On a dull Monday when the Sensex fell 1%, Titan Co. Ltd’s stock went up by 5.3% despite the September quarter results—announced after market hours on Friday—showing a 210 basis point contraction in the Ebitda (earnings before interest, tax, depreciation and amortization) margin to 10.6%. One hundred basis points equal one percentage point.

There were a few one-off costs. “Adjusting for the one-offs during the quarter, the Ebitda margin for the quarter was 11.3%, which was significantly lower than our and consensus estimates," wrote Naveen Kulkarni of Reliance Securities Ltd in a report on 12 November.

What was commendable was Titan’s revenue growth, which came in at 26% over the year-ago period, led by the performance of its mainstay jewellery business. Second, in the earnings conference call, management commentary regarding the outlook for the December quarter was encouraging. The company expects the festive season to boost performance. The upbeat outlook is exciting for investors, said analysts commenting on the share price rise on Monday.

Jewellery revenues in the September quarter increased by 28.5%, largely driven by the 24% jump in sales volumes. However, jewellery segment Ebit grew at a much slower pace of 6.6% on account of higher advertising spends and a one-time franchisee compensation.

Titan’s second main business, the watch segment, saw encouraging revenues and profitability. Product launches and better merchandise helped watch revenues rise by 17%. Operational costs for the watch business were in check, leading to good margins during the quarter.

Overall, Titan’s reported profit after tax increased by 3% year-on-year to 314 crore.

What of the stock? Despite the positive movement in the share price on Monday, the Titan stock has underperformed the BSE 100 index so far this fiscal year. However, that does not mean valuations are not demanding. The stock trades at 54 times estimated earnings for FY19, according to Bloomberg data. The current quarter outlook is promising, and from a long-term perspective, Titan is expected to benefit from the shift to the organized sector.

Valuations suggest that much of these positives are baked into the price.

What should investors worry about? “While overall topline traction is healthy, it remains volatile depending on consumer sentiment and the overall jewellery market is not growing. This is a concern," said analysts from Jefferies India Pvt. Ltd in an 11 November report.

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