Titan Company - Faster-than-expected recovery - ICICI Securities

2QFY21 - Jewellery sales declined just 2%, however, adjusting for the ineffective hedge, sales declined 16%. More importantly, adjusting for one-offs, jewellery EBIT margins declined only 170bps to 9.2% (see table 3 for calculations) despite an inferior product mix. Potential growth drivers are - (1) boost to volumes from (somewhat) stable gold prices, (2) consumers (likely) accepting higher gold prices and expecting further inflation and (3) market share gains (liquidity challenges for smaller competitors). We expect profitability to return to normal levels in FY22 once revenue growth and product mix normalises. Reiterate ADD.

- Strong recovery in jewellery: Reported revenue declined 11% (excluding Rs 3.9 bn gold bullion sale), EBITDA, recurring PAT declined 36%, 27%. Jewellery revenue declined 2% (volumes -31%). Store expansion remained muted - it added 8 Tanishq stores in 2Q (6 in 1Q, total store count of 341 stores in 210 cities, retail space of 1.29 mn sqft). It plans to open ~34 stores in FY21. Recovery in watches and eyewear was slower given their discretionary nature - watches (-44%), eyewear (-39%).

- Margins under pressure: Reported EBITDA margin declined 320bps YoY driven by - (1) lower studded share in jewellery (at 26% versus 38% in Q2FY20), (2) higher gold coin sales (at 14% versus 3% in Q2FY20), (3) ineffective hedges (Rs4.8 bn of higher other expenses which, if effective, would have been netted off from revenue), (4) negative operating leverage partially offset by cost controls in watches and better product mix and lower discounting in eyewear. Jewellery EBIT margin was reported at 8.3%. Adjusting for the one-offs and hedge accounting, jewellery EBIT margin would have been 9.2% (but revenue would have then declined by 16%). It has provided Rs340mn against receivables from a commodity broker. Also, it has formed a wholly owned subsidiary Titan Commodity Trading Limited.

- Balance sheet and cash flows: Cash generation has increased significantly driven by liquidation of inventory by bullion sale, increase in gold on loan and significant decline in capex intensity (-67% YoY). OCF / FCF was at Rs10.7bn / Rs10.3bn. Working capital days increased by 45 days to 170 days primarily driven by higher inventory (+43 days) due to significant decline in revenues in 1HFY21.

- Valuation and risks: We increase our FY22 earnings estimates by ~7%; modelling revenue / EBITDA / PAT CAGR of 16 / 16 / 19 (%) over FY20-22E. Maintain ADD with a DCF-based revised target price of Rs1,350 (was Rs1,250). At our target price, the stock will trade at 51x P/E multiple Sep-22E. Key downside risk is potential shift to fixed making charges that could limit long-term benefits from operating leverage.

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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