Higher gold prices, low growth in Q1 take the shine off Titan stock

High valuations and low growth in the June quarter (Q1) led to a steep 12 per cent fall in the Titan Company stock. Investors could not stomach the subdued performance by the company’s core jewellery segment, which accounts for over 80 per cent of overall revenues.

The stock, trading at 50-51 times one-year forward earnings, did not leave any room for disappointment on the operations front.

The company reported a year-on-year jewellery segment growth of 13 per cent for the June quarter, the slowest in four quarters. This would now put to test the company’s ability to achieve FY20 revenue growth target of 20 per cent.

Analysts at Reliance Securities now expect Titan to clock 15.6 per cent revenue growth in FY20, over 3 per cent lower than their earlier estimates. While there might not be a sharp revision in margins as the company is expected to pass on higher costs to customers, profit growth is expected to be affected.

(Figures as of quarter-end) Source: IBJA, company and brokerage reports
Analysts at Motilal Oswal Financial Services (MOFSL) have slashed their earnings estimates for Titan by about 3 per cent and 2 per cent for FY20 and FY21, respectively, after the company’s update on jewellery sales.

The reason for the lower sales was high gold prices, which had a significant impact on consumer demand.

In June, average gold prices were up by 8 per cent year-on-year and 4 per cent over May. Titan, during its March 2019 quarter earnings call in May, had indicated that jewellery growth had clocked growth of 19 per cent year-on-year in Q1 till May 7. The demand erosion came in the later part of May and in June.

According to MOFSL, gold prices increased towards the second half of the quarter, which led to demand postponement, impacting segmental growth for the quarter. In fact, higher Customs duty on gold would only compound the near-term growth worry for Titan’s jewellery business.

The Budget last week increased Customs duty on gold and precious metals from 10 per cent to 12.5 per cent. Analysts also believe that the higher taxation could lead to illegal imports of gold, impacting the business of organised players like Titan.

Apart from the jewellery business, performance of other businesses such as watch, eyewear, perfume (Skinn), remained satisfactory in Q1, restricting the negative impact of jewellery business to some extent. Titan’s watches segment reported 19 per cent revenue growth in Q1. This was partly supported by execution of a large institutional order from Tata Consultancy Services. Eyewear segment revenue too rose by 13 per cent in Q1.

Going ahead, gold buying behaviour of customers in the upcoming festive season and trajectory of gold prices would be the key drivers for the Titan’s stock. Because, despite Tuesday’s correction, at 43 times 1-year forward, the stock currently trades at 37 per cent premium to its long-term average valuation.

Some analysts, however, are positive on the stock given its long-term growth potential.  Analysts believe that market share gains, revenue visibility, margin expansion and return ratios could support valuations.

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