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Titan Company Ltd - Q2FY21 Result Update - YES Securities

Posted On: 2020-10-29 05:47:27

Decent revenue recovery across segments but jewellery margins under pressure; demand at risk of tapering down post festive period

- Quarter highlights - 98% recovery of jewellery business (led by higher gold prices) and 89% recovery overall (some benefit of sharp gold price hike last July); margins sharply impacted by negative operating leverage, higher share of jewellery business, lower studded share and higher coin sales; 26cr rent waivers in other income; inventory levels stable given sales of excess gold worth 391cr; 34cr provision for overdue from one broker used for hedging; Montblanc JV ended; studded share of 26% vs 38% yoy; coin share of 14% vs 3% yoy; watches recovery rate at 55%; eyewear recovery rate at 61%; Caratlane grew 10%

- Hedge accounting impact - Retail sales is 96% of normal in value terms with 74% of normal footfalls; adjusting for hedges, it would be about 86% of normal; ineffective hedging expense of 484crs (which leads to an inflation in revenue) as company sold more than expected quantity and benefitted from second gold on lease moratorium; will come off dramatically as most pre-pandemic hedging contracts are expiring by Oct-Nov.

- Current trends in 3Q - Currently running at high single-digit growth in first 10 days of festive season; Tier 2/3 towns have down much better than metro cities which have now started recovering; wedding segment has seen marginal growth given pent-up demand; studded segment demand remains sluggish; aiming for 90-100% recovery in jewellery business in 3Q and growth in 4Q; trying to maximize revenues even at slightly lower margins

- Studded/coins share - Recovered to 26% in 2Q from 18% in 1Q but still lower yoy, lower discounting than last year so no margin pressure on studded; coin sales remain strong with share at 14% vs mid single-digits normally.

- Festive sentiment - Witnessing marginal growth in the ongoing festive season but uncertainty remains as company is trying to advance Diwali/Dhanteras sales to manage crowds better.

- Store addition plans - Opened 14 stores YTD and will end up with 30-35 additional Tanishq stores in FY21 with L2 preferred mode (opening smaller stores in smaller towns); no addition in watches; 25-30 net addition expected in eyewear.

- Muted enrolment in Golden Harvest Scheme - Lower enrolment will impact sales in 1QFY22, currently back to 85% of normal levels; looking at other schemes to create demand for next year.

- Competition- Industry recovery in jewellery lower at 55-70% indicating further market share gains; gold prices currently stable.

- Watches business - Muted recovery at 55% but sentiment improving with ecommerce doing well; will look at 100% normalization by 4Q-end coupled with margin recovery; looking at growth in FY22 with stable margins.

- Eyewear business - Aggressive cost cutting initiatives have started driving turnaround with a 61% recovery rate in 2Q and positive EBIT.

- Hallmarking- Deferred to June 2021 which might be delayed further; will take time for the industry to fully comply.

- Valuation and view - The stock is currently trading at 47x FY23E earnings, which leaves little room for further upsides in the near-term. While market share gains in jewellery and margin turnaround in other divisions remains medium-term positives, near-term risk of jewellery demand trends sustaining beyond the festive season coupled with margin headwinds are key issues. We expect the stock to keep consolidating with a negative bias for now, till we get more clarity on demand trends post the festive period.

Shares of Titan Company Limited was last trading in BSE at Rs.1177.5 as compared to the previous close of Rs. 1217.9. The total number of shares traded during the day was 169196 in over 9478 trades.

The stock hit an intraday high of Rs. 1199.95 and intraday low of 1155.5. The net turnover during the day was Rs. 199524076.

Source: Equity Bulls

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