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Jewelry demand robust; margin outlook improving

* TTAN’s 1QFY23 result, though strong (three-year jewelry sales CAGR of 23% - the best among Consumer companies), was below our estimates. The management said gold prices have remained stable and that there has been no adverse impact on Jewelry demand so far. This was contrary to our fears that the hike in gold import duty on 1st Jul’22 will increase domestic gold prices and therefore affect demand. As a result, there has only been a minor correction in our FY23 operating profit forecast, despite the miss in 1QFY23 v/s our estimate.

* While the management expects margin in the Jewelry business to remain in the 12-13% range, it stated that the healthy margin improvement in Watches and Wearables (13% EBIT margin) and Eye Care (~15% EBIT margin) is likely to sustain. This implies that these segments will no longer remain margin dilutive as feared.

* TTAN can achieve its ambitious growth target (of 2.5x) for the Jewelry business (89% of FY22 sales) over the next five years, as highlighted in our detailed note after the analyst meet in May’22, having already delivered a similar performance in the preceding five years. We maintain our Buy rating.

Strong operating performance, but earnings below our estimate

* Consolidated revenue grew 172% YoY to INR94.4b (est. INR104.2b).

* EBITDA stood at INR12b (est. INR14b) in 1QFY23 from INR1.4b in 1QFY22.

* PBT stood at INR10.7b (est. INR13b) in 1QFY23 from INR0.4b in 1QFY22.

* Recurring PAT came in at INR7.9b (est. INR9.7b) in 1QFY23 from INR0.2b in 1QFY22.

* Consolidated gross margin rose 310bp YoY to 25.5% (est. 27%).

* As a percentage of sales, lower staff costs/other expenses (down 490bp/160bp YoY), but higher ad spends (up 90bp YoY) led to an 870bp expansion in EBITDA margin to 12.7% (est. 13.5%) in 1QFY23.

* Adjusted segmental performance: Jewelry sales grew 173.8% YoY to INR83.5b. Segment margin rose 610bp YoY to 12.6%. Sales of Watches grew 168.3% YoY to INR7.9b, with an EBIT margin of 12.5% in 1QFY23.

Highlights from the management commentary

* Jewelry sales, excluding bullion, grew 204% YoY as bullion sales fell 16%. Total jewelry sales rose 174% YoY.

* Despite the high import duty, domestic gold prices remained in the INR50- 51k range in Jul’22. There has been no change in its competitive intensity.

* Sales grew in Jul’22, albeit at a sluggish pace in low ticket items, whereas the momentum in high ticket items remained strong. The management expects demand for lower ticket items to improve, given the festive occasions in Aug’22.

* The management’s EBIT margin guidance in the Jewelry segment remains in the 12-13% range. In the Watches and Wearables segment, faster growth in the high-margin ‘Titan’ brand led to an improvement in margin. It has guided at a segmental margin growth of 13% on a sustainable basis. It indicated that EBIT margin in the Eye Care segment can sustain at 15%.

Valuation and view

* Changes to our model led to a 2.6% reduction in FY23 EBITDA, but higher than expected depreciation resulted in a 5.5% decrease in our EPS estimate. Our FY24 EPS forecasts have been raised due to the likelihood of healthy demand growth and robust margin outlook across all businesses.

* TTAN has a strong runway for growth, given its market share of sub-10% in Jewelry and continued struggles faced by its unorganized and organized peers. Its medium-to-long-term earnings growth visibility is nonpareil. Despite the volatility in gold prices and COVID-led disruptions, earnings CAGR has been stellar at 24% for the past five-years ending FY22. We expect this trend to continue, with a 26% earnings CAGR over the next couple of years.

* The stock’s near-term multiples appear expensive, but its long runway for profitable growth warrants premium multiples. We maintain our Buy rating, with a TP of INR2,670 per share (60x Jun’24E EPS)

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