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Amid gold price volatility jewelry sales rise 23% in Q3

Financial and valuation summary Titan’s Q3FY24 print was below our estimates; amid volatility in gold prices consol. Revenue/EBITDA/PAT grew 22.0%/16.2%/15.5%. Jewelry segment (incl. bullion sale) grew 23%, driven by strategic gold exchange offer creating customer excitement to lift wedding jewelry share. Management alluded this to, (1) 50% contribution from new buyer, (2) with 24% contribution studded revenues grew 14%, and (3) growth in international business (now 14 stores). Moreover, jewelry segment reported 12.2% EBIT margin. Watches segment grew 21.1%, with 5.6% EBIT margin. Eyewear business cut by 4.0%, with 8.4% EBIT margin. Emerging businesses grew 25.8% led by Taneira (+61%), F & FA (-7.0%), while Caratlane saw solid growth of 32.0%. Gross margin lowered to 23.4% (-60bp); EBITDA at Rs15.6bn improved by 16.2% settling EBITDA margin at 11.0% (-55bp) YoY. Titan guided to maintain operating margin ~12-13% range. We increased earnings and retain BUY rating, with a revised DCF-based TP Rs4,255 (implying 65.6x avg. FY25E/FY26E EPS).

Strong performance led by growth in new buyers though some sales got preponed in Q2

Consolidated revenue in Q3FY24 grew by 22.0% to Rs141.6bn led by 23.0% growth in domestic jewelry business supported by healthy double digit growth in buyer and average bill value. Segmental growth: India Jewelry (+23.0%), Watches & Wearables (+21.1%), Eyewear (-4.0%) and Caratlane (+32.0%). Management alluded this to, (1) 50% contribution from new buyer, (2) 24% contribution studded revenues grew 14%, (3) store addition in international business (now 14 stores), and (4) aggressive gold exchange program (~43%). Watches reported 21.1% growth at Rs9.8bn led by analogue watches (+18%) and wearables (+65%). Revenues for Eyeware division cut by 4.0% to Rs1.7bn led by 9% decline in house brands though international brands grew 14%. Revenues for Taneira grew 61%, while declined 7% in F & FA. Store addition in Q3: jewelry: 38, W & W: 25, and Taneira: 11. Management guided for (1) Tanishq to add 40-45 stores, and (2) International 24 store in FY24. TEAL revenue grew by 61.3% to Rs2.0bn driven by 85% growth in Automation division, while manufacturing services grew 30% YoY.

Gross margin stable at 23.4% despite higher share from gold exchange and bullion sale

Gross margin lowered by 60bp to 23.4% due to higher share of gold exchange (43%), bullion sale and rationalization of gold prices to gain market share. Ad spends to 2.4% of net sales. EBITDA improved by 16.2% to Rs15.6bn while EBITDA margin at 11.0% (-55bp) YoY on the back of higher Ad spends (+23.4%), Employee cost (+16.8%) and other exp. (+23.4%). Despite high competitive intensity management remains confidant securing market share and maintain operating margins in the range of ~12-13% in FY24.

Valuation driven by future revenue growth potential

We remain upbeat on Titan’s operating performance led by strong demand across businesses segments yet its footing in international market appears to be promising. We reckon Titan’s strategy revolving around serving millennials, meeting their aspirational demand with introduction of new designs and channels, yet rising share of wedding jewelry could pay richly. Further with rising interest rates and industry formalization showing up in market share gains for Titan. The turnaround in the Caratlane, watches, and eyewear divisions and continuity in their profitability potential need to be watched. With stable margin outlook we increased FY24E/FY25E earnings by 1.0%/9.9%. We retain BUY, with a revised DCF-based TP Rs4,255 (implying 65.6x avg. FY25E/FY26E EPS). Risks: irrational competition from regional players; prolonged recovery in the economy, leading to lower demand for jewelry and rising gold prices.

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