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Demand trends positive; miss on margins

* Titan Company (TTAN) posted consolidated sales growth of 16% YoY in 2QFY25 (in line). The pressure on EBITDA margins led to a 7% miss on EBITDA (after adjusting customs duty). Higher interest costs (+71% YoY) and depreciation (+19%) led to only 2% YoY growth in adjusted PAT.

* Jewelry sales growth (standalone, excluding bullion) was strong at 26% YoY (+9% in 1QFY25) due to strong demand recovery after customs duty reduction. Buyer growth was 12% YoY. Studded growth was 12% YoY, and the ratio was 30% (300bp decline YoY). Net store additions were 35 in 2Q, taking the total store count to 1,009. Standalone LFL growth was 15%. Caratlane’s growth was strong 28% in 2QFY25.

* Standalone jewelry EBIT margin (excl. bullion, adjusting customs duty) contracted 270bp YoY to 11.4% (est. 13.8%). The margin contraction was driven by rising gold costs, softer demand for large-carat stones amid price fluctuations, and rising competitive intensity. Caratlane’s margin expanded 300bp YoY to 7%. For FY25, we model 11.3% standalone jewelry EBIT margin (excl. bullion, adjusting customs duty).

* The watch segment grew 19% YoY. In analog watches, Fastrack, Titan, and Helios clocked 14%, 15%, and 43% YoY growth, respectively, while wearables revenue declined 13% due to price cuts (double-digit volume growth).

* With the jewelry industry seeing faster formalization, we believe that TTAN will continue to benefit, driven by store additions, multi-format presence, better designs and customer understanding, and a strong recall of trust. Although the margin trajectory has been weak for the last 4-5 quarters, we expect limited pressure going ahead. We reiterate our BUY rating with a TP of INR3,850 (premised on 60x Sep’26E EPS).

Jewelry sustaining healthy demand; miss on profitability

* Healthy revenue growth: TTAN’s consolidated revenue grew 16% YoY to INR145.3b (est. INR144.3b). Jewelry sales grew 15% YoY to INR127.7b (est. 127.1b) (ex-bullion sales grew by 27% to INR117.8b). Standalone sales (excl. bullion) grew by 26% to INR107.6b (est. INR102.9) and Caratlane’s sales grew 28% YoY. The number of jewelry stores grew 20% YoY to 1,009. Watches, Eyewear, and Others segments clocked revenue growth of 19%, 7%, and 30% YoY.

* Margin under pressure: After adjusting the customs duty effect, consol. gross margin declined 70bp YoY to 22.7% (est. 23.1%). EBITDA margin contracted 80bp YoY to 10.5% (est. 11.4%). The standalone jewelry EBIT margin (excl. bullion) contracted 270bp YoY to 11.4% (est. 13.8%). Caratlane’s EBIT margin expanded 300bp to 7%. Watches’ margin expanded 40bp to 15% and eye care margin dipped 230bp YoY to 10.9%.

* Muted profit growth: After adjusting the customs duty effect, EBITDA grew 8% YoY to INR15.3b (est. INR16.4b) in 2QFY25. PBT declined 1% YoY to INR12.4b (est. INR14.3b) on higher interest (+ 71% YoY to INR2.4b) and higher depreciation (+19% YoY to INR1.7b). Adj. PAT was up 2% YoY to INR9.3b. Reported EBITDA/PBT/APAT (due to customs duty reduction) declined 12%/24%/23%.

*  After adjusting the customs duty effect, 1HFY25 net sales grew 14%, EBITDA was up 9%, and APAT was down 2%. In 2HFY25, we estimate net sales/ EBITDA/APAT growth of 22%/18%/20%.

Highlights from the management commentary

* Wedding jewelry demand started picking up after the customs duty reduction announcement, and is expected to remain strong in the next two quarters.

* The average ticket size for studded jewelry has been affected partly by the decline in solitaire demand and delays in launching products in certain price ranges.

* TTAN expects 2H will see better margins than 1H. They expects jewelry EBIT margin of 11% to 11.5% for FY25.

* Customer interest in lab-grown jewelry significantly lower in products priced above INR1 lakh.

* CaratLane’s pricing strategy targets the sub-INR50,000 range, with products typically priced between INR30,000 and INR50,000.

* Watches business grew 19% YoY, driven mainly by a ~26% increase in the analog segment, with Sonata/Fastrack up 20%/18% YoY.

Valuation and view

* We cut our EPS estimates by 5% each for FY25/FY26.

* TTAN, with its superior competitive positioning (in sourcing, studded ratio, youth-centric focus, and reinvestment strategy), has continued to outperform other branded players. The brand recall and business moat are not easily replicable; therefore, Tanishq’s competitive edge will remain strong in the category. The store count reached 3,171 as of Sep’24, and the expansion story remains intact.

* TTAN’s EBITDA margin has been under pressure during FY24 and 1HFY25 owing to a lower studded mix. It will be critical to monitor the margin outlook amid intensifying competition. The non-jewelry business is also scaling up well and will contribute to growth in the medium term. The business currently accounts for 13% of revenue and 12% of EBIT.

* We model a CAGR of 17%/17%/18% in revenue/EBITDA/PAT during FY24-27E. TTAN’s valuation is rich, but it offers a long runway for growth with a superior execution track record. Reiterate BUY with a TP of INR3,850 (based on 60x Sep’26E EPS).

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