Weak festive sales hit watch sales, but jewellery shines
Titan’s Q3 results were below estimates due to the weak performance of the watch division. Sales were at R29 bn, up 9.4% year-on-year (estimate R29.7 bn), Ebitda grew 6.2% y-o-y to R2.52 bn, with 20 basis point margin contraction to 8.7% (est. 9.5%). PAT growth of 7.2% y-o-y to R1.9 bn (est. R2.1 bn) was impacted by delayed benefits of hedging gains. As per the management, 75% of the total gains will be accrued in Q4.
Healthy Jewellery performance by despite the absence of GHS: Jewellery revenue grew 11% y-o-y (in-line), with grammage growth of 25% (11% excluding coins as base did not have coins), driven by the Goldplus format (30% growth). The 11% revenue growth in Jewellery despite the absence of the Golden Harvest Scheme (typically contributed 30% of sales) is healthy. Jewellery Ebit posted 12.5% y-o-y growth, with 10bp y-o-y margin increase to 9.6% despite (i) mix deterioration due to the outperformance of Goldplus format and (ii) absence of hedging gains. Higher jewellery production from Pantnagar unit led to a lower tax rate.
LTL (like-for-like) sales declined 8% in Tanishq, while it was up 30% in GoldPlus. Titan added 15,000sqft of space in Jewellery in Q3 (added 71,000 in YTD–year-to-date—FY15).
Watch division disappoints: The Watch division posted a 2% revenue decline (4% volume decline) due to weak festive season sales and higher promotion activity in e-commerce. World of Titan and Fastrack posted 3% and 6% SSS (same store sales) decline, respectively. Segment Ebit margin eroded 70 bp to 9.7%, with 9% y-o-y decline in Ebit. The Eyewear division posted 22% revenue growth.
Valuation and view: We raise the estimates marginally to incorporate the lower tax rate. Healthy jewellery performance, despite the absence of GHS, was a key positive. Maintain Buy with a target price of R470 (30x FY17e EPS, three-year average P/E). Volatility in gold price is a key risk.
* Despite 80:20 import restrictions going, customs is not allowing shipments for domestic consumption on credit. Titan is awaiting clarity on this from RBI.
* However, it has been procuring gold on credit from other sources (SBI Gold Deposit, etc). Net procurement still remains predominantly on credit vs cash.
* Titan is net cash positive on balance sheet. Over the quarter debt has fallen sharply.
* Jewellery products assembled and sold out of the Pantnagarfactory were higher than budgeted. Hence tax rates have been recalibrated to 21-22% vs. 25-26%. Two more years of tax break (100% break available).
* The GHS was stopped in Q2. While it has been re-started in November in line with amended laws, benefits will come only after two-three quarters.
* The New GHS has six and ten months schemes. Imputed return is 12%/annum.
* Almost 75% benefits of gold hedging will come in Q4 on gross margin. Only 25% gains have been booked yet.
* Tanishq sales declined 4%, but despite the absence of GHA this contributed 30% of sales.
* Goldplus outperformed Tanishq after long time – 30% growth in sales. Expect growth of 20%+ in this division.
* Festive season sales during Dussera/Diwali were lower y-o-y. Additionally, e-commerce hyperactivity during the festive season also impacted.
* The entire Watch category suffered in Q3, but the management is seeing positive signs in Q4.
By Motilal Oswal