H2FY20 guidance reduced; FY20-21e EPS down 10-11% due to core jewellery business outlook; TP cut to Rs. 1,150.
Titan’s Q2 print was weak and disappointing operationally even as management had already cautioned of weak revenue (sluggish jewellery sales) in its preview. Underlying Ebitda declined ~7% y-o-y dragged by weak leverage and sharp rise in staff costs despite gains from higher making charges due to surge in gold prices. Spike in inventory (up ~30% due to surge in gold prices) led to negative OCF for H1FY20.
Management sounded cautious on near-term growth in jewellery and toned down H2FY20 guidance to 11-13% (from 20% earlier) even as it remains optimistic of sustained share gains. We trim our EPS estimates for FY20-21 by 10-11% as we cut our revenue/margin estimates for core jewellery business. Retain Reduce rating with revised TP of Rs. 1,150 (from Rs. 1,310) based on 45x Sept-21 EPS.
Titan posted an overall weak quarter with 1% y-o-y revenue growth, 3% Ebitda growth (down 7% y-o-y in underlying terms, 4% below estimates) and 6% y-o-y decline in recurring PAT (~16% below estimate). While revenue weakness was in line with our estimate (as shared in Titan’s Q2 preview) dragged by sluggish performance of jewellery and watch divisions, the incremental disappointment was on Ebitda margin which fell 80 bps y-o-y on underlying basis (50 bps below our estimate) to 10.4% and decline in recurring PAT (despite 250 bps dip in ETR) dragged by lower-than-expected other income (down 45% q-o-q) and ~2x jump in interest costs (underlying basis).
Among segments – (i) jewellery posted 2% y-o-y decline in reported revenue (2% growth adjusted for hedge loss, ~7% retail sales growth) and Ebit decline of ~2% y-o-y with Ebit margin of 10.9% (underlying Ebit declined ~5% y-o-y adjusted for Ind-AS 116 with margin of ~10.5%; adjusted for hedge loss in revenue underlying margin lower at ~10.2%); (ii) watches posted moderation in revenue growth to 6% y-o-y due to weak demand and segmental Ebit declined 7% y-o-y; and (iii) eyewear
saw strong 29% y-o-y growth in revenue with modest improvement in profitability to Rs. 20 mn and positive Ebit vs. Rs. 10 mn loss in the base quarter.
Jewellery business posted ~2% y-o-y decline in revenue dragged by sluggish demand due to surge in gold prices. While retail sales grew 7% during the quarter, reported sales growth was impacted due to gold hedge maturing during the quarter (adjusted underlying sales growth at ~2%). Reported segmental Ebit declined 2% y-o-y to Rs. 3.84 bn dragged by 10 bps y-o-y dip in margin to 10.9%.
Watches posted moderation in revenue growth to 6% y-o-y at Rs. 7.2 bn due to weak demand and segmental Ebit declined 7% y-o-y to Rs. 1.1 bn dragged by 220 bps contraction in margin to 15.8%.