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Recovery across divisions faster than last year

Titan Company (TTAN) has released its pre-quarterly update for 1QFY22. Here are the key highlights:

Strong sales growth on low base and quicker recovery

* TTAN recorded strong sales growth (excluding bullion sales) of 117% YoY for 1QFY22, aided by the low base in 1QFY21.

* While the company entered the quarter with strong momentum, the second COVID wave, and subsequent store closures and restricted operating hours affected sales for May’21 (which started recovering once again in Jun’21).

* The Watches & Wearables and Eyewear divisions saw rapid recovery in walkins with the re-opening of stores – this was seen only in the Jewelry division last year.

Jewelry – encouraging performance

* In 1QFY22, the Jewelry division grew ~107% YoY (excluding bullion sales) owing to a low base with nil sales in Apr’20.

* Total store operational days stood at 73%, 10%, and 58% for Apr’21, May’21, and Jun’21, respectively. Currently, more than 90% of stores are open (among which around a third are shut on weekends, in line with local restrictions).

* Despite fewer store operational days in Jun’21 – as the large states of Tamil Nadu and Karnataka were under lockdown for almost all of June’21 – Jun’21 sales were marginally ahead YoY.

* The division gained good traction in new customers, with the mix of total buyers reaching pre-pandemic levels. Fresh enrollments for the Golden Harvest scheme were adversely impacted due to the lockdowns, but still showed YoY growth, with refund requests being low and comparable with pre-pandemic levels.

* The government has started the phased implementation of the mandatory hallmarking of gold jewelry with effect from 16th Jun’21. In line with these new regulations, all stores have the hallmarking license, with 100% of Tanishq, Mia, and Zoya jewelry products hallmarked.

* With network expansion plans disrupted by the lockdowns, the division added five Tanishq stores on a net basis in 1QFY22, with retail space additions of ~20k sq. ft.

Watches & Wearables – impressive recovery rate

* The division posted YoY growth of ~280% on a very low base (nil sales in Apr’20) and faster recovery as stores reopened.

* Total store operational days stood at 70%, 24%, and 51% for Apr’21, May’21, and Jun’21 respectively.

* The e-commerce channel witnessed strong sales, especially in the second half of Apr’21 and May’21. Faster recovery was seen in the North and West regions.

* The division launched the ‘Edge Ceramics’ and ‘Raga Viva IV’ collections for women under the Titan brand; the ‘Stunners 1.0’ and ‘Wear Your Look’ collections under the Fastrack brand; and the 'Sleek' series of contemporary workwear watches for men under the Sonata brand.

* In 1QFY22, the division closed two World of Titan (WOT) and Fastrack stores each, while adding three Helios stores. On a net basis, it reduced 5k sq. ft. of retail space.

Eyewear – on the express path to normalcy

* The division posted YoY sales growth of ~117% YoY in 1QFY22. The company saw rapid recovery in walk-ins in May’21 and Jun’21 v/s last year.

* Total store operational days stood at 71%, 19%, and 62% for Apr’21, May’21, and Jun’21, respectively. Currently, more than 90% of stores are open.

* The division launched the Titan Eyeplus App with Neo Progressive lens and computer glasses, exclusively for the e-commerce channel.

* In 1QFY22, the division added six stores on a net basis, with the addition of about 1.5k sq. ft. of retail space.

New businesses and subsidiaries

* Taneira – 11 of 14 existing Taneira stores were reopened post the lockdown. On average, Taneira stores were operational for ~30% of the total store days in 1QFY22.

* Fragrances and accessories – The business saw slow recovery in 1QFY22, but grew 3x YoY. Sales continued to recover, with the second half of Jun’21 being better than the first. The e-commerce channel recovered almost fully and grew 2.5x YoY.

* Titan Engineering and Automation Limited (TEAL) – TEAL posted YoY revenue decline of 15% in 1QFY22, although the business has seen a strong comeback in the Automation Solutions business over the last few months, with encouraging inquiries.

* CaratLane – CaratLane surged ~274% YoY in 1QFY22, with 41% total store operational days for the quarter. Online sales grew 210% in 1QFY22, driven by strong domestic/international demand as well as demand from Shaya and CaratLane Live (the video assistance feature). Four new stores were added during the quarter, taking the total count to 121.

Other points

* Two American businesses were incorporated as wholly-owned subsidiaries of TTAN businesses in Apr’21: (a) TCL North America, Inc. was incorporated as a subsidiary of Titan Company to carry on the business of Jewelry Retailing and (b) TEAL USA Inc. was incorporated as a subsidiary of TEAL to carry on business development for Aerospace & Automation Solutions.

* During the quarter, Titan Commodity Trading Ltd. commenced operations for the hedging of gold.

Valuation and view

* There is no material change to our FY23E forecasts. Unlike other discretionary peers, TTAN can claw back some of the demand lost in 1QFY22. This is because underlying demand remains robust, led by decline in gold prices and strong wedding demand. Notably, despite ~62% YoY sales decline in 1QFY21, TTAN reported positive sales growth for FY21.

* TTAN's medium- to long-term earnings growth opportunity is best-of-breed, reflected in the EPS CAGR of ~24% over the past three years before the COVID19 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 smaller organized peers.

* While valuations of 59x FY23E EPS are not inexpensive, the long runway for profitable growth deserves a premium multiple. We maintain our Buy rating with TP of INR2,040 per share (65x FY23E EPS).

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