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Buy Titan Company Ltd For Target Rs.2,530

Q2 update: Robust recovery across divisions

Titan’s Q2 business update highlights a robust recovery and a strong performance across divisions, with the jewelry division reporting a 2-year CAGR of 32%. Network expansion has also been accelerated during the quarter. Full unlocking and the upcoming festive/wedding season are likely to further boost revenues in the coming quarters and may offer more upsides, in our view. Factoring in the strong growth momentum, we increase our FY23/FY24 EPS estimates by 8-12%. Given the solid growth and earnings outlook, we raise our Sep’22 TP to Rs2,530 (from Rs2,000), valuing the stock at 65x Sep’23E EPS (from 55x Sep’23E EPS earlier). Retain Buy.

* Jewelry grows 78% with 2-year CAGR of 32%: Excluding bullion sales of Rs3.9bn in the base quarter, the Jewelry segment grew 78% in Q2FY22 with a strong 2-year CAGR of 32%, aided by pent-up demand and a 10% store addition CAGR (414 jewelry stores vs. 345 in Q2FY20). Management said pent-up demand after the second wave was seen in gift purchases, occasions, milestone buying, weddings and investments in gold. While studded sales saw strong double-digit growth, studded mix was indicated to be lower than pre-Covid levels due to higher growth in plain gold sales. Since Titan’s entire network of jewelry stores across formats has been hallmarking compliant, we expect faster share gains from unorganized players. Enrollments in the Golden Harvest Scheme (GHS) surpassed the pre-pandemic levels. Titan also introduced digital gold for digitally-savvy young consumers. Mandatory hallmarking is effective in 256 districts in India. Tanishq and other jewelry brands are now 100% compliant in all aspects.

* Recovery in Watches/Eyewear also ahead of expectations: Watches and Eyewear segments also posted a strong recovery and returned to pre-Covid levels with a 2-year revenue CAGR of -2% and 3%, respectively. A faster recovery was aided by a 2%/6% store addition CAGR in Watches/Eyewear, improvement in mall walk-ins and consistent growth in the e-commerce channel. Titan added 8 stores for watches and 24 for eyewear in Q2FY22.

* Caratlane’s business remained on its strong growth trajectory with 95% growth, driven by the launch of new merchandise and marketing initiatives. Other businesses (Taneira, Fragrances and Accessories) grew 121%, aided by higher operational stores and healthy recovery in retail, department stores and E-commerce. TEAL recorded a 43% decline.

* Q2 expectations: Based on the update, we expect TTAN to report a solid 64% revenue growth to Rs71bn (80% excl Rs3.9bn bullion sale in Q2FY21). Despite high plain gold mix, operating margins should reach normalized levels of 11.5%, thanks to strong cost savings seen in Q1 and some operating leverage. We estimate a PAT of Rs5.5bn vs. Rs2bn in Q2FY21.

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