A strong beat in 2Q strengthens our conviction that the regulatory tailwinds and virtuous cycle of market-share gains are firmly in place. 2Q Jewellery revenue growth of 36% (49% grammage growth) indicates that the macro-tailwinds and micro-initiatives (new collections, wedding jewellery focus, value deals, reducing gold price premium) are finding increasing consumer acceptance. We raise FY17-19E earnings by 17%; our new target price is Rs 900.
2QFY18: strong beat
Sales/EBITDA/APAT grew 30/55/69 (%) vs. DBe 21/16/24 (%). Segments: jewellery sales/grammage/EBIT grew 36/49/69 (%). Watches sales/EBIT grew 9/42 (%). Eyewear sales grew 3.5%. Jewellery EBIT margin expanded 258 bps to 13.6%; Watches EBIT margin expanded 376bps to 16%. Tanishq SSG was 18%. Studded jewellery ratio was 36%. Jewellery GPM declined due to the higher proportion of wedding jewellery. Conversion of ‘Gold Plus’ stores into ‘Tanishq’, likely higher sales to franchisees have also aided the strong Jewellery revenue growth. It clarified that the decline in gross margin and reduction in ‘Other expenses’ are due to expenses’ reclassification.
Up elevators and down elevators
Upside risks to estimates: 1) consensus is likely modeling revenue growth to be entirely driven by Jewellery volumes. Any inflation in gold prices could drive consensus earnings upgrades. A 1% inflation in gold would result in 2% higher Jewellery segment EBIT; 2) effective implementation of regulatory changes (GST, mandatory hallmarking) could drive further share gains. Downside risks: 1) PAN card limit reduction from Rs 0.2 million, 2) reduction in customs duty from 10% to c.2% may result in one-time inventory loss, and may potentially impact investor sentiment (minimal NAV impact on Titan).
Reiterate Buy; valuation and risks
We increase our FY17-19 EPS estimates by 17% and our target price (TP) to Rs 900 (vs. Rs 625) factoring in the 2Q beat. The increase in our TP is higher than our earnings upgrade as we ascribe a 10% premium over its last five-year average P/E of 40x (we value Titan stock at 44x Sep-19E) and roll-over. We forecast earnings to double over FY17-19. Titan and Jubilant (Buy, Rs 1,611; target price Rs 1,775) are our top picks in Consumer Discretionary.
Conference call takeaways
Good growth especially in jewellery and watches due to festive season; jewellery sales impacted in Sep due to PMLA (Prevention of Money Laundering Act). Growth during the festive season was 16-17% on a y-o-y basis. GST transition was a challenge and everything due to GST has not been factored; excise benefit (58% of CGST) is expected to be refunded. GST had no impact on jewellery margins. Despite PMLA, wedding and high-value segments have outperformed non-wedding and lower-range segments. Diamond sales may see a reversal after PMLA. Market share gain in jewellery and watches seen with gains in small towns and cities at a faster rate; new customer addition share remains good. It expects jewellery growth to be at 25% in FY18. 17 Tanishq stores (~40k sq ft) to be opened in 2HFY18 with a focus on small towns.