A gain of 2,000% in last 10 years! Is Rakesh Jhunjhunwala's pet stock still a strong play?

Titan Company, one of the favourite stocks of India's ace investor Rakesh Jhunjhunwala, has jumped almost 2,000 percent in the last 10 years against a 134 percent gain in the market benchmark Sensex.

Since 2010, Titan, which leads the jewellery business in the country, has outperformed the Sensex seven times, clocking a cumulative gain of 1,994 percent against 133.8 percent jump in the index as of September 23.

At the end of the June quarter of FY20, Jhunjhunwala had seven percent stake in Titan, the company whose top asset is its well-diversified business that ranges from jewellery to watches to eyewear.

It has registered a CAGR of 13.5 percent in the last five years.

The company had a subdued FY-16 due to several factors, including regulatory pressure on the jewellery industry. But, it managed to gather momentum from FY-17 and has since been clocking a strong double-digit revenue growth.

The above set of data shows the stock has been consistently giving returns to investors. But, what is the way ahead?

Brokerages are positive on the stock

Morgan Stanley has upgraded the stock to overweight, with a target price of Rs 1,300.

"Ongoing marketing and promotion spends are unprecedented by the company, and the good news is that consumers are responding. Strong growth in a difficult macro environment should be rewarded by re-rating," said the foreign brokerage.

"We continue to see a long runway for growth in the jewellery segment, with an opportunity for share gains ahead of market estimates.”

The brokerage has raised its FY20, FY21 and FY22 earnings per share (EPS) estimates by 3 percent, 2 percent and 1 percent, respectively, to reflect a potential sharp recovery in consumer demand, offset by marginally lower operating margin.

Brokerage Anand Rathi also believes that Titan remains a strong play.

"We expect Titan to grow at a CAGR of 16.3 percent in the next two years. We estimate the company to report revenues of Rs 23,205.7 crore in FY-20E and Rs 26,731.1 crore in FY-21E," the brokerage said in a recent report.

It said the operating margins for the Tata group company should continue to improve with its estimate of around 128 basis points over two years. It expects the company’s EBITDA margins to be around 11.1 percent in FY-20 and 11.3 percent in FY-21.

Anand Rathi has a buy recommendation on Titan, with a target price of Rs 1,350 per share. At the current market price, the stock is trading at 56.8 times FY20E and 48.7 times FY21E consolidated earnings.

ICICI Direct also has a buy recommendation on Titan, with a target price of Rs 1,250.

"Titan has consistently displayed its ability to gain market share amid a tough industry scenario. With the long-term story intact, we believe the recent stock price correction offers a good entry point," said the brokerage in a recent report.

Even though the brokerage has revised its revenue and earnings estimates marginally downwards, factoring in the company's Q1FY20 performance, it has remained positive about long-term prospects.

"We continue to like the company given the healthy balance sheet (over 32 percent RoCE & virtually debt free status) and sustained market share gains driven by healthy store additions," ICICI Direct said.

Titan’s strong brand equity enabled it to outperform industry peers and deliver consistent earnings growth amid a challenging industry scenario, it said. “We model revenue, earnings CAGR of 18.4 percent and 26.7 percent, respectively, in FY18- 21E," the brokerage said.

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