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Titan’s good Q1 print illustrates the (1) buoyancy in jewellery demand enjoyed by the large players and (2) improved operating costs structures. Outlook for eye-care and watches business (not major contributor to FV though) is also favourable – recovery was swift compared to the last disruption. EBIT print benefited from costs rationalisation while gross margins were good on an underlying basis. We expect a strong demand environment going forward (vs other 'perishable' discretionary consumption). We believe that Tanishq will also benefit from the regionalisation strategy. Expensive valuations limit the upside for now; retain ADD.

We believe mandatory hallmarking (link) will create a level playing field in the Indian Jewellery market, driving further formalisation. It will lead to (1) likely traceability of raw material (gold) leading to potentially higher imports through formal route, (2) material business disruption for informal players in converting their inventory to hallmarked standards (necessity to melt and recreate ornaments), (3) opportunity for design-oriented brands to realise higher brand premium (versus commodity++), (4) higher industry-wide efforts to drive premiumisation (higher share of studded), and (5) consumers may choose to convert ‘old jewellery’ to hallmark-compliant ornament in FY21-23E.

* Strong growth in jewellery in 1Q: Reported revenue was up 122% on a YoY basis with April, May and June contributing 50%, 10% and 40%, respectively to the revenue. Jewellery segment reported growth of 109% (excluding bullion) – momentum in April was decent this year versus no sales last year; while there was no sale in May in both the years, the company alluded that sale in June’21 was marginally ahead of June’20 despite lower operational days.

Studded ratio improved to 22% (18% in Q1FY21). The company highlighted that (1) there is good traction from new customers with their contribution now close to pre-pandemic levels and (2) GHS enrolments have picked up and (3) demand momentum is healthy in July’21. It added 5 Tanishq stores in 1Q (total store count of 358 stores in 217 cities, retail space of 1.38 mn sqft). Watches and Eyewear recovered well. Titan highlighted that recovery in the segments was much swifter compared to the last year.

* Margin performance: A sharp reduction in operating expenses (including variable expenses) aided an EBIT print of Rs820mn despite the weak topline. The Watches and Eyewear segment reported losses for the year. Gross margins for the quarter were negatively impacted by infective hedge and cut in customs duty. Nevertheless, as per management, the trajectory continues to be healthy with underlying gross margins at the highest level in last five quarters (as per management) – higher studded share and lower share of gold coins helped.

* Valuation and risks: Titan continues to benefit 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 reduce our FY23 earnings estimates by ~4%; modelling revenue / EBITDA / PAT CAGR of 24 / 54 / 69 (%) over FY21-23E. Retain ADD with a DCF-based revised target price of Rs1,900. Key downside risk are irrational competitive environment and potential shift to fixed making charges that could limit long-term benefits from operating leverage.

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