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Strong sales growth accentuates market share gains

About the stock: Titan has transformed itself from a watch maker to an enviable lifestyle company, with jewellery being the leading vertical (82% of revenues). Robust distribution network comprising 1900+ stores spread across 2.5 mn sq. ft.

* Titan has consistently displayed its ability to gain market share amid a tough industry scenario owing to its robust balance sheet (30%+ RoCE and cash & investments worth | 2000+ crore) and strong brand patronage

Q2FY22 results: Titan’s Q2FY22 result print was better than our estimates owing to higher EBITDA margins on the back of stringent cost control measures.

* As guided by the management in its pre-quarterly update, the jewellery division (excluding gold bullion sale) reported robust 78% YoY revenue growth with impressive two-year CAGR of 32% in Q2FY22. It surpassed preCovid levels in H1FY22 with growth of 16% vs. FY20 levels

* Overall revenue grew 65% YoY to | 7493 crore. Despite lower share of studded ratio, Titan reported one of its highest EBITDA margins of 12.9%

* Robust operational performance resulted in the company reporting its highest ever quarterly PAT of | 641.0 crore

What should investors do? Titan has been an exceptional performer in the discretionary space with stock price appreciating at ~46% CAGR in last five years.

* We continue to remain structurally positive on the stock as high growth visibility justifies premium valuations and maintain a BUY on the stock

Target Price and Valuation: We value Titan at | 2850 i.e. 70x FY24E EPS

Key triggers for future price performance:

* Robust balance sheet and asset light distribution model has enabled it to outpace peers in terms of store addition (to add ~35 Tanishq stores in FY22)

 Tanishq’s penetration is still at a very nascent stage in the Indian jewellery market. This provides immense opportunity for Titan to enhance its market share. Mandatory gold hallmarking would further enhance market share gains from unorganised space

* Thrust on wedding space is bearing fruit with wedding jewellery becoming a critical growth driver while its share in overall jewellery revenue has increased meaningfully

* Gradual recovery in studded ratio to aid gross margins, going forward

* We bake in revenue, earnings CAGR of 23%, 55%, respectively, in FY21-24E

Alternate Stock Idea: Besides Titan in our retail coverage, we also like Bata India.

* Bata has a strong b/s, diversified branded product portfolio and pan India network which would enable sustained long term profitable growth

* BUY with target price of | 2380/share

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