Q3 marks start of a strong growth phase; TP revised to Rs 1,800; ‘Buy’ maintained
Q3 marks the beginning of a strong growth phase: (i) Jewellery sales in Q3FY21 were up 16% y-o-y, led by recovery in Metros and increase in walk-ins; (ii) despite high contribution from low margin coins (c8% of sales) and a lower share of studded jewellery (26% of sales), the division still delivered a respectable Ebit margin (of 12.0%), defying the street’s scepticism on margins; (iii) watches sales (88% recovery rate) improved sequentially; (iv) eyewear (93% recovery rate) delivered strong Ebit margin improvement; (v) Carat Lane sales were up 33% y-o-y, near full recovery on a year-to-date basis; (vi) overall, standalone sales /Ebitda/clean PAT grew by 17.4%/ 16.6%/ 18.3% y-o-y, respectively; sales were in line, while Ebitda/PAT were ahead of Bloomberg consensus.
Demand outlook is robust: January jewellery sales growth momentum (28% y-o-y) is better than expectations. This is helped by a growth rebound during studded jewellery activation, and sequential improvement in wedding sales (16% y-o-y in January vs 10% in Q3). Mgmt appears confident of revenue growth momentum continuing. Moreover, the base for the next three quarters is quite benign. We expect 30% jewellery sales growth in FY22e.
Why own Titan: (i) We believe that COVID-19 has further consolidated Titan’s competitive position as a structural winner in the jewellery sector; (ii) while its share price performance (up 95% from March lows) has largely factored in the recovery phase, we now believe a strong growth phase has begun and will continue for the next several quarters; (iii) if one were to ignore this disrupted year, the like-for-like valuation re-rating has been only 8%, and our implied growth framework suggests Titan needs a long-term earnings compounding trajectory of c15% to sustain this multiple, which is not unrealistic.
Maintain Buy with new TP of Rs 1,800: Titan’s appeal is its position to capture value from the long-term growth in the jewellery sector by gaining market share consistently. Titan is also building long-term growth options such as Taneira (ethnic wear), which has the potential to be a large value driver. We maintain our Buy rating with a new TP of Rs 1,800 (from Rs 1,750) as we adjust our estimates and roll-forward our valuation.