This Jhunjhunwala stock falls amid margin dip in Q4; should you sell?

Titan's medium- to long-term earnings growth opportunity is best-of-breed, say analysts
Titan Company shares declined 2.3 per cent to Rs 1,471.6 apiece in the intra-day deals on the BSE on Friday after the jewellery maker took a hit on its margins in the March quarter of FY21 on the back of salary hikes, lower proportion of studded sales, and reduction in gold import duty. At close, the stock was down 0.95 per cent at Rs 1,492 on the BSE as against a 2 per cent decline in the benchmark S&P BSE Sensex.

Titan Company, in which Rakesh Jhunjhunwala has a stake holding of 3.9 per cent at the end of March quarter, reported  operating margins at 10.9 per cent, down 210 bps relative to 13 per cent a year ago. "The financial year ended March 2021 has been a testing one for the company with the pandemic hitting operations significantly, particularly in the first half of the financial year," Titan’s Managing Director C K Venkataraman said in a statement.

However, its consolidated net profit rose 66 per cent YoY to Rs 568 crore -- highest-ever quarterly prodit -- on the back of a low base. Bloomberg consensus estimates had pegged Q4 net profit for the Bengaluru-based company at Rs 549 crore. Operating profit, meanwhile, rose 33 per cent year-on-year to Rs 817 crore.

Revenue for the quarter rose 59 per cent over the previous year to Rs 7,494 crore, against a forecast of Rs 7,516.8 crore by a poll of Bloomberg analysts. Individually, the jewellery division recorded an income of Rs 6,397 crores for the quarter (excluding gold bullion sales) as compared to Rs 3,754 crores last year. The Watches and wearables business recovered well in the quarter to record an income of Rs 555 crores against Rs 557 crores in the previous year. The Eyewear business also improved with revenues growing by 18 per cent in the quarter, recording an income of Rs 127 crores as against Rs 108 crores last year, the company said.

Here's how brokerages interpret the results:

Jefferies
Reco: Hold | Target price: Rs 1,450 | Potential downside: 3.7 per cent

Titan's 4Q EBITDA grew 32 per cent YoY to Rs 800 crore, which was 4 per cent ahead of our forecast. Gross margin (GM) declined 850bps YoY due to inferior mix (inter/intra categories). However, this was offset by lower costs. Staff, advertising and other expenses saw moderate YoYchange. Net earnings were up 48per cent YoY to Rs 530 crore, marginally ahead.

Jwellery business led revenue & profit growth and managed to gain shareswhile other businesses were mixed. Series of initiatives are underway to navigatethrough the crisis but pandemic clouds near-term outlook, evident from the fact thatjust half of Titan's jewellery stores are currently operational. Forecasting FY22 isparticularly tough and we expect volatile trend

Motilal Oswal Financial Services
Reco: Buy | TP: Rs 1,785 | Potenial upside: 19 per cent

Titan's Jewelry sales grew an impressive 71.3 pe cent YoY to Rs 6680 crore but the segment margin fell 290bp YoY to 10.7 per cent. The factors that led to strong Jewelry demand were decline in gold prices, robust wedding demand, absence of other avenues of spending on a wedding, thus boosting Jewelry sales, and gains from other organized and unorganized players. The latter would continue to boost Jewelry sales over the near to medium term.

Unlike other discretionary peers, Titan can claw back some of this lost demand. This is because the underlying demand remains robust, led by decline in gold prices and strong wedding demand. Despite a 62 per cent YoY sales decline in Q1FY21, it ended up reporting positive sales growth in FY21.

Titan's medium- to long-term earnings growth opportunity is best-of-breed, which is reflected in the EPS CAGR of 24 per cent over the past three years before the Covid-19 impact in FY21. There is a strong growth runway given the company's market share of less than 10 per cent and the continuing struggles of unorganized and other organized peers. While valuations of 50.6x FY23E EPS are not cheap, the long runway for profitable growth deserves a premium multiple.

Kotak Instituitional Equities
Reco: Add | TP: Rs 1,625 | Potential upside: 7.8 per cent

We like Titan's razor-sharp focus on market share gain. It has taken several structural measures (focus on wedding segment, reducing price gap versus competition on undifferentiated designs, etc.) and tactical interventions (nimble response to competitive pressure) to drive continuous share gains. We expect Titan to continue to prioritize volume-growth and share gains over profitability. We also expect a gradual recovery in jewelry margin over the next few quarters, partly driven by product mix recovery and efficiencies.

We cut our FY2022E EPS estimate by 17 per cent to factor in the impact of ongoing lockdowns. We tweak FY2023E estimates, roll-over and maintain DCF-based FV of Rs 1,625.

ICICI Securities

Reco: Add | TP: Rs 1,700 | Potential Upside: 13 per cent

The near-term demand outlook is uncertain due to store shutdowns, however, we believe demand postponement in jewellery is higher (vs other 'perishable' discretionary consumption). We believe that Tanishq can strongly benefit from regionalisation strategy implemented in Tamil Nadu (market share gains seen) as similar strategy can be applied to other states where the brand is currently underpenetrated / underrepresented.

We expect profitability to further improve and return to normal levels in FY22 as product mix normalises. We reduce our FY23 earnings estimates by 1 per cent; modelling revenue / EBITDA / PAT CAGR of 27 / 58 / 72 ( per cent) over FY21-23E.

Key downside risk are irrational competitive environment and potential shift to fixed making charges that could limit long-term benefits from operating leverage.

JM Financial Services
Reco: Hold | TP: Rs 1,415 | Potential downside: 6 per cent

Titan’s margin performance was disappointing across both Jewellery and Watches with mix playing a spoilsport for both the divisions. There is also an element of competitive intensity involved as far as the Jewellery business goes; this could continue to drive needs for higher promotions and customer-acquisition costs in the business in the short-term, with attendant impact on margin.

Near-term demand condition is also uncertain, with 50 per cent of Tanishq stores closed for business for now, following the re-imposition of localized lockdowns in the country in recent weeks. We believe the stock lacks trigger for the time being, especially since the market seems to have already priced-in a lot of the good news relating to demand-recovery in the Jewellery business. Continuing with HOLD for now.

HDFC Securities
Reco: Sell | TP: Rs 1,300 | Downside potential: 13.7 per cent

Titan’s 4QFY21 topline grew 59 per cent YoY, in-line with estimates. That said, it’s relative market share gain (in jewelry) doesn't seem material as most big-box jewelers grew at a similar clip to Titan's estimated 63 per cent YoY (adj. for bullion/ B2B sales). Further, jewelry margins stood at 10.7 per cent, courtesy an inferior revenue mix (higher bullion sales + lower studded ratio) and custom duty cut on gold. Non-jewelry recovered 98 per cent of its base revenue, but disappointed on profitability due to higher e-comm and lower margin product sales. 

While Titan’s recovery execution (esp. in Jewelry) has been on point, a strong bounce-back in volumes is already baked in FY22 despite the impact of Apr-May-21 partial lockdowns in Maharashtra and Delhi. Against this backdrop, margin of safety seems non-existent at 58x FY23 P/E. Hence, we largely maintain our SELL recommendation with a DCF-based TP of Rs 1,300 per share (implying 50x FY23 P/E). FY22/23 EPS estimates remain unchanged.



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