IGI Logo

Back on growth trajectory on festive demand…

Titan is among few discretionary companies in our coverage to have reverted back to heathy sales growth. Key takeaways from Q3FY21 results: a) jewellery division posted healthy sales growth of 16% YoY with fall in grammage arrested to 14% vs. 31% decline in Q2FY21, b) demand for gold coins continues to be on higher end YoY but share QoQ falling (Q3FY21: 8%, Q3FY20: 5%, Q2FY21: 14%), c) share of studded ratio on uptrend with absolute growth of 9% YoY in Q3FY21, with wedding jewellery also seeing strong growth of 10% YoY d) watches division showed sharp improvement QoQ but still below pre-Covid levels (~88%), e) increased its ad expenditure by 72% QoQ to | 105 crore but still below its run-rate of | 150-160 crore, f) despite gross margins declining 300 bps YoY, EBITDA margins contracted mere 50 bps YoY to 11% due to stringent cost control measures. Overall 12% sales growth in Q3FY21 is ahead of management’s internal target of achieving normalcy by Q4FY21E. Revenue trajectory accelerated further in January with jewellery division seeing 28% YoY growth driven by 16% growth in studded ratio. Robust performance in challenging times reaffirms our thesis of long term market share gains for Titan.

Strong brand patronage provides competitive edge

Despite competition by regional players in terms of higher discounting, Titan has maintained its making charge percentage that has translated into higher making charges per gram for its jewellery portfolio. This reflects the inherent strength of the brand to absorb inflation in gold prices. We expect gross margins to gradually revert back to pre-Covid levels (27-28%) on the back of sustained improvement in share of studded ratio. Trends indicate that demand for wedding jewellery is expected to perk up (16% YoY growth witnessed in January), as people have cut down on other discretionary spends leading to higher share of wallet for jewellery. Also, softness in gold prices may result in better grammage recovery. The company expects certain savings on fixed cost to be structural in nature except for marketing expenses. On the balance sheet front, Titan has significantly focused on optimising inventory and generating cash flows in FY21. Total capital employed as on December 2020 for jewellery division has come down significantly from March levels (| 1857 crore vs. | 3775 crore).

Valuation & Outlook Factoring in the Q3FY21 performance and improvement in demand outlook, we revise our earnings estimates upwards by 3-7% for FY22-23E. The company’s ‘War on Waste’ programme is well on track with tight control on inventory position and higher focus on gold on lease replenishment (~56% of inventory). We expect initiatives to improve cash positions and significantly enhance RoIC (from 31% in FY20 to ~42% in FY23E). We build in revenue and earnings CAGR of 14% and 22%, respectively in FY20-23E. Healthy balance sheet, sustained focus on market share gains and better earnings visibility prompts us to upgrade from HOLD to BUY with a revised target price of | 1830 (60x FY23E EPS, previous TP: | 1660).

To Read Complete Report & Disclaimer Click Here

For More ICICI Direct Disclaimer https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer