Buy Titan Company Ltd For Target Rs. 2,000 - Emkay Global
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Faster recovery could drive upsides:
* Operating performance was better than expected, led by strong margins. EBITDA margin was higher than estimates at 4.4% on impressive cost control. Other expenses were down ~40% vs. ~75% revenue growth yoy (ex-bullion, recovery was ~60% of pre-Covid levels).
* Management indicated faster recovery trends across segments. It expects strong wedding demand and hallmarking-led share gains in H2. Expansion pace remains strong with 30- 35 stores of Tanishq, rapid expansion plans for eyewear and large potential for Caratlane.
* It expects to completely recover margins in the jewelry segment as studded sales recover on full unlocking. We believe a turnaround of eyewear/Caratlane and exit of loss-making JVs (Mont-Blanc/Favre Leuba) should lead to a better than pre-Covid margin profile.
* Faster recovery and share gains from hallmarking can offer upsides. Eyewear/Caratlane earnings potential is not yet priced in. TTAN’s valuation at 56x/47x FY23/24E consol. EPS is at a discount to its high-growth peers. Retain Buy with a revised TP of Rs2,000.
* H2 is expected to be strong with pent-up demand and market share gains: Revenues (ex-bullion) grew ~120%, led by higher number of operational days and better recovery. The watch segment grew faster at ~3x on a low base, while the jewelry/eyewear segments grew ~110%/120%. Revenue recovery (ex-bullion) was ~60% compared to pre-Covid levels due to lower store operational days in Q1 (~50%). Management commentary was indicative of a faster recovery in July. It expects strong wedding demand and share gains on hallmarkingrelated challenges for smaller players in H2. Expansion targets remain strong - 30-35 store additions for Tanishq (11 already rolled out), rapid expansion for eyewear (from 600 to 1,000 stores in 2-3 years), and huge penetration potential for Caratlane (only in 44 cities now). Caratlane grew strongly at a 40% CAGR in FY16-21 (grew 263%/20% vs. Q1FY21/Q1FY20).
* Impressive cost savings drive margin beat: TTAN reported Rs0.8bn PBT vs. Rs3.4bn PBT loss during the last lockdown. Other expenses were down ~40% vs. ~75% reported revenue growth on a cut in discretionary spends and cost savings from its ‘war-on-waste’ program. Gross margins were low but stable at ~21%, led by low-margin bullion sales. Studded mix at 22% (retail 25% vs. 21% Q1FY21 and 28% in Q1FY20) was low but is recovering fast. TTAN expects to get back to pre-Covid margin levels. Management indicated a shift from cash-flow hedging to hedging gold inventory. This will reduce the margin impact of ineffective hedges.
* Potential earnings upsides keep us positive; maintain Buy: We maintain a positive view and expect faster recovery and margin gains to drive upsides. The turnaround of the Caratlane/eyewear divisions and their profitability potential are not yet priced in (can add ~10%, in our view). We raise TP to Rs2,000 from Rs1,810, now valuing it at 55x Sept’23E EPS.
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