High gold prices, soft jewellery demand weigh on Titan's Q2 performance

Growth in watches business too fell to 6.4 per cent from 20.4 per cent in the June 2019 quarter
Titan reported a muted performance for the September quarter (Q2) on Tuesday after market hours because of higher gold prices and weakness in overall consumption.


This took a toll on the company’s key jewellery business, which accounts for 80-85 per cent of overall sales as well as operating profit.


On a standalone basis, the jewellery and watch major’s operating revenue was Rs 4,435 crore and remained almost flat compared to the year-ago figure. Profit before tax (PBT) stood at Rs 429.4 crore, down 3.7 per cent and net profit was up just 1.8 per cent year-on-year (YoY) to Rs 320.2 crore.


Even as tax outgo fell with the company shifting to the new regime, revenue, PBT, and net profit were below Bloomberg consensus expectations of Rs 4,569 crore, Rs 482 crore, and Rs 362 crore, respectively.


Higher gold prices not only pulled down overall demand for the yellow metal amid feeble consumer sentiment (jewellery volume was down 14 per cent), but also led to the highest ever hedging losses for the firm. While gold prices were up 14 per cent sequentially and 22 per cent YoY in Q2, Titan booked Rs 120 crore in hedging losses. It must be noted while Titan had recently indicated of hedging losses in its Q2 update last month, hedging loss only affects the top line.


Had it not been for hedging losses, Titan would have reported 7 per cent growth in retail jewellery sales in Q2, as compared to a 1.5 per cent YoY decline in the reported sales, its first decline since September 2015 quarter. Growth in watches business, too, fell to 6.4 per cent from 20.4 per cent in Q1.


Due to the lacklustre performance and more than expected weakness in consumer sentiment, Titan lowered its H2FY20 (October 2019 to March 2020) revenue growth guidance sharply to 11-13 per cent from 20 per cent.


However, the road ahead may not be as bad. Improved jewellery demand during the festive season and the upcoming wedding season should help the business.


According to the management, jewellery business grew by 10 per cent during Dussehra and Diwali.

Demand pressure was more for low-priced jewellery. Off-take of pricey products was relatively better in Q2, with share of studded jewellery up at 38 per cent from 25 per cent in Q1 and 35 per cent a year ago.


This supported a 127 basis point YoY expansion in overall gross profit margin, besides inventory gains.


Discounts and feeble operating leverage, however, restricted improvement in operating profit margin to 97 basis points YoY at 11.6 per cent.


“Given the dismal performance in H1FY20 (April to September 2019), there would be a downward revision in Titan’s revenue growth and operating margin for FY20, warranting a valuation de-rating for the stock,” says Priyank Chheda, analyst at Reliance Securities.


At 51 times FY21 estimated earnings, the stock is trading at 35 per cent premium valuation to its long-term historical average.


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