Titan to increase stake in CaratLane; here is what top brokerages make of the transaction

Titan Company share price: Shares of Titan Company rose nearly a per cent to Rs 3,081.20 apiece on the BSE on Monday (August 21) after the company last week announced the acquisition of an additional 27.18 per cent stake in its subsidiary CaratLane for Rs 4,621 crore, thereby taking its total holding to 98.28 per cent.

The Tata group-controlled firm entered into a share purchase agreement on Saturday to acquire 91.90 lakh equity shares held by the founder of CaratLane Trading Pvt Ltd and his family members, according to a regulatory filing. READ MORE

What analysts make of the transaction

"The current transaction pegs Caratlane’s valuation at around Rs 170 billion (US$ 2 billion), which is lower than our target valuation of around Rs 245 billion (US$ 3 billion) for the business. The valuation differential, at least part thereof, is likely attributable to the premium attributable to Tata co-branding, in our view, and Titan has possibly excluded that aspect from the acquisition price that it would be paying for the balance stake," wrote Richard Liu, Mehul Desai, and Sumanyu Saraf, research analysts at JM Financial, in their latest report issued on August 19. 

From an FY25E financials perspective, the analysts estimate the deal to have around a 4 per cent hit on Titan’s consolidated EPS (as shown in the table below), though there could be some savings from the unabsorbed losses carried in Caratlane’s books.

"We do not expect the stock to react adversely to the deal, given the medium-term value accretion from the same," JM Financial further said in its report. The brokerage has maintained 'BUY' on the stock with a target price of Rs 3,085. 

The term 'accretive' refers to incremental or gradual growth. Hence, value accretive means that the deal will increase the value of the purchasing company in the medium term. Accretive is derived from the word accretion, which means a process of growth or enlargement by a gradual buildup.

Prabhudas Lilladher, in its results review note, said that it has cut its standalone FY24/FY25 EPS (earnings per share) estimates by 1.9 per cent / 3.5 per cent as Titan will have to partly fund a Rs 46 billion payout for a 27 per cent stake purchase in Caratlane.

"We believe this acquisition is in the right direction for acquiring full control of the largest omnichannel play in the light jewellery segment in India, with a presence across 233 stores and an area of 29 million. Caratlane reported a full turnaround in FY23 with a PBT of Rs 482 million and has shown sales growth of 32.8 per cent with a 5.5 per cent EBIT margin. We believe Titan will be able to fully leverage growth prospects in light jewellery with omnichannel play in Caratlane," it added.

The brokerage notes that Titan trades at 60.1x FY25E EPS with a 16.4 per cent EPS CAGR over FY23–25. "We have assigned a sum-of-the-parts (SOTP) target of Rs 128/share for Caratlane (Rs 76 earlier) and assigned a DCF-based target price of Rs 3,300 (Rs 3,172 for standalone business and Rs 128 for Caratlane) (Rs 3,240 earlier—Rs 3,164 for standalone and Rs 76 for Caratlane). Retain ‘Accumulate’.

Among foreign brokerages, CLSA has maintained an 'outperform' rating on the stock with a target price of Rs 3,270. The brokerage notes that the current deal values CaratLane at Rs 170 billion (approximately 6 per cent of Titan’s market cap) and implies a valuation of 7.8x FY23 revenue.

JP Morgan believes this transaction is accretive to the medium-term value of Titan. It has maintained an 'overweight' rating on the stock with a target of Rs 3,260.

Macquarie, too, has maintained an 'Outperform' rating on the stock with a target price of Rs 3,400. It has cut the FY24/25/26 standalone earnings per share (EPS) by 2 per cent /4 per cent /3 per cent to factor in higher interest expenses.

Furthermore, HSBC has also maintained 'BUY' on the stock with a target price of Rs 3,580. In its note, it said CaratLane’s valuation increased 30 times under Titan’s ownership. CaratLane is an omnichannel jewellery retailer that turned profitable in FY21.