Graphic: Mint
Graphic: Mint

Titan: All eyes are on the jewellery business

Investors should watch for sales performance in the festive season (the December quarter) and whether it brings some positive surprises

Shares of Titan Co. Ltd have underperformed the BSE 100 index considerably this fiscal year. That does not however mean that valuations have become attractive. Currently, the stock trades at 49.5 times estimated earnings for FY19, according to Bloomberg data. And, that’s not cheap.

However, after a miserable June quarter performance, things could well be looking up for the company. “Our channel checks across several Tanishq stores suggest strong demand over the last two months," wrote Amit Sinha of Macquarie Capital Securities (India) Pvt. Ltd, in a 14 September report. Tanishq is Titan’s flagship jewellery brand, which contributes at least three-fourths of its total revenue.

Revenue performance of the jewellery business took a beating in the June quarter, growing at just 5.7% year-on-year over a high base last year. The performance lagged the management’s internal targets, and disappointed Street estimates as well.

Nonetheless, management commentary on jewellery growth in July during the June quarter earnings call was encouraging. Titan said sales in July surged 70% compared with the year-earlier period, aided partly by a lower base. The company maintained its 25% jewellery revenue growth guidance for the remaining three quarters of FY19. Investors should watch for sales performance in the festive season (the December quarter) and whether it brings some positive surprises.

Separately, it helps that the risk of an adverse regulation on gold compared to the last rupee crisis appears lower. Gold imports as a percentage of trade deficit have come down from about 40% during the 2013 rupee crisis to about 15% currently, said Macquarie Capital. “Also, with a 10% import duty the risk of a meaningful increase is lower, as the government would need to balance it with the risk of higher smuggling," it added. Still, sharp increases or decreases in gold prices are never good for demand and that will be a key measure to follow.

The company’s second major business is watches, which have done relatively better in the June quarter. But it has a smaller share of overall business and, hence, does not have a big impact as such.

What’s important is that even as Titan’s shares have fallen by 12% so far in FY19, investors haven’t lost out, if one takes a slightly longer time frame. In the last one year, from its closing low on 28 September, the stock has appreciated 43%.

Titan is expected to be one of the key beneficiaries of the shift to the organized market from the unorganized one. While higher valuations could restrict meaningful expansion from current levels, if the jewellery business performs better than expectations, investors might be happy to give it some brownie points.