Jewellery margin lacks shine, adds to Titan’s valuation discomfort

Some brokerages trimmed their earnings expectations after the Q3 results. Photo: Preetha K/Mint
Some brokerages trimmed their earnings expectations after the Q3 results. Photo: Preetha K/Mint

Summary

  • While the company saw 23% year-on-year growth in jewellery revenue, excluding bullion sales, in Q3, margins took a beating

Titan Co. Ltd’s shares are down 2% since it announced its December-quarter (Q3FY24) results on Thursday. A key disappointment in Q3 was the margin performance of its jewellery business.

Amid stiffer competition and higher gold prices during the quarter, Titan made increased investments in marketing and gold exchange programs to spur demand. While this led to 23% year-on-year growth in jewellery revenue, excluding bullion sales, margins took a beating. Ebit margin fell by 80 basis points year-on-year and 190 bps sequentially to 12.2%. A lower share of studded jewellery year-on-year also weighed on the overall margin. The watches and eyewear segments also had lackluster margins in Q3.

Consequently, some brokerages trimmed their earnings expectations after the results. Prabhudas Lilladher cut its FY24, FY25 and FY26 earnings-per-share estimates by 2%, 1.6%, and 1.4%, respectively, “following margin pressure across segments indicating some softness in demand and higher competition". The brokerage said it expects an improvement in watch margins, but maintained that eyewear margins would remain low thanks to heightened competition.

That said, Titan’s robust outlook is encouraging. In an earnings call, the management said it was optimistic about the company’s growth prospects in FY25 and FY26, given rising income levels. This confidence is due to the fact that Titan still has only single-digit market shares in most categories. Management reiterated its 20% compound annual growth rate (CAGR) guidance for the jewellery business for FY22-FY27.

 

Given this, Titan’s focus on adding new stores is understandable. The company has opened 36 Tanishq stores, 50 Mia and 40 Caratlane stores so far this year. The management retained jewellery Ebit margin guidance for FY24 at 12-13%, despite increased competition.

A word of caution here. Titan is seeing some demand pressure from new buyers for the sub- 1,00,000 category. While Titan continues to enjoy a premium on gold prices, continued pressure in these categories poses a potential near-term downside risk to margins.

According to ICICI Securities, smaller peers (Kalyan, Senco, Thangamayil, etc) appear to be outperforming Tanishq in this business cycle. The competitive intensity in sub- 1,00,000 jewellery remains elevated (and appears structural). Pressure on margins may thus continue in the near-term. On margin outlook, investors also need to keep an eye on the adoption of lab-grown diamonds in India and the trend in its share of studded jewellery.

To be sure, Titan enjoy’s strong brand positioning and remains a key beneficiary of the premiumisation trend, but valuations are expensive and don’t leave room for an earnings disappointment. At FY25 price-to-earnings, the stock trades at a multiple of nearly 69 times, according to Bloomberg data.

“Titan’s execution over FY19-24 has been on point. However, it has benefited from a sharp rise in gold prices and the channeling of elevated household savings during this period," read a HDFC Securities report. Most of the heavy lifting for growth from here on will have to be volume-led, which could restrain supernormal growth rates in a slowing economy, the report added.

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