Mixed results: Sales growth at 4% year-on-year (consensus estimate of 15%) was disappointing with muted growth across segments (3% in Jewellery, 1% in Watches and 3% in Eyewear). However, due to various nonsustainable reasons (hedging gain of R240m in Jewellery and oneoff lower costs led to 450 bps increase in watch margin), Ebitda & Adj PAT grew 32% and 48% y-o-y vs. consensus estimate of 24% and 22%.
Way forward: We estimate sales and EPS compound annual growth rate of 13% and 19% over FY16-18. We see structural weakness in watches (estimate 9% sales CAGR over FY16-18) but hope strong execution in jewellery (estimate sales and earnings before interest and taxes CAGR of 13% and 19% over FY16-18) will be well supported by a recovery in the overall category. Maintain HOLD with revised TP of R370 (based on 30x fwd. P/E) vs. R340 earlier.
Jewellery industry in turmoil: Management mentioned that the industry is in turmoil (official imports down 56% in Q1FY17 with industry sales declining 30-35%) given flat gold prices, weak consumer sentiment, regulatory issues, tightening of unaccounted money etc. Q1 sales (+3% year-on-year) was muted despite no GHS^ in base (although an earlier than usual activation in diamond jewellery partially helped last year’s base). Management is still hopeful of achieving sales growth of 15% (unlikely in our view), with 9-10% earnings before interest and taxes margin in financial year FY17. Adjusted earnings before interest and taxes margin (ex hedging cost gains of R240m) improved 30 bps y-o-y to 9.1% despite studded share being much lower at 24% vs. 29% in Q1FY16. We estimate sales growth of 12% with Ebit margin improving 70 bps y-o-y to 9.7%. GHS limit improving to 35% of net worth from 25% earlier is a positive but management mentioned it is not able to use existing limits as it is difficult to sell the new GHS scheme. The company started selling its Mia brand on Myntra and saw good traction in the Niloufer collection. It is looking to add 25 Tanishq stores in FY17, mostly in new cities.
Watch performance continues to disappoint: Domestic watch sales grew 11% y-o-y with LTL volume growth of 6%. However, management remained cautious on the future and guided for single-digit sales growth in FY17. Overall, watch sales grew 1.4%, negatively impacted by weaker exports, OEM component sales, and loss of revenue due to customer service business reorganisation. We believe that the high growth in the domestic market was helped by inventory filling from the re-launch of variants in the R1,500-2,000 range as well as early activation in Q1 (which historically takes place in Q2). We therefore estimate sales growth of 7% in FY17. Adjusted Ebit margin (ex-VRS costs of R610m) came in at 14.3%, up 449 bps y-o-y. As per management, the margin increase was because of one-off cost benefits. We estimate EBIT margin at 10% for FY17.
Eyewear business struggles: The division recorded poor sales growth, with SSSg (same store sales growth) sales declining 2% despite activation as the performance was negatively impacted from lower growth in sunglasses.