Momentum in jewellery sales expected to be maintained; valuations are within reasonable bounds; ‘Buy’ retained
Despite market expectations that the company would be one of the most disrupted in the crisis, Titan has managed to surprise in every quarter with its pace of recovery, especially for its Jewellery business (nearly 80% of revenue and 90% of profits), which is a key value driver. The stock price has also mirrored this outperformance, nearly doubling from the low in March 2020. While the stock has corrected from its recent peak, we retain Buy rating on Titan.
Jewellery growth should continue to surprise: Given the stock’s recent run-up, the key question now is whether Titan can still outperform the near-term expectations. For October, Titan registered sales growth of c8% y-o-y while the full quarter ended with growth of 16%, implying that growth in November and December was c20% y-o-y. According to Titan, Jewellery sales rose by 28% y-o-y in January, and we expect the momentum to stay strong as the studded promotion has performed well and demand for gold jewellery is set to remain robust.
The feedback of retailers corroborates these trends. Titan has also extended its studded promotion to accelerate growth in March. The base for Q1FY22 onwards is also very benign, demand has been strong and its network rollout was aggressive last year despite disruption (Titan added 100K sq ft of jewellery area till Q3FY21). These are all ingredients for very strong growth in Q4FY21e and in FY22e, which could be a key catalyst for stock performance, in our view.
For us, Titan’s appeal remains its long-term opportunities to win market share: (i) Titan’s appeal is its pole position to capture value from the long-term growth potential in the jewellery sector (driven by its consumer trust, brand, compelling value proposition of pricing, exchange offers, design, wedding focus) by gaining market share consistently; (ii) it is also building long-term growth options, such as Taneira (ethnic wear), which has the potential to be a large value driver that does not look to be in the current price; and (iii) Titan is also gradually and firmly shaping its international growth strategy to augment its growth longer term.
Valuation within reasonable bounds: The current share price builds in long-term earnings growth expectations of c15%, on our estimates, which is an easily surmountable hurdle given the growth opportunities and Titan’s formidable position to capture the value of this prospective growth. We retain our TP of Rs 1,800 as we keep our estimates unchanged.