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Jewellery revenues of Rs72bn in Q2FY23 were up 18% YoY with reported EBIT margin of 15.3% which has one-off benefit of ~200bps from diamond gains and custom duty change. Underlying markers (new recruits, studded, GHS) were encouraging even as wedding demand was relatively soft. The momentum continues to be steady in the festive season as well. Watches (+21% YoY) had a good quarter led by growth in the premium segment and wearables category. Eyewear had a relatively muted quarter (+4% YoY) though. The newer businesses are also seeing good traction.

We continue to like Titan’s good traction in new markets (new cities, low share markets and in parts of South India). While on an adjusted basis, the margin performance may not look attractive, the same needs to be seen in the context of (1) good consumer recruits, who typically buy staples jewellery first, and (2) store expansion continues to be healthy. It has also increased investments in the watches and eyewear segments.

We believe Jewellery Hallmarking will likely create a level-playing field, driving further formalisation. Our optimism stays intact. This is one company where the capabilities to translate the opportunity to earnings is high, in our view. Key risks: Sustained weakness or worsening of macro environment can lead to some slowdown, which is not being factored. ADD.

* Good top-line performance with steady store expansion: Net sales were up 18% YoY to Rs82.5bn. Jewellery revenue came in at Rs72bn. It highlighted that (1) new buyer contribution was strong at 50%, (2) the wedding contribution was slightly lower in the quarter, (3) studded’s growth was ahead at 25% YoY led by activations and increase in high-value purchases, and (4) Golden Harvest enrolments continued to be good. Domestic jewellery segment recorded 15% YoY growth. CaratLane continues to deliver healthy growth trends with revenue of Rs4.5bn (+53% YoY) with 6.5% EBIT margin. In terms of store addition, it added eight stores in Tanishq (403; including GCC), 16 Mia stores (79) and 14 CaratLane stores (157). It has highlighted that it is also increasing the area of some of the Tanishq stores. Watches reported a strong growth of 21% YoY while eyewear business grew 4% YoY. In watches, growth was led by premium watches and wearables category. It added 7 World of Titan stores and 14 Helios stores. In eye care, 38 new stores were added (EoP: 827).

* Ahead-of-expected margin performance with some one-off benefit: EBITDA margin expanded 130bps YoY to 15.0% (highest-ever) with Jewellery EBIT margin at 15.3% (non-recurring benefit of custom duty and diamond prices). EBITDA came in at Rs12.3bn, ahead of our estimate. It has increased spends in some of the segments (both watches and eye care) but margin performance continues to be good. PAT came in at Rs8.6bn, up 34% YoY.

* Valuation and risks: We increase our FY23-24E earnings estimates by ~9-1%, modelling revenue / EBITDA / PAT CAGR of 21 / 29 / 31 (%) over FY22-24E. Maintain ADD with a DCF-based revised target price of Rs2,950 (was Rs2,900 earlier). Key downside risks are irrational competitive environment and sustained weakness or worsening of macro environment leading to demand slowdown.

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