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Commendable result amid the lockdown, further recovery underway

* Despite losing out on sales for a large part of May’21 due to the lockdowns across the country, TTAN reported a decline of only ~33% over 1QFY20 (normal) levels. This was to some extent aided by bullion sales of INR4.24b. Margin performance was also better than expected, led by cost savings and better than expected sales.

* Watches and Eyewear seem to be reporting a much faster recovery v/s that witnessed after the lifting of lockdown restrictions last year.

* With the recovery in Jun’21 continuing into Jul’21 as well, pent up demand and a healthy wedding season demand outlook appears attractive. We maintain our Buy rating.

Strong beat on all fronts in 1QFY22

* Consolidated revenue grew 75.5% YoY to INR34.7b (est. INR29.2b).

* EBITDA stood at INR1.4b (est. INR299m) v/s a loss of INR2.5b in 1QFY21.

* PBT stood at INR390m (est. -INR654m) v/s a loss of INR3.6b in 1QFY21.

* Recurring PAT stood at INR180m (est. –INR654m) as against a loss of INR2.9b in 1QFY21.

* Consolidated gross margin rose 50bp YoY to 22.4%.

* As a percentage of sales, lesser other expenses (down 1250bp YoY to 8%), lower staff costs (down 410bp to 9%), but higher ad spends (up 30bp to 1.4%) led to EBITDA margin expanding by 1670bp to 3.9% (est. 1%).

* Segmental performance: a) Jewelry sales grew 67.2% YoY to INR30.5b. Segment margin rose 1,020bp YoY to 6.5%. b) Sales of Watches were ~4x YoY to INR2.9b, with an EBIT margin of -20.8%.

Highlights from the management commentary

* The management remains confident on growth in FY22, especially as the momentum in Jun’21 continued into Jul’21 as well.

* Similar to 2HFY21, pent up demand, wedding demand, and continued benefits of disposable incomes moving towards jewelry are factors that will aid growth in subsequent quarters.

* The change in its gold hedging policy will get rid of ineffective hedges arising on account of a delay in sales due to store closures.

* On a steady state basis, the management believes it can return to 12-13% EBIT margin that it used to earn on jewelry in the pre-COVID period.

Valuation and view

* There is no material change to our forecasts.

* We continue to believe that TTAN can claw back some of the lost demand in 1QFY22. The recovery in Jun-Jul’21 was strong. Underlying demand remains robust, led by a decline in gold prices and strong wedding demand. Despite a decline of ~62% YoY in sales in 1QFY21, it ended up reporting positive sales growth in FY21.

* TTAN's medium to long-term earnings growth opportunity is the 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 60.2x FY23E EPS appear expensive, the long runway for profitable growth deserve a premium multiple. TTAN remains our top pick on the discretionary consumption space. We maintain our Buy rating with a TP of INR2,065 per share (60x Sep’23E EPS).

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