05-04-2021 09:20 AM | Source: Emkay Global Financial Services Ltd
Buy Titan Company Ltd : Robust growth but miss on margins - Emkay Global
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Buy Titan Company Ltd For Target Rs. 1,725

Robust growth but miss on margins

* TTAN reported robust sales growth of 61% in Q4FY21 but operating performance was 20%/6% below our/Street estimates on lower EBITDA margins (down 250bps vs. flat expectations) due to a steep fall in gross margin. TTAN attributed the margin miss to weak revenue mix, higher coins & B2B sales in jewellery and impact of custom duty reduction.

* Despite lockdowns, management indicated growth in Apr’21 over Apr’19. We expect nearterm impact due to Covid-19 restrictions, but a strong recovery in H2FY21 indicates pentup demand and market share gains. Besides, its initiatives to accelerate growth in the wedding segment may offset most of the loss in sales ahead.

* Jewelry margin performance should improve as studded sales recover on full unlocking. Turnaround of eyewear/caratlane and exit of loss-making JVs (Mont-Blanc/Favre Leuba) should also provide potential margin upsides.

* Strong earnings run rate in H2FY21 offers visibility of the likely earnings recovery in FY22 on full unlocking. TTAN remains our preferred pick in discretionary, offering a faster growth outlook. Maintain Buy with a revised TP of Rs1,725, rolling forward o Jun’23E EPS.

 

Pent-up demand post unlock, share gains to help recover lost sales in Q1:

Titan delivered ~61% revenue growth in Q4, driven by strong ~71% growth in jewelry, 18% growth in eyewear and flat sales in watches. Jewelry volumes recovered strongly on pent-up wedding sales and market share gains from smaller unorganized players. Store expansion in jewelry was healthy with 2/26 additions in Q4/FY21 and entry into 14 new cities in FY21. Within watches, TTAN saw 8-10% retail growth in WoT/Helios, while overall growth was muted due to a 3-4% decline in Fastrack/LFS channels. TTAN indicated strong wedding sales till 20th Apr’21 to deliver growth in Apr’21 vs. April 19; however, store closures now increased to 50% on virus resurgence and increased restrictions.

 

Recovery in studded, turnaround of eyewear/Caratlane to drive margin gains ahead:

Gross margins declined by 870bps YoY due to lower studded mix (30% vs. 37% YoY), weaker revenue mix (more of lower margin jewelry sales), negative impact of import duty cut in Feb’21 and higher competitive activity in jewelry. However, tighter cost controls helped restrict the EBITDA margin decline to 250bps. Caratlane (Rs7bn size now) saw 15% growth and turned profitable with 3% EBIT margins in FY21 from -2% in FY20. Recovery in studded share on full unlocking should improve margin ahead. Strong gains in subsidiary profitability and exit of loss-making JVs (Mont-Blanc/Favre Leuba) also provide potential margin upsides.

 

Near-term weakness on lockdowns offers entry opportunity; maintain Buy:

Strong earnings run rate in H2FY21 offers visibility of the likely earnings recovery in FY22 on full unlocking. We maintain FY22/23 estimates assuming a mild lockdown impact, which will likely be offset by pent-up demand. TTAN remains our preferred pick in the discretionary space, offering a faster growth outlook. Maintain Buy with a revised TP of Rs1,725, rolling forward to Jun-23 EPS.

 


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