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Stellar performance momentum continues

Titan Company (TTAN)’s end-of-quarter update released in early January had indicated the strong revenue growth trend in Jewelry, owing to which sales forecasts were in-line. However, there was a big positive surprise on operating margins (the highest in 66 quarters), which drove a comfortable beat on EBITDA and PAT.

The Jewelry segment continues to report impressive share gains across large parts of the country; nonetheless, the runway remains long, with less than 10% market share. Impressively, in the absence of any material movement in gold prices in the past year, the mid-30s retail jewelry sales growth was entirely volume-led, and new customer additions continue to be impressive. As the sales momentum remains strong and the share of Studded Gold returns to earlier levels, the earnings growth outlook remains attractive. Maintain BUY.

Sales in-line; margins surprise positively

3QFY22 consolidated revenue grew 31.7% YoY to INR100.4b (in-line). EBITDA grew 70% YoY to INR14.4b (est. INR12.5b). PBT grew 81.4% YoY to INR13.4b (est. INR11.5b). Recurring PAT grew 90.9% YoY to INR10.1b (est. INR8.7b).

Consol. gross margins were up 270bp YoY to 25.3%. Lower other expenses as a % of sales (down 100bp YoY), lower staff costs as a % of sales (down 30bp YoY), but higher ad spends as a % of sales (up 70bp YoY) led to EBITDA margins expanding 320bp YoY to 14.4% (est. 12.5%) in 3QFY22.

9MFY22 sales/EBITDA/PAT grew 48%/181%/307%.

Segmental performance: (a) Jewelry sales grew 32.5% YoY to INR90.6b. Segmental margins were up 300bp YoY to 14.2%. Jewelry sales excluding bullion sales grew 37% YoY. (b) Watches sales grew 28.9% YoY to INR7.1b, with the EBIT margin expanding 850bp YoY to 11.3% in 3QFY22.

Highlights from management commentary

* Market share gains continue to be good across the country. For 3QFY22 South and West gains were sharper, followed by East. In South India (Tamil Nadu and large cities such as Bengaluru and Hyderabad), TTAN saw strong market share gains YoY.

* Wedding demand was a big factor driving growth in 3QFY22, with 40% growth v/s 34% retail jewelry sales for the quarter. The proportion of weddings to jewelry sales is still in the early 20s percentage for Tanishq, compared with 50–60% for jewelry peers.

* The management indicated that good wedding demand would also be a factor driving growth over the next 4–5 months.

* Ticket size growth in 3QFY22 was negligible, so a large part of the 34% retail jewelry sales growth was grammage-led. The 39% new buyer growth was also very encouraging.

* Margin gains of ~100bp were driven by some one-off factors in 3QFY22, including a) diamond prices going up sharply, leading to inventory gains, b) the reversal of some provisions, and c) lower payout this year on account of GHS. These factors may not sustain beyond 1–2 quarters. 4QFY22 would also see the benefit of inventory gains on sharp diamond price movement.

* On the other hand, the Studded Jewelry proportion was up marginally YoY to 26% and offers room for further profitability growth.

* Revenue scale advantages may not be as high in subsequent quarters as in 3QFY22. While the 3QFY22 EBIT margin of 14.2% in the Jewelry segment is great, the management is happy with margins settling at ~13% on a steady-state basis. This is at the higher end of the earlier targeted 12–13% Jewelry margin range.

Valuation and view

* A 66-quarter high operating margin performance led to a beat on our EBITDA and PAT forecasts. Even as we maintain our FY23E and FY24E EPS estimates, we increase the FY22E EPS estimate by 9%, led by the 3QFY22 beat and a good outlook for 4QFY22 as well.

* TTAN has a strong growth runway, given its market share of less than 10% and the continued struggles faced by its unorganized and organized peers. Its medium- to long-term earnings growth opportunity is the best-of-breed. Despite gold price volatility and COVID disruptions, TTAN’s earnings CAGR has been stellar at ~24% for the past five years ending FY22E. We estimate the trend to continue with a similar best-of-breed earnings CAGR of ~24% over the next couple of years as well.

* At its current valuation of 60x FY24E EPS, the stock’s near-term multiples appear expensive, although its long runway for profitable growth warrants premium multiples. TTAN remains our top pick in the Discretionary Consumption space. We maintain our Buy rating, with TP of INR2,900 per share (70x FY24 EPS).

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