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Maintain REDUCE On Titan - Washout quarter! - HDFC Securities

Posted On: 2020-08-12 02:58:01

Ms. Jay Gandhi, Institutional Research Analyst, HDFC Securities.

Titan's demand across categories was severely impacted in 1QFY21 due to the COVID-led nationwide lockdown. Topline declined 62% YoY to Rs. 19.8bn. The road to recovery remains hazy as weak consumer sentiment meets rising gold prices. Jewellery sales (ex-bullion sale of Rs. 6bn) declined 71% YoY to Rs. 12.2bn (HSIE: Rs. 10.5bn). Impact on profitability was even more severe across categories, courtesy unfavourable operating leverage. Titan reported a Rs 2.5bn EBITDA loss in 1Q - a first! We largely maintain our FY22 EPS estimates and arrive at a DCF-based target price of Rs 950/sh (implying 48x Jun-22 P/E). Note: DCF rolled over to Jun-21.

1QFY21 highlights: Jewellery sales (82% of sales) declined 56% YoY to Rs. 18.2bn. (including Rs. 6bn of Gold Bullion sales). Ex-that, Jewellery sales declined 71% YoY to Rs. 12.2bn underpinned by a severe volume loss courtesy the pandemic (grammage down 81% YoY). Note: Jewellery realisation is up 43% YoY, implying that there is likely to have been significant downtrading in jewellery purchases too in 1Q along with lower studded ratio (1QFY21: 18% vs. 1QFY20: 25%). GMs contracted 490bp primarily led by 1. Severe destruction in the Higher GM non-jewellery biz, 2. Lower studded ratio, 3. Lower-margin Gold Bullion sales. EBITDA losses for 1Q stood at -Rs.2.5bn (a first for Titan). Watches volume/revenue declined -93/-89% YoY, and Eyewear declined 80% YoY in 1Q.

Outlook: We expect a recovery in jewellery to be painfully slow as soaring gold prices act as gravity for jewellery demand in the near term. We build in revenue/EBITDA/PAT CAGR of 9%/8%/11% over FY20-23E. While Titan remains well-capitalised to ride through these tough times, the market share narrative may take a pause as other big-box jewellers resort to intense discounting to liquidate inventory. Hence, we maintain our REDUCE recommendation.

Shares of Titan Company Limited was last trading in BSE at Rs.1066.5 as compared to the previous close of Rs. 1107.8. The total number of shares traded during the day was 338798 in over 17907 trades.

The stock hit an intraday high of Rs. 1087.6 and intraday low of 1050.2. The net turnover during the day was Rs. 361417628.

Source: Equity Bulls

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