Value migration from informal sector – a structural growth driver
* Titan’s (TTAN) 2QFY18 reported revenues were up 29.6% YoY (est. of +15%) to IN34.7b. EBITDA grew 50.6% YoY to INR3.98b (est. of INR2.69b), while recurring PAT increased 64.6% YoY to INR2.78b (est. of INR 1.89b).
* Gross margin contracted 530bp YoY to 26.1%. Other expenses were down by 540bp and ad spends by 60bp, while staff costs increased 100bp YoY. EBITDA margin thus expanded 160bp YoY to 11.5% in 2QFY18. Reclassification of cost led to lower other expenses in 2QFY18.
* Segment-wise: a) Jewelry sales were up 37% YoY to INR27.5b, while segment margin expanded 230bp YoY to 12.7%. b) Watches sales grew 9% YoY to INR5.7b, with EBIT margin improvement of 350bp to 14.5% in 2QFY18.
* 1HFY18 performance: Sales, EBITDA and adj. PAT grew 36%, 38.4% and 36% YoY, respectively. Jewelry sales grew 49.4% YoY, with EBIT margin expansion of 120bp YoY.
* Concall highlights: 1) Festive season (21st September to 31st October) sales were up by 16-17% YoY. If not for PMLA, growth would have been even better, despite a high base of 50% sales growth in the festive season last year. 2) Government actions taken to formalize the economy have started to benefit Jewelry significantly and marginally for Watches.
* Valuation view: Strong 37% YoY sales growth in Jewelry (despite a few one-offs constraining business growth) points to the sheer magnitude of value migration happening in the Indian jewelry market. In FY17, TTAN accounted for only 5% of the INR2t jewelry market. Regulations governing the segment, including identity proofs for all transactions over INR 200,000, GST implementation and crackdown on black money, have tilted trade decisively in favor of organized players, among which TTAN is a dominant player in terms of scale and trust. Recent aggression to capitalize on the massive opportunity is also heartening. Earnings CAGR is likely to be a massive 36% over FY17-20. The sheer scale of top-line opportunity demands premium valuations. Upgrade to Buy, with a target price of INR850 (45x Dec 2019E EPS).
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