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* Titan Company (TTAN)’s 1QFY24 revenue grew 26% YoY, ahead of our expectation, with double-digit growth across all segments. However, due to lower-than-expected margins, EBITDA and adj. PAT missed our estimates. Margins were adversely affected by seasonality, volatility in gold prices and a one-time diamond price inventory gain in 1QFY23.

* Four-/Five-year Jewelry EBIT CAGR was robust at ~24%/22% in 1QFY24. Management indicated that Jewelry margin guidance of 12-13% in FY24 remains unchanged and 1Q is normally weak on margin front due to more gold contribution.

* TTAN’s brand-building initiatives across segments, increasing customer base, store expansions and development in international markets continued to be impressive. We reiterate our BUY rating with a TP of INR3,325 (premised on 60xFY25E EPS).

Sales beat; margins weaker than expectation

* TTAN’s consolidated revenue grew 26% YoY to INR118.9b (est. INR109.5b) in 1QFY24. ? EBITDA declined 5.9% YoY to INR11.3b (est. INR13.6b) in 1QFY24.

* PBT dipped 6.5% YoY to INR10.0b (est. INR12.3b).

* Recurring PAT came in at INR7.6b (est. INR9.1b) in 1QFY24, down 4.3% YoY. ? Consolidated gross margin contracted 330bp YoY and 200bp QoQ to 22.2% (est. 25.6%).

* As a percentage of sales, staff costs (down 30bp YoY), advertisement costs (flat YoY), and higher other expenses (up 30bp YoY) led to 330bp contraction in EBITDA margin to 9.5% (est. 12.4%) during the quarter.

* Adjusted segmental performance in 1QFY24: Jewelry sales grew 28.1% YoY to INR106.9b. Segment margin dipped 300bp YoY/150bp QoQ to 9.6%. Sales of watches grew 16.2% YoY to INR9.1b, with an EBIT margin of 11.1%.

Highlights from the management commentary

* Management focuses on brand building through regional development, high-value studded collections, wedding collections, and a gold exchange program. The company aims to achieve double-digit market share in 3-4 years and is pursuing a regionalization strategy.

* Demand in Jun'23 was healthy vs. previous months due to gold price volatility. The gold exchange program is a robust engine for growth, the cost of which is fully absorbed by the company.

* Margins are weaker in 1Q but would improve in subsequent quarters due to sales pattern. Volume is driven by growth in customers, with a keen eye on new and repeat buyer metrics.

* Management is looking for store expansions in the international market. It plans five stores in the US, and 13 in GCC to take the count to 24-25 stores in FY24.

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