Titan shares a long-term growth story, but here’s why two brokerage firms are giving a ‘Hold’ call

The fixed making charges mode, ICICI Securities said, could limit long-term benefits from operating leverage of the company.

Titan Company shares might be a long-term growth story that is likely to march higher with gold prices but at this juncture a leading domestic brokerage firm and an international one are not convinced enough to buy the stock. Titan shares have slipped 2% in the last five days to now trade at Rs 1,130 per share on BSE Sensex. The favourite stock of ace investor Rakesh Jhunjhunwala finds both Jefferies and ICICI Securities agreeing on its long-term growth potential, but both are advising investors to ‘hold’ the stock at the current levels, citing two different issue that in their view could put near-term pressure on the company’s performance.

In a recent note analysts at ICICI Securities said that for them Titan stock is about “when to buy” and not “why to buy”. The brokerage firm is sceptical about Titan’s shift towards fixed price making charge structure from the percentage of gold price model. “Introduction of fixed making charges, even though a small proportion currently, is something that we will watch carefully given that a potential shift to fixed price making charge could significantly reduce operating leverage and limit the business’ gross profit expansion,” ICICI Securities said in a note. 

According to the company management, the shift comes in the view of customers not being aware of the percentage of gold price model. “…in many markets, and especially small towns, people are still used to getting a making charge in terms of fixed rupees per gram and they are expecting Rs 400 – Rs 500 per gram. Now suddenly, when the gold price has gone up and they start seeing Rs 1,000 a gram because of the percentage basis, to that extent,” Titan’s management said the earning call post April-June quarter results explaining the shift. The fixed making charges mode, ICICI Securities said, could limit long-term benefits from operating leverage of the company.

Meanwhile, Jefferies’ argument while putting a ‘Hold’ call on the stock is that it is eyeing equal odds for price performance. In a note Jefferies said that Titan structurally remains a growth story, but at this juncture, keeping in mind the coronavirus pandemic, Titan could face headwinds. Jefferies in a note said that the odds are evenly balanced for Titan’s stock price. Being a large organised player Titan is benefiting from the shift towards organised players from the unorganised market, however, lower footfall in the non-jewellery segment could hurt the company.

The surging gold prices help Titan company inch up revenues but Jefferies noted that a esser number of festivals in the current fiscal year will be an issue. Being a non-essential product seller, Titan stores faced a longer lockdown and the resurgence of lockdown to control the virus spread could hit the company further. “In our base case, we forecast 11% annual growth in revenue over FY20-22E with flat Ebitda margins, which factors in a strong double-digit back-ended recovery in FY22 after a steep ~30-35% volume decline across jewellery and watches divisions this fiscal year,” said Jefferies. In the bull case scenario the annual revenue growth climbs up to 15%. 

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