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Stellar performance; momentum to continue

* Titan Company (TTAN) reported strong sales growth of ~37% YoY in 2QFY24 (sales rose 22% in the base quarter), beating our estimates. TTAN is one of the few consumer companies in the current context that has been growing revenue at this pace for the last 5-6 quarters, despite the high base and discretionary nature of its product segments. This underscores the superior brand positioning and the prowess of its franchise, which is consistently gaining share. Comparatively, the staples companies have found it difficult to grow their revenue beyond 6-7%. TTAN achieved double-digit growth across segments. Domestic jewelry sales were robust driven by higher diamond sales, mystique collections, and a healthy double-digit growth in both buyers and average ticket size.

* The EBITDA margin contracted YoY due to a one-time gain in the base year and some changes in the product mix. However, the margin improved sequentially by 180bp led by better studded share at ~33%. Management retained its margin guidance of 12-13% for FY24.

* Management remains optimistic on the festive and wedding seasons despite the upswing in gold prices. TTAN’s other businesses such as watches, wearables, and eyecare, also consistently delivered healthy performance. We reiterate our BUY rating with a TP of INR3,900 (premised on 65xFY25E EPS) and continue to maintain TTAN as our top Consumer Discretionary idea in India.

Beat on all fronts

* TTAN’s 2QFY24 consolidated revenue grew 36.7% YoY to INR125.3b (est. INR107.1b).

* EBITDA grew 13.2% YoY to INR14.1b (est. INR12.5b) in 2QFY24.

* PBT increased 9.5% YoY to INR12.5b (est. INR11.2b) during the quarter.

* Recurring PAT came in at INR9.2b (est. INR8.5b) in 2QFY24, up 9.6% YoY.

* Consolidated gross margin contracted 430bp YoY, while it was up 120bp QoQ to 23.4% (est. 24.3%).

* The EBITDA margin contracted YoY due to a one-time gain in the base year and some changes in the product mix. As a percentage of sales, staff costs (down 60bp YoY), advertisement costs (down 30bp YoY), and other expenses (down 100bp YoY) led to 330bp contraction in EBITDA margin to 11.3% (est. 11.7%).

* Segmental performance: Jewelry sales jumped 38.6% YoY to INR110.8b (excluding gold ingots sales that rose 23.3% YoY to INR92.7b); while margin contracted 260bp YoY to 11%. Sales of watches jumped 31.6% YoY to INR10.9b, with an EBIT margin of 14.7% in 2QFY24.

* For 1HFY24, TTAN’s net sales/EBITDA/Adj. PAT grew 31.3%/3.8%/2.8%.

Highlights from the management commentary

* The contribution from new customers is currently at 48%, with a consistent trend of ~45%. New customers often start with lower ticket sizes, below INR75,000, as they familiarize themselves with the brand. Repeat customers, on the other hand, tend to make larger purchases, contributing significantly to their lifetime value.

* Gold prices have increased by around 10% since 30th Sep’23. Despite the recent stability, customers typically wait until the last moment for festive purchases. However, management expects a surge in customers over the next 10 days, provided there are no further jumps in gold prices.

* Zoya enjoys better gross margin than Tanishq, mainly due to its intensive focus on studded business (95% share). The remaining factors contributing to higher operating leverage result in significantly elevated margin and profitability.

* The company has experienced a drop in diamond prices, particularly in higher carat solitaires, due to international demand and supply dynamics. This might lead to margin dilution over the next seven to eight months, as inventory prices influence margins.

Valuation and view

* There are no material changes to our FY24 and FY25 forecasts.

* TTAN is one of the few consumer companies that has been growing revenue at this pace despite the high base and discretionary nature of its product segments. This underscores the superior brand positioning and the prowess of its franchise. TTAN is on track to achieve the existing jewelry revenue guidance of 2.5x FY22 revenue by FY27, implying an impressive CAGR of 20%. With a current market share of ~7% in a sizable ~INR5t market, there is significant headroom for growth.

* The gradual recovery in the studded ratio is expected to support improved gross margin in the future. Its healthy growth outlook, favorable industry trends, and a strong balance sheet, make it a compelling option in the discretionary sector. TTAN has an impressive track record of outperforming its peers as well as exceptional long-term growth potential, all of which justify its premium valuations. We reiterate our BUY rating with a TP of INR3,900 (premised on 65xFY25E EPS) and continue to maintain it as our Top Consumer Discretionary idea in India.

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