Sailing through Rough Waters; Maintain HOLD
Titan (TTAN) reported 2QFY20 results with marginal miss on operating performance. Its revenue grew by a muted 0.6% YoY (+7.4% YoY in 1HFY20) on the back of 1.5% YoY decline in jewellery segment and 6.4% YoY growth in watches segment. Revenue recognition of jewellery segment declined due to adverse impact of gold hedges (revenue impact of Rs1.2bn or ~280bps). The Management has cut revenue growth guidance to 11-13% in 2HFY20 considering current weak consumer sentiments. Notably, TTAN managed to grow by 10% YoY in 33days of festive season. While we are enthused by TTAN’s market share gain during though times, we do not rule out its ability to grow >20% as consumer sentiments improve, going ahead. Consistent RoE of ~25% in the coming years and strong cash flow generation ability is likely to aid Titan to trade at premium valuation of 55x of FY21E, based on CMP. Incorporating our revised estimates, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs1,220, valuing it at 52x based on FY21E EPS.
Retail Jewellery Sales Pick-up; Financials Impacted due to Gold Hedges
Total sales remained flat at Rs44.35bn (+0.6% YoY) led by subdued jewellery sales (Rs35.3bn; -1.5% YoY), partially impacted by gold hedges (revenue loss of Rs1.2bn). Though retail sales declined in Jul’19 due to sudden surge in gold prices, retail sales growth picked up to 15%/11% YoY during Aug’19/Sept’19. Revenue from the watches segment grew by 6.4% YoY to Rs7.18bn (volume down 1% YoY) owing to weak consumer sentiment. Eyewear division grew by 28.5% YoY to Rs1.5bn led by attractive promotional offers
Higher Gross Margin offset by Lower Operating Leverage
Titan’s gross margin grew by 142bps YoY to 29.2% mainly led by inventory gains (vs. our estimate of 27.2%). While reported EBITDA rose by 3.4% YoY to Rs5.13bn, reported EBITDA margin expanded by 31bps YoY to 11.6% mainly due to IND-AS116 adjustments partially offset by lower operating leverage. Whilst EBIT margin of the jewellery segment remained flat on YoY basis at 10.9%, adjusted for revenue loss on gold hedge, it would have been lower by 40bps. EBIT margin of the watches segment declined by 225bps YoY to 15.8%. Adjusted PBT (pre-IND AS116) declined by 3% YoY to Rs4.33 (vs. our estimate of Rs4.6bn) mainly due to higher interest cost and lower other income. Adjusted net profit declined by 3.2% YoY to Rs3.2bn.
Outlook & Valuation – Maintain HOLD
TTAN remains the biggest beneficiary of the formalisation theme, while increasing female working class, strong brand recall, trust and transparency are the key sector tailwinds favoring TTAN to outperform the industry growth. Consumer sentiment which has been subdued on the back of sharp surge in gold prices (>24% YoY in 2QFY20, highest in last 28 quarters) is likely to improve, as the gold prices stabilise at current levels. Indian consumer jewellery market provides huge headroom for TTAN to grow in longer term given <8-9% market share. We arrive at fair value of Rs1,220 based on PE multiple of 52x based on FY21E EPS and hence maintain HOLD recommendation leaving 5% downside from the CMP with positive bias.
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