Buy Titan Company Ltd For Target Rs.2,770 - Emkay Global
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Strong margin improvement offers upside
* TTAN’s operating performance was 13-17% ahead of our/street estimates as better margins boosted EBITDA growth by 3x on low comparables (2yr CAGR 36%). Despite lower studded mix, Jewelry EBIT margins improved on operating leverage. Favorable product/channel mix led to a strong improvement in eyewear EBIT margins to 23%.
* Jewelry sales grew 77% with a 2-year CAGR of ~32%. Strong growth was driven by store expansions, pent-up demand and market share gains. Management did not quantify festive period growth but indicated growth trends to be healthy.
* Expansion picked up pace with 10 store additions after a lockdown-hit Q1. TTAN expects to add 35-40 Tanishq stores annually. It also indicated an aggressive target of 250-300 store additions for eyewear and higher investments on upgradation of WOT stores.
* Festive/wedding season can further boost revenues and offer more upsides, in our view. We raise earnings by 3-6%. Given a solid earnings outlook, we retain Buy and raise the TP to Rs2,770 (from 2,530) based on 65x Dec’23E EPS (vs Sep-23 EPS earlier).
Strong all-round performance: Ex-bullion sales, TTAN revenues grew 78% yoy (2yr CAGR 25%), led by a strong 32% CAGR in the Jewelry segment and a near-full recovery in the watches/eyewear segments. The Jewelry CAGR was driven by market-share gains in a healthy demand environment and a ~10% store addition CAGR (414 jewelry stores vs. 345 in Q2FY20). A full recovery in watches/eyewear was led by strong online traction and higher footfalls. Growth in Caratlane was even faster with a 2-year CAGR of 47%, led by the launch of new merchandise, marketing initiatives and offline retail expansion (32% CAGR). Store additions picked up pace across segments, with 10/8/24 net additions for Tanishq/watches/ eyewear segments. TTAN sees medium-term scope for adding 35-40 Tanishq stores annually. It expects aggressive 250-300 store additions for eyewear in the next 12- 15 months and also plans to upgrade WOT stores.
Margins improve despite lower studded mix: Consol EBIT margins at 12.2% were higher than pre-Covid levels of ~10%, despite a lower studded mix (30% vs. 38% in Q2FY20). This was offset by operating leverage and cost savings, and a turnaround in eyewear/caratlane. Eyewear turnaround was driven by a change in the product/ channel mix and low activations, which is likely to continue and sustain 18-20% margins. Caratlane also saw a turnaround and should see higher margins as strong growth results in scale efficiencies and operating leverage. Management plans to increase investments in watches, which should be easily offset by operating leverage/studded recovery and drive further margin gains, in our view.
Potential earnings upsides keep us positive; maintain Buy: With strong growth visibility and healthy improvement in profitability of Eyewear/Caratlane businesses, we maintain our positive view on TTAN. Strong festive sales and likely share gains from hallmarking can offer more upsides. We raise estimates by 3-6% and TP to Rs2,770 (vs. Rs2,530), rolling over to Dec’23E EPS vs. Sep’23E EPS earlier.
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