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Strong start, impressive Q1FY23, margin beat slightly

Titan’s Q1FY23 revenue was tad below our estimates; revenue grew 172% on a high base (75.5%), while EBITDA/ PAT grew 7.7x/7.9x. Jewelry segment grew 208% (including bullion sale) with 3-year CAGR of 23.4% led by growth in: (1) grammage +170%, (2) new buyer contribution +46%, (3) studded ratio +26%, and (4) wedding segment +178%. Moreover, jewelry segment reported 13.5% EBIT margin. GHS enrolment grew +30%. Watches segment grew 169% driven by 109% growth in volume, while wearables grew 4x. Eyewear business achieved highest quarterly revenue at Rs1.83bn (+173%) with 19.8% EBIT margin. Taneira grew 608%, while Fashion & FA grew 275%. Caratlane grew 204%. Gross margin at 25.5% (+310bp); EBITDA jumped to Rs11.9bn (7x) YoY, resulting in EBITDA margin at 12.7% (+872bp) YoY. APAT at Rs7.9bn (7.9x). We maintain BUY, with a DCF-based TP Rs2,817 (implying 69.5x FY24E EPS).

Strong performance in Q1FY23 with 3-year CAGR at 20.1%

Consolidated revenue grew 172% to Rs94.4bn albeit on high base (+75.5%). All the business verticals recorded strong growth. Segment growth: jewelry (+208%), watches (+169%), eyewear (+173%) and Caratlane (+204%). Management said strong demand led by (1) grammage growth 170%, (2) GHS enrolment +30%, (3) studded jewelry contribution at 26%, (4) wedding segment growth +178%, and (4) new buyer contribution at 46%. Watches segment saw 169% growth led by 109% volume growth, whilst wearables grew 4x YoY. Eyewear achieved highest quarterly revenue of Rs1.83bn with 173% growth. Taneira grew 608%, while F & FA grew 275%. Management said, formalisation of jewelry industry taking shape gradually, yet management guided store expansion targets to remain strong: ~40 store additions for Tanishq, rapid expansion for eyewear (to add 500 stores in 2-3 years), and huge penetration potential for Caratlane (also entered US markets now). Store addition in Q1: jewelry: 24, W & W: 39, Eyewear: 54, Fastrack: 2. Taneira: 6. TEAL saw 29% growth.

Impressive margin expansion across businesses

Gross margin at 25.5% (+310bp), led by 170% growth in gold grammage sold and 109% growth watches volumes. Despite some inventory gains, growth in Ad-spends (+345.9%), other expenses (+116.5%) and employee cost (+23.6%) resulted in EBITDA at Rs11.9bn (7x); EBITDA margin at 12.7% (+872bp) YoY. Management indicated that with turnaround in watches and eyewear business, margins to remain in 12-13% range as the company intends to invest in brands, new businesses, and digital platforms such as Caratlane and digital gold, new platform connecting consumers for purchase of gold online and convert into jewelry at a later stage.

Valuation driven by potential earnings upside

Though operating performance was much stronger in Q1, we note Titan’s strategy revolving around serving millennials, meeting their aspirational demand with introduction of new designs and channels, could pay richly. Further industry formalization showing up in market share gains for Titan at 6%. We maintain a positive view and expect faster recovery and margin gains. The turnaround of the Caratlane, watches, and eyewear divisions and continuity in their profitability potential not yet priced in. We retain our earnings and maintain BUY, with a DCF-based TP Rs2,817 (implying 69.5x FY24E EPS). Risks: irrational competition from regional players; prolonged recovery in the economy, leading to lower demand for jewelry; rising gold prices.

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