Maintain REDUCE on Titan - Reasonable print - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

Titan's demand recovery has been reasonable (especially in Jewellery). That said, Titan's relative market share among the big-box jewellers seems to have hit a pit stop. Channel checks suggest big-box jewellers have declined 0 to -15% vs Titan's (jewellery business) -15% (adj. bullion sale and ineffective hedges). While optically the reported Jewellery margins remain weak at 7% (HSIE: 6.3%), the underlying Jewellery EBIT margin at 10%+ remains healthy. Non-jewellery recovering progressively with improving profitability but isn't a needle mover. We mostly maintain our FY22/23 EPS estimates and our DCF-based target price of Rs 1,050/sh (implying 50x Sep-22 P/E).

2QFY21 highlights: Jewellery sales (82% of sales) grew 9% YoY to Rs. 39.8bn. (including Rs. 3.9bn of Gold Bullion sales; in-line). Adjusting for Bullion sales and ineffective hedges, Jewellery sales declined 15% YoY to Rs. 31bn. Volumes were down 31% YoY, and realisations were up 38%. While reported Jewellery EBIT margins at 7.2% contracted 320bp YoY (HSIE: 8.5%), the adj. jewellery EBIT margin (ex-Bullion sales, ineffective hedges and a provision of Rs. 340mn towards overdue margin money from a broker) remains healthy at 10%+. Studded ratio courtesy the aggressive activation in 2Q continues to improve progressively (26%), albeit still significantly lower YoY (38%; HSIE: 27%). Watches/Eyewear declined 44/39% YoY with better than expected profitability. On recovery rates, management hopes to clock single digit growth/75-80% recovery rates in Jewellery/Non-jewellery revenues in 3Q. Adj consolidated EBIT margin declined 400bp YoY to 5.4% (HSIE: 6.3%). Adj. PAT declined 44.5% YoY to Rs. 1.73bn (HSIE: Rs. 1.98bn).

Outlook: While Titan's jewellery recovery is encouraging, calling out a secular revival is akin to jumping the gun as the ecosystem remains extremely competitive. Note: Big-box jewellers are sitting on significant GM gains, which can be used to remain more competitive for a couple of quarters. Hence, the market share gain narrative is likely to hit pause momentarily. In this backdrop, the stock at ~60x Sep-22 P/E doesn't offer comfort. We maintain our REDUCE recommendation and our DCF -based target price of Rs. 1,050/sh (implying 50x Sep-22 P/E).

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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