While we expected a good Q1FY12 for Titan?s jewellery business, volume growth of 35% in gold jewellery surprised us. However, Titan has also witnessed significant decline in demand in June for jewellery and watches as well as lower footfalls and reduced demand for studded jewellery. It is also likely witnessing lower conversions (footfalls to purchases) due to implementation of PAN card identification for gold purchases above R5 lakhs. The company had about R15 crore of diamond inventory gains in the first quarter.
Titan reported net sales of R2,020 crore (up 61%), Ebitda of R180 crore (up 66%) and PAT of R140crore (up 76%). Jewellery sales increased 72% yoy driven by volume growth of 35% and the balance being gold and diamond price increases.
During the quarter, gold price increased by 27% and diamond prices have been inflationary for the last six months to the extent of about 50%.
However, the price increases in diamonds have affected its demand wherein the share of diamonds in the jewellery segment has declined to less than 25% (from about 28% in FY2011) as consumers prefer gold jewellery over diamonds.
EBIT margin for jewellary expanded 169 bps to 8.9% driven by increasing scale of operations and some benefits of low priced diamond inventory. Adjusting for the inventory gains in diamonds (of about R15 crore); the underlying margin expansion is 80 bps.
Watches sales grew by 23% on the back of about 15% volume growth, the balance being improvement in realisations. EBIT margin for watches declined 178 bps to 14.6% due to higher fixed costs for the new ?Helios? formats.
Considering the uncertain demand outlook potential headwinds, we retain REDUCE rating.
Our new EPS estimates for FY2012E and FY2013E are R7.4 and R8.8, respectively (higher by about 13%). We retain target price of R240 as we value the stock at 28XFY2013E (valued at 31XFY2013E, previously). Key upside risk is continuing inflation in gold prices, which is a strong tailwind for earnings and jewellery margins.
Kotak