Tanishq is targeting addition of 70 stores in FY20. Losses in Carat Lane are continuously coming down, and it is moving towards profitability in the near future.
Titan Company’s (Titan’s) Q1FY20 revenue growth of 14.4% y-o-y came in line with our estimate, while adjusted Ebitda growth of 3.8% y-o-y belied it. Key highlights: (i) while jewellery business grew 13.3% y-o-y, key however is cut in FY20 revenue guidance from ~22% to 20%+ only for H2FY20. Q2FY20 too has started on a soft note; (ii) Watch segment revenue grew 20.4% y-o-y, partly aided by the order from TCS (ex-this order, our calculation suggests watch business grew ~11% y-o-y) and thus should moderate in the ensuing quarters, in our view; (iii) the biennial franchisee and dealer meets were held during the quarter at an outlay of ~Rs 400 mn which too weighed on margins. We retain our conviction that Titan is a strong play on discretionary spends and demand shift from unorganised to organised segment. Maintain Buy with TP of Rs 1,260.
All round performance
Key highlights: (i) Titan’s jewellery division delivered moderate growth, impacted by the general slowdown and rising gold price (up 3.9% YoY). Ebit margin remained flattish at 10.9%. Pace of store addition at ~16% y-o-y was sustained (led by 62% expansion in CaratLane); (ii) the watch division recorded strong revenue growth of 20.4% y-o-y. Ebit margin declined 89bps y-o-y primarily due to the biennial dealer meet expense; (iii) while eyewear division clocked strong volume growth, revenue grew only 13.1% y-o-y due to higher consumer discounts and rising competition from Lenskart.
Q1FY20 conference call: Key takeaways
Company is sticking to its 20%+ growth guidance for H2FY20. Actual Tanishq growth is 16% y-o-y in retail channels. Volatility in gold prices is keeping customers away. Tanishq has been growing ahead of the market; hence, it is gaining market share. Tanishq is targeting addition of 70 stores in FY20. Losses in Carat Lane are continuously coming down, and it is moving towards profitability in the near future.
Outlook and valuation: Shining bright; maintain ‘BUY’
Demand is improving, particularly in urban areas. Titan stands to benefit from retail expansion. It will focus on expansion in smaller towns and enhancing share in the high-margin wedding jewellery segment (management believes ~40 plus stores can be added annually to tap demand in smaller towns). We expect the strong run rate clocked in FY19 to sustain, amply fueled by robust macro tailwinds. Growth, going forward, will also be amplified by gold exchange scheme, store expansion as well as new launches, new enrolments and rising preference for the Tanishq brand.
We envisage Titan to extend its growth run led by market share gains, rising share of studded, launches and retail expansion. Margin expansion levers such as higher share of studded (jewellery), in-house frame manufacturing (eyewear), cost optimisation and operating leverage are in place. Rolling forward, we retain 55x PE multiple and TP of Rs 1,260. We maintain ‘BUY/SO’. At CMP, the stock is trading at 39.5x FY21E EPS.