Higher gold prices play party pooper at Titan
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Titan Co. Ltd is one of the Tata group firms that is fairly insulated from the current Ratan Tata-Cyrus Mistry battle. In fact, the Titan stock closed at about Rs377 on Thursday, a level seen on 24 October when Tata Sons Ltd announced that Mistry had been replaced. On Friday, the stock closed 2% lower, after touching a low of Rs360 during trading hours, reacting to disappointing September quarter results.
Sure, the tussle creates a general uncertainty for Titan but its chief concern right now is that sales growth isn’t picking up meaningfully, says an analyst, adding that the Tata group firms that are likely to be affected by the boardroom battle are those with stress such as high debt.
Coming to the quarter gone by, the company’s revenue declined nearly 1% on a year-on-year basis. The jewellery business, contributing almost three-fourths of the revenue, reported more or less flat revenue. Demand for gold jewellery was adversely affected by high gold prices, according to Titan. Jewellery volume declined 32%. However, gross margins of the business improved thanks to better studded jewellery mix and benefits to gold jewellery margin on account of higher gold prices.
Revenue from the next main business—watches—declined 5% while its earnings before interest and tax declined faster. One factor that affected the performance of the watches division is the challenge faced by exports (the Middle East economies have been affected badly by lower oil prices). Watch volumes declined too.
Overall, operating profit margin improved 287 basis points to 10.4%. A basis point is one-hundredth of a percentage point. Pre-tax and exceptional item earnings increased 37% to Rs250 crore.
But higher revenue growth will be crucial in the days to come. The festival season has started on a firm footing and that should help. But Emkay Global Financial Services Ltd believes that achieving the 15% revenue growth target for this fiscal year would be challenging. For the half year ended September, revenues have increased by a mere 1.3%. “We have reduced our FY17/ FY18 earnings estimates by 8%/ 8.8% to factor in lower growth in the jewellery segment,” analysts from Emkay wrote in a report on 4 November.
At present, one Titan share trades at 38 times estimated earnings for this fiscal year. That’s not cheap.