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Buoyant prospects beyond the near-term blip

* TTAN’s 4QFY21 result was in line with our expectation (as guided by its end of quarter update). The factors that led to strong Jewelry demand were: a) decline in gold prices, b) robust wedding demand, c) absence of other avenues of spending on a wedding, thus boosting Jewelry sales, and d) gains from other organized and unorganized players. The latter would continue to boost Jewelry sales over the near to medium term.

* The three factors that affected margin in 4QFY21 were: 1) reversal of salary cuts made in 1QFY21, 2) lower proportion of studded sales, and 3) reduction in gold import duty. All the three factors are transient and would not affect margin in the medium term.

* Balance Sheet improvements, especially on the working capital front, were impressive. If sustained, these could significantly elevate medium to longer term RoCE, especially for a business that has prospects of ~20% topline growth beyond the near term COVID-related blip. Maintain Buy.

In line performance

* Consolidated revenue grew 59.1% YoY to INR74.9b (in line) in 4QFY21. EBITDA grew 33.4% YoY to INR8.2b (in line). PBT grew 43.3% YoY to INR7.3b (in line). Recurring PAT grew 65.5% YoY to INR5.7b (v/s our estimate of INR5.9b). This has been the highest ever quarterly PAT.

* Consolidated gross margin fell 830bp YoY to 22.1%.

* As a percentage of sales, other expenses/staff cost/ad spends was lower by 330bp/220bp/70bp YoY to 6%/3.9%/1.3%. Thus, EBITDA margin fell 210bp YoY to 10.9% (in line) in 4QFY21.

* Segmental performance: a) Jewelry sales grew 71.3% YoY to INR66.8b. Segment margin fell 290bp YoY to 10.7%. b) Sale of Watches were flat YoY at INR5.6b, with EBIT margin down 290bp to 6.8% in 4QFY21.

* FY21 performance: Sales/EBITDA/PAT grew by +2.8%/-30.8%/-35.4% YoY. EBITDA margin stood at 8% in FY21 v/s 11.8% in FY20.

* Balance sheet: On a year-end basis, inventory/debtor/creditor days rose by 2/1/46 days to 142/6/84 days.

* Cash flows: OCF increased to INR41.4b in FY21 from -INR3.3b in FY20 due to improvement in working capital. Accordingly, FCF increased to INR40b in FY21 from -INR6.9b in FY20

Highlights from the management commentary

* Golden Harvest (GHS) sales were robust in FY21. However, Feb’21 and Mar’21 sales from GHS were lower as enrollments in 1QFY21 were weak. Since GHS enrollment picked up in 3Q and 4QFY21, demand in the GHS channel will be healthy going forward.

* The management expects buoyant wedding demand beyond the temporary lockdown led blip due to COVID-19.

* At present, 50% of its stores are shut due to localized lockdowns across India.

* A 360 degree strategy specifically designed for the Tamil Nadu market has yielded strong revenue growth recently in a very large market where Tanishq has had extremely limited success earlier.

Valuation and view

* Given the ongoing lockdown/restrictions across India, we have cut our FY22E EPS estimate by 12.2%. However, there is no material change to our FY23E EPS.

* Unlike other discretionary peers, TTAN can claw back some of this lost demand. This is because the underlying demand remains robust, led by decline in gold prices and strong wedding demand. Despite ~62% YoY sales decline in 1Q, it ended up reporting positive sales growth in FY21.

* TTAN's medium- to long-term earnings growth opportunity is best-of-breed, which is reflected in the EPS CAGR of ~24% over the past three years before the COVID-19 impact in FY21. There is a strong growth runway given TTAN's market share of less than 10% and the continuing struggles of unorganized and other organized peers.

* While valuations of 50.6x FY23E EPS are not cheap, the long runway for profitable growth deserves a premium multiple. We maintain our Buy rating with a TP of INR1,785 per share (60x FY23E EPS).

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