Morgan Stanley downgraded Titan Company to Equal-weight from Overweight on July 3 as the risk-to-reward ratio at current levels seems unfavourable.

Titan Company is still one of Morgan Stanley’s favourite long-term plays on urban discretionary consumption growth in India. However, following the strong trailing performance, the global investment is reluctant to push multiples beyond current levels.

It sees balanced risk-reward at the current stock price, the global investment bank said in a note. The 12-month forward P/E trades at 53x which is at peak level in the last decade and at a 25 percent premium to its 5-year average.

After the recent run-up seen in Titan, re-rating of the stock is complete. “The risk-to-reward prompts us to take a breather and await a better entry point,” added the note.

Titan Company has risen over 40 percent so far in 2019, outperforming the benchmark index by a wide margin.

The stock rose from Rs 931 on December 31 to Rs 1,328 on July 3, which roughly translates into an upside of 42 percent in the same period.

The big bull Rakesh Jhunjhunwala also reduced his cumulative holding in Titan Company from 7.08 percent in December 2018 quarter to 7.04 percent in the March quarter, according to shareholding data.

Morgan Stanley expects strong earnings from Titan in the near future. Their FY20 earnings estimate is ~4 percent above consensus. “Even as long-term holders may continue to do well with Titan stock over time, we see less room for positive surprises in coming quarters,” said the report.

Even though Titan remains a strong play in the urban discretionary space, Morgan Stanley prefers Jubilant Foodworks. The global investment bank maintains an overweight stance on the stock with a target price of Rs 1,525.

“On an industry-relative basis, we prefer companies with high operating leverage. This is important because this captures the full benefit of strong consumer offtake. At our price targets, FY21e P/E would be 46x for Titan and 38x for Jubilant,” said the note.

For Jubilant Foodworks, Morgan Stanley is of the view that the combination of latent demand growth amidst an improving demand environment, moderate cost inflation, stringent cost control, and favourable base could drive earnings growth ahead of our base case estimates.

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