Focus on recovery amid tough demand scenario
The Covid-19 pandemic had an unprecedented impact on the retail industry, forcing temporary closure of physical stores from mid-March onwards in India. The same impacted Titan’s performance in Q4FY20. However, controlled opex and higher gross margins led to significant beat in profitability. As guided by the management in its pre-quarterly update, the jewellery division reported revenue de-growth of 5% YoY to | 3899.3 crore (SSSG: -9.0%). The company recorded impressive growth of 16.5% in January-February despite high gold prices (up 26% YoY). Watches division reported steady revenue growth of 5% YoY to | 558.3 crore (15.7% growth in January-February). Owing to activation of diamond studded jewellery, gross margins improved sharply by 250 bps YoY to 30.4%. Furthermore, significant compression of operating cost aided profitability. Employee expenses remained constant YoY at | 285.0 crore (down 13% sequentially), while advertisement expenses fell 30% YoY to | 97.1 crore. EBITDA margins (adjusting for Ind-AS 116) for the quarter improved 260 bps YoY to 11.7%. On account of a steady operational performance, PBT grew 13% YoY to | 509.3 crore. The company has now opened ~75% of total 1800 stores and expects to operate at ~90% by June end. The initial response has been inspiring with average daily sales of certain stores reaching as high as 80% of pre-Covid levels. The management remains cautious in the near term outlook and targets normalcy by Q4FY21.
Festive/wedding demand to aid recovery in H2FY21
FY20 was a challenging year for Tanishq owing to a significant surge in gold prices (up ~31% YoY) and slowdown in discretionary spending. Despite the dual headwinds, Tanishq continued to outperform the industry with sustained market share gains (revenue growth: 6% YoY in FY20). With washout of sales in the second half of March, grammage fell 20% YoY in Q4FY20. Titan added highest number of Tanishq stores in a year (40) taking total store count to 327 as on FY20. Going forward, it expects a gradual recovery in jewellery space from H2FY21 onwards led by festive buying in Q3FY21 and benefits of deferred demand for wedding jewellery. Cost optimisation exercise will continue in FY21E (15% fixed cost reduction) to limit the impact of negative operating leverage (total fixed cost component is <10% for jewellery segment).
Valuation & Outlook
Disruption in sales led to a material increase in capital employed (mainly owing to higher inventory) for FY20. However, Titan has a comfortable liquidity position due to adequate banking limits and ability to issue commercial paper at attractive rates (raised ~| 1000 crore at 4% interest rate). With a gradual rise in cash inflows, the management expects to be net cash positive by September 2020. Titan remains a quality franchise with strong brand patronage. The stock saw a sharp run up in the last month (up 22%) and is currently trading at rich valuations (43.7x FY22E EPS). We continue to remain structurally positive on the company and its long term growth prospects. However, post the recent surge in stock price, we downgrade it a notch from BUY to HOLD with a target price of | 1095 (48.0x FY22E EPS) (earlier TP: | 1150)
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