Titan continues to glitter after robust Q3 show; stock hits all-time high

Stocks of Titan Company, India’s largest jewellery player, hit an all-time high of Rs 1,049 a share on Monday, before closing at Rs 1,026. 

This is a gain of 3.5 per cent over its previous close against a 0.66 per cent fall in the S&P BSE FMCG index. 

Besides an upward thrust for the overall consumption given in the Budget on Friday, healthy performance for the December 2018 quarter (Q3) and expectations of a strong growth momentum turned investors bullish on Titan.

The company clocked a 35 per cent year-on-year rise each in net sales and net profit in Q3 at Rs 5,632.5 crore and Rs 416.2 crore, respectively. This was mainly on the back of a 37 per cent year-on-year growth in jewellery revenue. 

The segment accounted for over 85 per cent of the company’s total revenue in Q3. Mega festivals such as Diwali and the wedding season resulted in strong demand for both studded and plain jewellery.

Though jewellery growth slowed a bit in January due to a closing of the gold exchange scheme and offseason (for a wedding), the management is confident of the high demand in the March 2019 quarter and does not expect higher gold prices to impact consumers’ buying pattern. Also, 2019-20 or FY20 looks optimistic, considering the number of weddings. Analysts believe this, coupled with store expansion (it added 24 Tanishq stores during April-December 2018 taking the tally to 358; aims to add 16 more by March 2019), and implementation of goods and services tax (GST) may help Titan witness over 22 per cent annual jewellery revenue growth over FY18 to FY20.

 
Analysts at Edelweiss Securities envisage Titan to extend its growth run led by market share gains, rising share of studded jewellery, new launches and retail expansion.

The wedding season would also fuel demand for the high profitable studded jewellery business and help push up overall operating profit margin of the company. Studded jewellery accounted for around 25 per cent of the company’s overall jewellery sales in Q3. 

This, along with operating leverage, would take Titan’s EBITDA or earnings before interest, tax, depreciation and amortisation margin close to 12 per cent by FY20 from 10.7 per cent during April-December 2018, analysts estimate.

Even in Q3, lower operating expenses and a 254 basis points expansion in the jewellery segment’s profitability (earnings before interest and tax or EBIT margin) helped Titan contain margin pressure at the EBITDA level. 

Amid a 28 basis point year-on-year contraction in gross profit margin, Titan’s EBITDA margin fell 23 basis points year-on-year to 10.3 per cent in Q3. Moreover, a sharp 682 basis points contraction in operating margin of watches business, too, pulled back Titan’s overall profitability in Q3.

Strong multi-channel campaigns to create awareness about new launches took a toll on the watches’ margin, but should help improve growth visibility of the division. 

The company is confident of growing its watches division to around 20 per cent (revenue from watches business was up 19 per cent year-on-year in Q3) amid increase in scale with operating margin likely to be at the 14-15 levels. These margins look achievable given that the division has clocked EBIT margins of 15-18 per cent in the past 3-4 quarters.

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