Markets
Titan faces pressure in solitaire
Summary
- The management expects margins to recover in H2FY25, driven by a better mix and higher Caratlane margins.
MUMBAI : Titan Co. Ltd’s jewellery business revenue growth of 26% year-on-year for the September quarter (Q2FY25), excluding bullion sales, was propelled by a reduction in custom duty to 6% from 15%. But at the same time, inventory loss from lower custom duty and a weaker product mix dragged the profit margin lower.
In Q2, the reported standalone jewellery Ebit margin contracted as much as 540 basis points (bps) year-on-year to 8.7%. Ebit is short for earnings before interest and tax.
Excluding bullion sales and the ₹290-crore inventory loss, normalized Ebit margin is still 270bps lower at 11.4%. In effect, Titan’s management has trimmed its consolidated jewellery Ebit margin guidance by 50bps to 11-11.5% for FY25.
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The management expects margins to recover in H2FY25, driven by a better mix and higher Caratlane margins.
In Q2, jewellery business profitability was hurt due to a slowdown in high-ticket solitaire purchases, as consumers preferred a wait-and-watch approach despite soft international prices. However, the non-solitaire and smaller-carat solitaire segments performed well.
According to the management, purchases in the ₹1-2 lakh segment continued to grow at a healthy rate. Put together, the share of studded jewellery in the mix fell to 30% in Q2FY25 from 33% a year ago.
Analysts advise caution
Analysts from Kotak Institutional Equities are cautious. “The current state of flux that is weighing on consumer sentiment for solitaires could gradually impact the non-solitaire segment as well (especially everyday jewellery)," they said in a report on 6 November, adding: “Broad-based availability of lab-grown diamonds jewellery could trigger natural diamond-to-LGD shift."
Thus, the trends in the coming quarters will be crucial to determine if there would be a meaningful impact on growth and margin trajectory ahead.
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To be sure, the overall studded segment was up 12% on-year in Q2FY25, while the gold segment (including coins) grew about 30%.
Watches and wearables, Titan’s next key business, saw an Ebit margin of 14.9% in Q2, up 26bps on-year, as it continues to capitalize on the ongoing premiumization trend through its analogue watches. The business saw 19% revenue growth, with the analogue watches segment growing faster at 26%. However, the uptick in business was not enough to boost Titan’s overall profits in Q2FY25, as the division accounts for a smaller share of the company’s revenue and earnings.
Following the Q2 results, Jefferies India has cut its FY25-27 earnings per share estimates by 3-7%, mainly on account of lower margin guidance. “Concerns on moderating urban consumption trends along with elevated competition in jewellery and weaker product mix (partially due to lab-grown diamonds) would likely keep the share price range-bound," said the Jefferies 5 November report.
Titan has been reeling under competitive pressure from existing companies as well as the entry of new ones like Aditya Birla Group in the jewellery business. Against this backdrop, Titan’s shares have fallen around 13% so far in 2024, lagging the 13% gain in the Nifty50 index. Despite the underperformance, it is not as if valuations offer comfort. The stock trades at almost 58 times, estimated earnings for FY26, based on Bloomberg data.
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From a near-term perspective, the management anticipates another ₹280 crore inventory loss in Q3. However, it is projecting robust festive and wedding season demand in H2FY25. In general, discount pressure on making charges and hefty store expansion plans are likely to cap profit margins. This, in turn, can adversely affect investor sentiment.
