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Strong execution aiding sustained outperformance

About the stock: Titan has transformed itself from a watch maker to an enviable lifestyle company, with jewellery being the leading vertical (85% of revenues). Robust distribution network comprises 2300+ stores spread across 2.9+ 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 | 1600+ crore) and strong brand patronage

Q2FY23 results: The company witnessed strong double-digit growth across most segments (except eyewear division) with overall sales increasing 18% YoY.

* As guided by the management in its pre-quarterly update, the jewellery division (excluding gold bullion sale) reported robust sales growth of 18% YoY to | 7515 crore (impressive three year CAGR: 27%). Watches division recorded its highest quarterly sales of | 830 crore (up 21% YoY). Overall consolidated revenues (including gold bullion sale: | 482 crore) grew 22% YoY to | 9163 crore

* Despite higher marketing & other expenses, improvement in share of studded ratio and positive impact of low cost diamond inventory led to EBITDA margins expanding 70 bps YoY to 13.6% (second highest margin). Absolute EBITDA grew 29% YoY to | 1247 crore (three-year CAGR: 34%)

* Tracking robust operational performance, PAT grew 30% YoY to | 835.0 crore (three year CAGR: 39%)

What should investors do? Titan has been an exceptional performer in the discretionary space with stock price appreciating at ~30% CAGR in last five years.

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

Target Price and Valuation: Introducing FY25E, we roll over our valuations and now value Titan at | 3240 i.e. 66x P/E on average of FY24-25E EPS (earlier TP | 3080).

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 FY23)

* Aspires to grow jewellery revenues by 2.5x by FY27 (implied CAGR: 20%). Huge headroom for growth with current market share at ~6% in | 4 lakh crore market

* 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

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

* Bata has a strong b/s, diversified branded product portfolio, pan India network enabling sustained long term profitable growth. TP: | 2225

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