Recovery of Titan's jewellery business in Q1 fails to enthuse Street

Apart from jewellery, most of other businesses including watches, where recovery rate is up to 35-40 per cent, are still away from normalcy
In its first-quarter update for FY21, Titan Company after market hours on Tuesday said its jewellery business in June reached 70 per cent of the year-ago level, and 83 per cent of its stores across all businesses were now open. But, the Street wasn't impressed and the stock fell 2.6 per cent on Wednesday; the Sensex was down 0.8 per cent. According to the update, Titan's jewellery revenue in May was slightly below 20 per cent of the year-ago level.

Even as the recovery in the jewellery business, which accounts for over 80-85 per cent of Titan’s revenue and operating profit, sounds encouraging, there is scepticism over the pace and quality of further recovery.

Analysts at PhillipCapital in their report said, based on channel checks, pent-up demand with a preference for low-margin gold coins and bars, the redemption of the golden harvest scheme, and purchase of jewellery for weddings in advance amid fear of a further rise in the gold price are the key reasons for green shoots visible in jewellery demand. The bigger share of jewellery for weddings —despite such events being postponed — as reported by Titan, underlines the advance buying of such ornaments.
So, it needs to be seen if the pace of recovery is sustainable. The higher price of gold at a time when there is uncertainty over consumers’ income may put pressure on jewellery demand in the near term.

 

 
Within the jewellery segment, there are little signs of demand for high-margin studded jewellery reviving anytime soon which may also hurt Titan’s earnings. “Lower share of high-value studded jewellery would weigh on Titan’s profitability in FY21,” say analysts at Motilal Oswal Securities, who are also cautious on near-term demand. Apart from jewellery, most other businesses, including watches where the recovery rate is around 35-40 per cent, are still far from normal.

Also, given that of Titan's total stores, 57 per cent are located in metros and tier-1 cities and around 35 per cent are in the worst-affected states of Maharashtra, Delhi, Tamil Nadu and Gujarat, reaching back to pre-Covid sales will be tough.
Among some silver linings, the company has negotiated significant rental waiver/reduction for the period of disruption and the September quarter, a move that could protect its bottom line to some extent.

While management commentary on demand pattern and recovery would be the key, Titan’s stock valuations remain expensive. The stock, which is up 25 per cent from its March lows, currently trades at 1-year forward PE valuation of 63 times, a 40 per cent premium to its five-year mean.


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