitive environment and worsening macroeconomic conditions leading to a slowdown in demand. The brokerage has a target price of Rs 2,600, which indicates an upside potential of 10% from the current market price of Rs 2,360 per share.
ICICI Securities stated that the gold price premium charged by Tanishq in the top nine cities has reduced by about 50%, ranging from 1-3%, due to increased competition from national and local jewelry retailers. The brokerage estimates that about 20% of Titan’s fair value in DCF is contributed by the gold price premium, which is now at risk.
The hike in custom duty on gold has resulted in a higher profit pool for players accessing gold through informal channels. Large regional players have become aggressive on gold rates, in some cases selling below the bank rate. This has created higher competitive pressure on national retailers like Titan, Kalyan, and Senco.
ICICI Securities expects the implementation of hallmarking to reduce this pressure going forward. However, in the near term, the gold-rate premium, as charged by Tanishq in different geographies, is expected to be constricted.
The stock was trading 0.5% lower at Rs 2,358 on BSE at 12.47 pm. On a year-to-date basis, the stock has declined over 8%.
Many national retailers, including Kalyan, Joyalukkas, and Malabar, have moved to a one-nation, one-gold-price policy, under which the gold rate charged by them has been the lowest and uniform.
ICICI Securities believes that the operating leverage benefit enjoyed by Tanishq, 50% higher EBIT margin versus competition lead by ~2x revenue versus closest competition, could enable the company to combat the rise in competitive intensity more aggressively.
Despite retailers/brands hiking making charges to offset the impact of lower gross margin, overall gross margin is likely to remain impacted lower by 100 bps as companies have chosen to pass on 1/3rd benefit to customers while retaining 2/3rd through higher making charges.
ICICI Securities maintained its FY23-24E earnings estimates, modeling revenue/EBITDA/PAT CAGR of 23/29/31% over FY22-23E. It maintained its “Add” rating with a DCF-based target price of Rs 2,600.