Titan Company rated ‘hold’; Revenue ahead of estimates, margins slipped

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New Delhi | November 19, 2018 3:01 AM

While execution is strong, volatile jewellery topline and regulatory risks leave little upside; ‘Hold’ maintained.

gold, jewelleryJewellery sales growth of 28.5% (retail sales growth higher at 38% y-o-y) was driven by 24% y-o-y grammage growth.

TITAN reported strong sales growth of 26.4% y-o-y (10% ahead of our estimates) driven by broad-based growth (28.5% in Jewellery, 17.3% in watches). Ebitda margins were down 210 bps y-o-y to 10.6% impacted by high base and few one-off costs. Management sounded confident of Q3 given strong festive demand and wedding segment pick-up. While recent correction has improved risk-reward, valuation still keeps us on the sidelines. Maintain Hold, price target Rs 920.

Jewellery sales strong but margins impacted by lower studded and one-time costs

Jewellery sales growth of 28.5% (retail sales growth higher at 38% y-o-y) was driven by 24% y-o-y grammage growth. Jewellery segment Ebit margins at 10.9% (down 230bps y-o-y) came below expectations partly due to `180 mn inventory MTM loss (to be reversed in Q3) and `150 mn one-time payment to a franchisee and lower share of studded jewellery (35% vs 37% in PY).
Strong all-round show in watches but expect H2 to trend lower

Watch sales grew by 17.3% y-o-y driven by 21% volume growth. While world of Titan retail network grew sales by 8% y-o-y, inventory stocking ahead of festive season by distributors coupled with strong growth in modern retail and e-commerce helped topline. Ebit margins also surprised, up 210 bps y-o-y to 18% led by operating leverage. While underlying demand trends are healthy, we expect growth rates and margins to trend lower in 2H to low teens.

Eyewear remains in investment mode

Eyewear segment posted a healthy 19.3% y-o-y sales growth though Ebit remains low (Q2 Ebit loss of `10 mn) due to high A&P spends to attract new customers and drive volumes through expanding range at lower price points which is in-line with strategy for FY19. Despite lower average pricing, gross margins improved on y-o-y basis.

Overall Ebitda margins down 210 bps

Gross margins down 80bps y-o-y, employee cost down 50 bps y-o-y, A&P up 30bps y-o-y and other expenses up 150bps y-o-y due to `290 mn provision for IL&FS exposure resulted in 5% y-o-y Ebitda growth (6% below est). Adjusting for IL&FS impact, Ebitda growth of 11% was largely in-line with our estimates. Adj PAT at `3.14 bn, up 2.7% y-o-y due to 150-bps higher tax rate.
Our view and PTTTAN continues to execute strongly and is gaining significant share in jewellery business. While overall topline traction is healthy, it remains volatile depending on consumer sentiment and the overall jewellery market is not growing which is a concern. Given regulatory risks and volatility, we believe 43x FY20e PE fairly captures superior execution and strong brand franchise. We maintain our estimates, PT and Hold rating on the stock.


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