Underweight on Titan as Q2 results poor

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SummaryTitan reported F2Q14 revenue, Ebitda and net income growth of 2%, 5% and 4%.

Titan reported F2Q14 revenue, Ebitda and net income growth of 2%, 5% and 4%, respectively, which compares poorly with our expectations of 11%, 8% and 6%. We expect valuation multiples to compress, given a combination of a relatively muted jewellery volume growth in the lead up to the festive season, a sharp decline in watch volume growth and poor visibility for gold procurement with recent policy changes.

Titan’s jewellery business reported revenue growth of 4% y-o-y (MSe 10%) on weak consumer demand — customer growth was -3% in F2Q14. According to management, ex-gold coin revenue growth was 13.6% y-o-y in F2Q14, while grammage growth was 10%. Tanishq and Gold Plus reported SSG of -7% and -21%, respectively.

Reported operating margin expanded 90 bps y-o-y, but adjusting for customs duty increase on gold imports (10% from 8% earlier) and reversal of inventory losses accounted for in Q1 (R34 crore), Ebitda margin contracted ~200 bps y-o-y, we believe. Product mix improved with studded share of 37% vs. 32% in F2Q13.

Titan added 21k sq feet under the Tanishq format in F2Q and management maintained guidance for 100k sq feet of addition in F2014. Capital employed increased 10% q-o-q and 37% y-o-y. After the regulatory changes, Titan will become a net debt company. According to the management, current debt is R950 crore, which will trend up to R1,800 crore by F4Q14.

Consumer sentiment continues to be weak and discretionary spending remains subdued.

Morgan Stanley

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