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Faster-than-expected recovery (growth)

3QFY21 - Jewellery sales revenue grew 16%, however, slightly lower than other discretionary companies likely due to higher postponed demand (our view). More importantly, jewellery EBIT margin recovery was strong (down only 90bps YoY to 12% despite an inferior product mix – lower studded, higher coins). Further, continued growth momentum in jewellery sales in Jan’21 (+28% YoY) inspires confidence of Titan benefitting from (1) increased share of jewellery in overall wedding expense, (2) consumer spending more on discretionary given savings in travel etc. and (3) accelerated industry formalisation (smaller competitors facing supply and financing challenges). We expect profitability to further improve and return to normal levels in FY22 as product mix normalises. Reiterate ADD.

* Strong growth in jewellery: Reported revenue (excluding Rs 3.4 bn gold bullion sale) / EBITDA / recurring PAT grew 12% / 17% / 18% driven by strong recovery in Jewellery (growth of 16% driven by higher ticket size, volumes down 14%). Studded jewellery and wedding jewellery grew by 9% and 10% respectively with studded ratio improving sequentially to 26% (29% in Q3FY20). Growth momentum in jewellery continued with 28% YoY overall growth in Jan’21 while studded (studded ratio at 39% in Jan’21 versus 43% in Jan’20) and wedding jewellery grew by 16% each. Store expansion remained muted – added 10 Tanishq stores in 3Q (14 in 1H, total store count of 351 stores in 214 cities, retail space of 1.34 mn sqft). Recovery in watches and eyewear were faster with improving consumer confidence driven by festive season and opening up of economy – watches (-12%), eyewear (-7%).

* Margins improved despite various headwinds: Reported EBITDA margin expanded 50bps YoY despite – (1) lower studded share in jewellery (at 26% versus 29% in Q3FY20), (2) higher gold coin sales (at 8% versus 5% in Q3FY20), (3) ineffective hedges (Rs510mn of higher other expenses which, if effective, would have been netted off from revenue), (4) negative operating leverage partially offset by cost controls in watches and better product mix and lower discounting in eyewear. Jewellery EBIT margin was reported at 12% (-90bps). Watches and Eyewear EBIT margin improved significantly to 10.4% (+200bps) and 17.7% (+2276bps).

* Valuation and risks: We increase our FY22 earnings estimates by ~3%; modelling revenue / EBITDA / PAT CAGR of 21 / 23 / 25 (%) over FY20-23E. Maintain ADD with a DCF-based revised target price of Rs1,700 (was Rs1,600). At our target price, the stock will trade at 52x P/E multiple March-23E. Key downside risk is potential shift to fixed making charges that could limit long-term benefits from operating leverage.

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