But revenue trends are encouraging: Overall revenue growth at 9% was below estimates as jewellery revenues grew 6%. But a closer look reveals much more encouraging picture: (i) Retail sales growth in jewellery came in at 17%, more than reported 6% as dealers delayed purchases, a trend that is likely to reverse in Q3. Tanishq revenue growth was at 19%. (ii). Gammage (volume) growth was11% as expected, but this was due to 30% decline in low margin coins segment, and plain gold jewellery volumes fell just 1- 2%, which in our view was much better than expected.
(iii) Early trends of festive demand have been quite encouraging and the management appears upbeat about a pick-up in the jewellery demand in Q3. (iv) Titan added about 34K retailer areas in Q2 and bulk of the expansion was in self-owned stores. Aggressive retail expansion is progressing well in Q3 and the target of adding 200K jewellery retail areas this year remains on track. Despite the overall jewellery markets stubborn demand weakness, this quality of results both at revenue mix and margins highlights Titans competitive advantage and pull. This increases our conviction in Titan as the long-term structural winner in the growing branded jewellery market.
Segment performance Jewellery
Segment sales increased by 6% to R17.2 bn as high gold prices continue to support top line growth momentum despite volume decline. Retail sales growth in jewellery came in at 17%, more than reported 6% as dealers delayed purchases, a trend that is likely to reverse in Q3. Tanishq revenue growth was impressive at 19%.
Studded jewellery share increased to 32% from 28% last year and helped in 274bp margin expansion y-o-y. We expect Titan will continue to focus on product mix changes in favour of studded jewellery.
Grammage(volume) growth was -11% as expected, and plain gold jewellery volumes fell by 1-2%, which was much better than expected.
Titan added about 34K retailer areas in Q2 and bulk of the expansion was in self owned stores (5000-8000sq ft).
Early trends of festive demand have been encouraging and Titan is likely to benefit from direct import of gold as well. According to HSBCs precious metal analyst, gold prices are unlikely to move upward significantly going forward and, therefore, we expect volume driven growth from H2FY13e onwards.
Watch sales grew by 13% to R4.7 bn helped by 4% volume growth and were inline with our estimates.
Titan continues to focus on expansion led growth, as it further added 30 watch stores in Q2FY13 having combined area of 26K sq ft. Titans watch business overall retail presence increased by 24% y-o-y in Q2.
Titans watch division imports a significant portion of components and, therefore, INR depreciation against the other currencies continues to weigh down on margins. We expect input price pressure coupled with y-o-y weakness in local currency to continue in FY13e. We expect recent price hike and better cost management should help Titan to have relative better margin profile, going forward.
Titan Eye+ registered 32% y-o-y sales growth, added by the retail area expansion. Titan Eye+ further added three stores in Q2.
Eyewear business still remains unprofitable but holds good earning potential and Titan expects to become profitable in H2FY14e.
Valuation and risks: We expect a revival of jewellery demand in Q3 which will be the key catalyst for stock performance. We reiterate our OW (overweight) rating, remove the volatility indicator from it, and increase our target price to R310 from R290 as we revise our estimates and roll our model forward. We expect FY12-15e EPS CAGR (earnings per share, compound annual growth rate) of 25% and are 6 % above consensus on FY14e and FY15e operating profits. Key downside risks include a sharp correction in gold price or severe macro slowdown and destructive price competition in the jewellery market.