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Remarkable recovery in Jewelry; festive demand trends encouraging

* TTAN reported a largely in line set of 3QFY21 earnings. The management commentary continues to remain strong on near and longer term growth prospects in the Jewelry business.

* Commentary on Jan’21 retail sales growth as well as management outlook on its components like wedding/studded sales growth is encouraging as is the recovery in Watches and Eyewear businesses

* We retain our Buy rating (upgraded in Aug'20) given the healthy growth outlook and attractive opportunity as highlighted in our CEO meet note.

Broadly in line performance

* Consolidated revenue grew 16.7% YoY in 3QFY21 to INR76.2b (in line). EBITDA increased 8.2% YoY to INR8.5b (v/s our estimate of INR8.1b). PBT rose 10% YoY to INR7.4b (v/s our expectation of INR7b) and recurring PAT grew 7.5% YoY to INR5.3b (in line).

* This has been the highest ever quarterly sales, EBITDA, and PAT.

* Consolidated gross margin fell 300bp to 22.6%.

* Higher other expenses as a percentage of sales (up 20bp YoY to 6.5%) was offset by lower staff costs (down 110bp to 3.5%) and lower advertising spends (down 120bp to 1.4%). EBITDA margin fell 90bp YoY to 11.1% (in line) in 3QFY21.

* Segmental performance: a) Jewelry sales grew 21.9% YoY to INR68.4b, including gold sales of INR3.4b. Segmental margin fell 180bp YoY to 11.2%. b) Sales of Watches declined 12.2% YoY to INR5.5b, with EBIT margin down 350bp YoY to 2.7% in 3QFY21.

* 9MFY21 performance: Sales/EBITDA/PAT declined 13.4%/51.7%/64.9%. EBITDA margin stood at 6.4% in 9MFY21 as against 11.5% in 9MFY20.

Highlights from the management commentary

* Return to positive growth has been ahead of earlier expectation (4QFY21). The management expects strong growth in FY22 as well.

* Retail sales in Jewelry rose 13%/27-28% YoY in 3QFY21/Jan’21 led by activation.

* Wedding demand increased 10%/16% in 3QFY21/Jan’21. The management expects double-digit growth in wedding demand for the next two quarters.

* After a tough 1HFY21 for high margin studded Jewelry sales, TTAN is seeing a good recovery in studded, with 9% growth in 3QFY21. This has improved further to 16% in Jan’21.

Valuation and view

* Changes to the model have led to ~8% higher EPS growth forecasts for FY21E and ~2.5% each for FY22E/FY23E.

* Store expansions continue unabated, indicating the company's and franchisees' confidence on its medium and long-term growth prospects. This would further increase the opportunity to gain from unorganized and other organized players as they are expected to struggle even further going forward

* TTAN's medium- to long-term earnings growth opportunity is best-of-breed, which is reflected in the ~24% EPS CAGR over the past three years. There is a strong growth runway given TTAN's market share of less than 10% and the continuing struggles of unorganized and other organized peers.

* While valuations of 67.9x/52.2x FY22E/FY23E EPS appear expensive, the long runway for profitable growth deserves premium multiples. Near term valuations appear expensive because of the impact of COVID-19 in FY21. Maintain Buy with a TP of INR1,800/share (60x FY23E EPS).

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