Stock pick of the week: Why analysts are bullish on Titan Company

Industry-wide, gold jewellery sales have taken a major hit due to the government’s move to demonetise old Rs 500 and Rs 1,000 notes. Analysts estimate that the consumption of gold in Tamil Nadu, the biggest gold consuming state, has gone down more than 50% on account of demonetisation. The situation is more or less similar in other parts of the country.

Though Titan could not escape from this blow, the company did not suffer as much as the industry in general. This is because Titan’s cash sales component is only around 40% compared to the industry average of around 70%.

After the initial hit, Titan has recovered some of its lost sales. Special initiative by the management—attractive gold exchange scheme—helped improve sales, aided by improved market share and sales shifting from smaller jewellers to organised players such as Titan. However, the company won’t be able to meet its 2016-17 sales targets, despite making small recoveries. Since the overall shrinkage in jewellery demand, due to demonetisation, may continue for few a more quarters, the company’s 2017-18 sales target of is also under the cloud.



Despite the short-term hiccups, analysts are getting bullish on this counter because of its long-term prospects. In other words, they are using the normal value investing strategy of betting on the best player from the worst industry. Around 20-30% of the unorganised gold jewellers may shut shop in the coming years as their competitive advantage—low making charges due to tax evasion—will get wiped out due to tighter regulations. Unlike most unorganised competitors, Titan is more focused on jewellery consumption—especially on products with high adornment value—and not on low-value jewellery or investment products like bars and coins.

A strong balance sheet and a large franchise network, built over decades, also work in favour of Titan. Most of the gold supply chain is still dependant on cash and has come to a grinding halt. However, strong players, such as Titan, could manage their supply chain using their strong balance sheet.

Fall in valuation due to its underperformance compared to the market—Titan is down by 16% from Since 8 November, compared to a 6% fall in the Sensex—is another positive for this bullishness. However, only investors with a strong holding power should get into this counter. This is because two more risks, higher GST rates and further demand erosion due to government actions against gold hoardings,– can hit the jewellery industry in the coming quarters.

Selection Methodology: We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.