Restless at Titan
The first page of Titan Co. Ltd’s annual investor forum (held last week) presentation says “restless, responsible, respected.” Of the three, at present, it is likely that the feeling of restlessness is most dominant in Titan’s world, what with depressed macro-economic fundamentals and weak consumer sentiment. To be sure, these factors are already playing out in the company’s results in the past few quarters. For perspective, jewellery volume in the June quarter declined 10% and in the March quarter by 11%. Earnings estimates were corrected after the June quarter corporate results, when profit decreased 15% from a year earlier to Rs.151 crore.
To improve revenue, some aspects that Titan will focus on include: “thrust on advertising and marketing like never before,” store renovations, richer product mix and better customer store experience. While these factors may yield results in the long run, the pressure continues in the medium term, say analysts.
For one, higher jewellery volumes are not expected to compensate for the substantial decline in gold prices. The jewellery business is Titan’s mainstay accounting, for about three-fourth of its revenue. According to the management, after the first decline in gold price in July, the jewellery volumes spurted but it flattened out in a week, pointed out analysts from Motilal Oswal Securities Ltd in a note on 13 August. It is concentrating on driving advertising and promotion spends and correcting making charges, added the report. Having said that, one must remember that Titan’s efforts to boost sales through promotions and lower making charges in gold jewellery did not yield exceptional results last quarter. It could be because, in a falling gold price environment, customers postpone their purchases in anticipation of a further decline in prices.
Secondly, investors must watch out for the implementation of the goods and services tax (GST). Currently, jewellery attracts 1% value-added tax rate and nil excise. However, if jewellery attracts a higher rate under GST, it will be discouraging. “This would result in ‘devaluation’ when consumers sell their jewellery, and reduce the attractiveness of jewellery as a store of value for consumers,” say analysts from JM Financial Securities Ltd.
Meanwhile, competition from the online platform hurts the watch segment. Watch business volume has seen mid-single-digit declines in the last three quarters. According to the company, the hype about smart watches has brought some focus and excitement back onto the watch category. While that augurs well, a pick-up in consumer demand is crucial for both segments to perform.
Not surprisingly, Titan’s shares have declined 15% or so in this fiscal year. “We came away from the meeting with mixed feelings about the company—though we continue to believe that Titan is a structural play on jewellery retail in India with an excellent management, we also believe that the near-term regulatory and competitive scenario looks tough, especially amidst weak consumer sentiment,” says Nomura while maintaining its reduce rating on the stock.
The writer does not own shares in the above-mentioned companies.