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Buy Titan Company Ltd For Target Rs. 1,650

* Operating performance was 11-12% ahead of our expectations, with EBITDA /PBT (before exceptional) growth of 17%/20% driven by better margins across divisions. Margins in eyewear/watches expanded despite lower sales, whereas jewelry margins were a tad lower at 12% (vs. 13% in Q3FY20) on lower studded mix (26% vs. 29% YoY).

* Growth momentum continued post Q3, with Jewelry seeing 28% growth in Jan’21, aided by wedding demand and studded activation (39% mix vs. 26%/43% in Q3FY21/Jan’21). Management remains bullish on wedding demand in the near term.

* TTAN remains confident of regaining jewelry margins and expects cost savings (ex. ad spends) to continue in FY22, driving margin gains across divisions. Turnaround of eyewear /Caratlane and exit from loss making divisions can drive more margin upsides in our view.

* We raise FY22/23E EPS by ~8%. TTAN remains our top pick in the discretionary space. We believe that growth and margins can offer more upsides ahead. We retain a Buy rating with a revised TP of Rs1,650 (vs. Rs1,450), based on 50x Mar’23E EPS.

Jewelry growth improves; Q4 outlook encouraging:

Titan delivered 17% YoY revenue growth in Q3, led by ~16% YoY growth in jewelry revenue (ex. bullion sales) and ~90% recovery in watch/eyewear segments (vs. 60%/15% recovery in Q2/Q1FY21). Jewelry/watch volumes recovered further with YoY decline narrowing to 14%/26% in Q3 (vs. 31%/48% decline in Q2FY21). Titan indicated stronger growth momentum for jewelry in Jan’21 with 28% growth, led by strong traction in studded activation (39% studded mix vs. 26%/43% in Q3FY21/Jan’21) and wedding demand. Store expansion in jewelry was healthy with 10/24 additions in Q3/9MFY21. Management remains bullish on wedding demand in the near term and expects a full recovery in watches/eyewear by Q4FY21.

Studded jewelry recovery and eyewear/Caratlane turnaround to drive margin gains ahead:

Gross margins declined by ~300bps YoY, dragged down by lower studded mix (26% vs. 29% YoY) and Rs3.3bn sale of bullion gold. Turnaround in the eyewear business and margin improvement in watches led to flat YoY EBITDA margin performance in Q3FY21. TTAN expects margins to recover further with strong traction in studded sales and continued recovery in watches and eyewear. Eyewear turnaround is sustainable and is led by increased in-house production, closure of unprofitable stores and manufacturing consolidation; TTAN expects eyewear to deliver double-digit EBIT margins in FY23E.

Raise earnings by 8-9%, maintain Buy:

Acceleration in jewelry growth and strong cost saving program, exit from unprofitable businesses and full recovery in sales can offer more upsides ahead, in our view. We raises FY22-23 estimates by 8-9% and maintain Buy/OW in EAP, with a revised TP of Rs1,650 (from Rs1,450), based on 50x Mar’23E EPS.

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