Nomura downgrades Titan Ind to Neutral on near-term uncertainty

Nomura has downgraded Titan Industries to a Neutral rating from Buy as it believes the near-term concerns over falling gold prices and the uncertain demand environment will likely mean earnings growth could be much more tepid than what consensus is building in

Nomura Equity Research has downgraded Titan Industries to a Neutral rating from Buy as it believes the near-term concerns over falling gold prices and the uncertain demand environment will likely mean earnings growth could be much more tepid than what consensus is building in. The brokerage is 10% below consensus on FY14F earnings estimate and believes that over the next couple of months there will be a meaningful correction to consensus earnings estimates.


While FY14F is going to be a tough year for Titan, the long-term dynamics for the organized jewellery retail business remains strong with the possibility of gaining market share, according to Nomura. Nomura has downgraded Titan to Neutral and look for the near-term uncertainty to dissipate, and cut the target price (TP) to Rs250 from Rs321.


One of the key catalysts for Titan is how the price of gold moves in the next couple of quarters. Nomura assumes that prices will likely remain range-bound at current levels, which, however, means they are down more than 10% y-y versus FY13. Any further drop in gold prices will be a negative for the company, as per Nomura’s observations.


Titan trades at 21.7x FY15F earnings (Rs11.4) versus the sector average of 24x. While the stock trades at a discount to the sector average, the brokerage believes it is justified as Titan will deliver an average 15% earnings growth over the next couple of years against the sector average of around 18%.


Nomura has factored in a lower valuation multiple of 22x to account for the potential slower growth. Uncertainty around both gold prices and the demand environment means the stock price is likely to remain range-bound in the near-term and trade at lower than long-term multiples.


Gold prices have corrected significantly in the past one month or so and are down 10% in rupee terms. The spot price is around 12% down from the average FY13 prices.


Gold prices are a significant determinant of the topline growth for Titan’s jewellery segment. Since gold prices are a pass-through for the company, they contribute to the realization impact in the jewellery segment. As an example, we look at the gold price movement in the past three years and Titan’s jewellery segment realization impact.


In the FY10-13 period, average gold prices have been up 21%/22%/34%/17%, while Titan’s realizations have improved by 26%/29%/36%/25%. This clearly shows the impact that gold prices have on Titan’s topline growth.


One of the key reasons for a strong 44% earnings growth recorded by Titan between

FY08-11 was rising gold prices which pushed both realisation and EBIT margins in the jewellery business up. Now, with gold coming under pressure due to: a) global factors such as slowing demand, and b) macro concerns in India, Nomura believes that current consensus estimates may potentially come under pressure.


Nomura’s analysis shows that all other things remaining steady, a 10% movement in gold prices will cause a 6% movement in earnings. However, the practical situation may be different and the impact may by less due to: a) rising demand in a weak pricing scenario, and b) a potential mix improvement.


Over the past few quarters, volume growth has also been subdued for the company as the macro economic slowdown has had an impact on consumer offtake. While it has recovered somewhat in Q3FY13, the brokerage is still cautious on how robust this recovery can be. One reason for volume growth likely to be subdued over the next couple of quarters is a sharp fall in gold prices.


Consumers tend to postpone their buying decisions when gold prices are volatile. However, once gold prices settle down, we are likely to see a strong pickup in demand. Historically, volume growth trends have been either robust (FY06-09 average volume growth of 34% vs. FY10-13 average volume growth of around 5%). The brokerage expects a pick up in volume growth over the next couple of years, although not anywhere near the growth rates seen in FY06-09.


There have been a number of changes on the regulatory front in recent months. Here is a quick snapshot of the key measures and their likely impact. The basic aim behind these measures is to cap gold consumption as it has been one of the key factors causing the current account deficit for India to widen over the past couple of years.


Increase in customs duty on gold: Recently the government had increased customs duty on gold from 4% to 6% and one cannot rule out further increase in customs duty. This will increase the landed price of gold in India, according to Nomura.


Limiting the credit period to 90 days in case of direct imports: Currently, Titan leases gold from domestic banks which is expensive and hence was contemplating direct gold imports which would have been significantly cheaper. However, a 90-day credit period effectively takes away the margin expansion benefit by negatively impacting the working capital.


Limiting the lease period to 90 days when leased from domestic banks: If implemented this will impact the balance sheet significantly and the benefit derived over the past two-three years (working capital days reduced from 42 days in FY08 to three days in FY12) will be lost. However, management has clearly mentioned that no such rule has been implemented yet and management continues to get 180 days credit from domestic banks.


Removal of the base rate exemption for gold lease: Currently, leasing of gold by domestic banks happens at a rate below the designated base rate. Typically, for Titan the cost is around 5%-6% while the base rate is 10% (for most PSU banks). According to RBI, there is no case for this base rate exemption and RBI proposes to remove it. This will be negative for the jewellery industry as a whole, opines Nomura. Most of the big jewellers are either sourcing gold through the lease route or are incrementally shifting to it. So this will impact everyone and can be negated by a fairly small price hike. According to the company CEO, if implemented, the rate is going to rise from the current 6% levels to between 6%-10% levels.


Mandatory KYC norm implementation for all sales: The company is already a complaint in its own way as all sales are accompanied with a legitimate invoice which mentions the customer’s name and address. All this is already mentioned by the company in the bill. The only additional thing it might have to do is to ask the customer for a verification of the data provided, which is also being followed by the company.


Nomura has cut its FY14F earnings estimate of Titan due to the sharp drop in gold prices in recent months. The brokerage now assumes a volume growth of 10% in the jewellery division and realization of -5%. Gold prices, as mentioned earlier, are now down 12% against the average prices in FY13. It believes the impact on realization will be less than what the company will benefit somewhat from the mix improvement (a shift to studded jewellery compared to plain gold). There is also a possibility that gold prices could recover from the losses over the past weeks during the course of the year.


Nomura’s revenue growth assumptions are down from 19.4% to 9.4% for FY14F, largely as a result of the changes to its assumptions for the jewellery division.


The brokerage has also cut its margin assumptions from the earlier 10 basis points (bps) improvement to flat now. It believes the company will benefit from higher volume growth over the next couple of years, as well as some likely improvement in the product mix. These factors will help the company maintain margins at current levels in the next couple of years.


While the business mix should change next year with the share of studded jewellery going up compared to plain gold, the watches business, which is 21% of the overall business, is likely to face some margin pressures as discretionary spends continue to remain under pressure.


As a result of these changes, the brokerage expects net income growth for FY14F to be 10.1%, which is around 4% lower than consensus.


Nomura has cut its target price from Rs321 to Rs250. This cut is on account of two factors: first, earnings estimates are cut by around 7%/9% for FY14F/FY15F and secondly the brokerage has also cut its target multiple to 22x from 26x. The cut in the multiple is to reflect the higher risk to earnings as well as our lower earnings growth estimate for FY14F. The new TP of Rs250 is based on 22x FY15F EPS of Rs11.35, according to Nomura.


Nomura’s new target multiple of 22x one-year forward is at an 18% discount to the past three year average and at a 12% discount to the long-term average trading multiple. While a multiple de-rating could happen for Titan, the long-term fundamentals continue to remain intact and there will be a rebound in the earnings growth trajectory in FY15F. Hence, the brokerage is not taking multiples to the mid-teens number which has been the case when the company has had a prolonged period of uncertainty.


RTI Judgement Series: One lakh families in Delhi were deprived rations due to non-entry of their data

In Delhi, rations of about one lakh families were stopped due to non-entry of the data into the computers. The CIC directed the Food Commissioner to look into the issue and send a compliance report. This is the 78th in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application

The Central Information Commission (CIC), while allowing a complaint, directed the Food Commissioner at the Government of National Capital Territory of Delhi (GNCTD) to look into the disenfranchisement of over one lakh families in Delhi because of improper functioning of the computer systems.
While giving this judgement on 21 March 2011, Shailesh Gandhi, the then Central Information Commissioner said, “Since computer systems and connectivity was not proper, 44,172 families in Delhi that should get rations at a fixed price were unable to get it. Government policies appear to be the victim of a completely inefficient computer system. And this is scandalous.”
New Delhi resident Amlesh Gupta, on 13 July 2010, sought information under the Right to Information (RTI) Act from the Public Information Officer (PIO) of the Food and Supplies Department at the GNCTD. Here is the information he sought...
1. What action taken by the Deputy Commissioner on the application submitted on 13/04/2010 vide diary no. 1818/A/CFS/16/14/10.
2. If no action has been taken, give reasons thereof. If action is being taken, give progress report. 
3. Since June 2010 how many cards were by certified, give complete details with card number and names. 
Since the PIO did not give any information, Gupta then filed his first appeal. The First Appellate Authority (FAA) while disposing the appeal said, the respective PIOs have forwarded the complaint to the concerned assistant commissioners for taking necessary action. 
Not satisfied with this reply, Gupta then approached the CIC with his second appeal. During the hearing, he stated that rations have been stopped to 44,172 above poverty line (APL) cardholders in the eight zones as per information received by him in rely to a RTI query. It appears that the rations have been stopped due to non-entry in the database of the computers. Gupta had given a complaint about this and had sought to know the action taken on this. The number of cards for which rations were not being provided is as follows:


Circle no.

Number of cards

























Total number of cards:


The PIO in his reply stated that as per the Delhi Government Circular in 2008 APL ration cardholders with annual income less than Rs1 lakh were to be given rations at fixed rates. The applications were taken but 44,172 cardholders were not given rations because of non-entry in the database. This happened since the computer systems are not working properly and connectivity is unreliable and extremely poor, the PIO stated.
Gupta had been provided information only by erstwhile Circle-52 (51). The appellant had not been provided information from all the other circles. 
Shakti Bangar, food security officer (FSO) for Circle-51 informed the Commission that the entire information would be available with PK Mehresh, system analyst, Computer Branch at the Department of Food and Supplies.
The PIOs also informed the Commission that a large number of cardholders (around 70,000) in the category of un-reviewed cards were also suffering because of inefficient operation of the computer systems. 
While allowing the appeal, the CIC then directed PK Mehresh to provide the complete information about the restoration of foodgrain allocation to the 44,172 cards holders to the Gupta and the Commission before 10 April 2011. Mr Gandhi, also asked the food commissioner to send a compliance report to the Commission about the action taken about disenfranchisement of over one lakh families before 20 April 2011.
Decision No. CIC/SG/A/2011/000118/11570
Appeal No. CIC/SG/A/2011/000118
Appellant                   :                             Amlesh Gupta
                                                                    New Delhi - 110019
Respondent              :                            (1) Chokhe Lal
                                                                   Public Information Officer & 
                                                                   Assistant Commissioner (HQ)
                                                                   Food and Supplies Department, 
                                                                   Govt. of NCT of Delhi
                                                                   K- Block, Vikash Bhawa, 
                                                                   IP Estate, New Delhi - 110002
                                      :                           (2) PK Mehresh, 
                                                                   System Analyst, Computer Branch, 
                                                                   Department of Food and Supplies, 
                                                                   K-Block, Vikash Bhawan, 3rd Floor, 
                                                                   ITO, Delhi 



McLeod Russel India: Stock reaction appears overdone, says Nomura

Any concerns on the outlook for India tea prices for FY14 on the back of trends in Kenya may be a kneejerk reaction, says Nomura Equity Research

McLeod Russel’s stock price decline of 15% over the past two trading sessions is an excessive reaction, According to Nomura Equity Research in its Quick Note, to the recent tea price trends in Kenya, the outlook for domestic demand and prices in India remains robust at this point. This was reinforced during the brokerage’s discussion with J Thomas, the world’s largest auctioneer of tea. They suggested that any concerns on the outlook for India tea prices for FY14 on the back of trends in Kenya may be a kneejerk reaction. Key takeaways from the discussion:


  • The first flush tea crop is largely for the domestic market, and J Thomas indicated good demand visibility in the Indian market. They therefore do not see any impact on the first flush crop from Kenyan price trends. If at all, it is the second flush crop (starts from 10th May and continues to end-June) which gets exported, where there may be some impact (assuming the trend in Kenya doesn’t reverse).


  • Given that some of the land has been diverted for orthodox production in India, CTC (McLeod mainly sells CTC) supply has become tighter.


  • Opening tea prices will be visible in the 17th week auction and are expected to be higher. The current prices of very small quantities have been higher by Rs10-Rs15, but they are still not representative and the full impact will be visible from the 17th week. More than a single data point on opening prices, they remain positive on the outlook for tea prices in India.


  • Typically there used to be inventory in the system of the prior season which continued until the early part of the new season. But now inventory levels have been running extremely low.


  • Global demand supply is still tight and is expected to remain that way for the next three years.


As per Nomura’s observations, two months of higher production in Kenya (Kenya has produced 83.9 million kg in Jan-Feb2013 versus 54.6 million kg last year, when the crop was impacted by weather) has meant that tea prices in Kenya in CY13 have gradually come down from $3.08 at the end of CY12 to $2.49 in the 13th auction (average prices in Kenya in CY13 are at $3.02 still higher than last year similar period average of $2.96). Part of this is due to recovery of lost production in Kenya, which produced 369.2 million kg in CY12 (versus 377 million kg in CY11 and 398.7 million kg in CY10).


Ex-Kenya production is only marginally up in Jan-Feb, as Sri Lanka has produced 48.5 million kg in Jan-Feb (versus 45.3 million kg last year) and India has produced 34.9 million kg in Jan-Feb (versus 33 million kg last year), while Malawi and Indonesia put together have produced 20.2 million kg in Jan-Feb versus 23.8 million kg last year. Empirically in CY11 Kenyan tea price was down from $2.98 at the starting of the calendar year to $2.69 in the 13th week, but McLeod Russel average exports realization for FY12 closed at $2.93 versus $2.86 in FY11.


Nomura had a discussion with the CFO of McLeod Russel on the company’s outlook for Indian tea prices in FY14, especially in the context of recent production and price trends in Kenya. He highlighted the following points:


  • McLeod Russel expects Rs10-Rs15 increase on their own crop for FY14 as domestic demand remains robust, and in his view it would be premature to extrapolate production and price trends in Kenya.


  • April production in India has been good, and indications are that they may recover around 2.7 million kg of its own crop that the company lost last year in Q1.


  • The tea major plans to increase bought leaves production from around 18.5 million kg in FY13 to 25 million kg in FY14 (it is currently factoring in only a 2 million kg increase in bought leave tea production in FY14). Assuming an EBITDA/kg of rs35 (irrespective of prices), this alone could lead to incremental EBITDA of around rs210 million.


  • Normalized production in FY14 would mean a recovery of 6 million kg of lost production in FY13. This would mean that even if one assumes flat realization (own crop realization was around Rs176 in FY13), the company could generate incremental EBITDA of Rs950 million.


According to Nomura, McLeod Russel currently trades at 5.3x FY14F EBITDA (3.9x adjusted for treasury shares) and 7.2x FY14F EPS (5.7x adjusted for treasury shares). If one assumes that realizations remain flat, on normalized production the brokerage expects FY14 consolidated EBITDA close to around Rs5,549 million and EPS of Rs37.6.


The brokerage further adds, so in a flat realization scenario for FY14, the stock trades at around 5.8x FY14F EBITDA (4.3x adjusted for treasury shares) and 7.9x FY14F EPS (5.9x adjusted for treasury shares). “This is still a very attractive valuation, in our view, especially in the context of a strong free cash flow yield of around 9.8%,” said Nomura.


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