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Titan’s return to growth in Q3 fails to add lustre to its stock valuations

Titan derives a lion’s share of its revenues from the jewellery business, which had understandably suffered a setback owing to covid restrictions in previous quarters. (File Photo: Reuters)Premium
Titan derives a lion’s share of its revenues from the jewellery business, which had understandably suffered a setback owing to covid restrictions in previous quarters. (File Photo: Reuters)

  • Overall growth received a boost from growth in jewellery revenues in the Dec quarter
  • Lower studded share plus higher coin sales impacted the company’s jewellery margin

Sales growth is back at Titan Co. Ltd. The jewellery retailer’s standalone operating revenues (excluding bullion sale) for the December quarter rose by 12% year-on-year. Note that revenues have increased after three straight quarters of decline.

Titan derives a lion’s share of its revenues from the jewellery business, which understandably suffered a setback owing to the covid-19 restrictions in previous quarters. In the December quarter, jewellery revenues excluding bullion grew 16% y-o-y, boosting overall growth.

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What’s more, the company told analysts in its post-earnings conference call that retail jewellery revenue for January increased by 28% y-o-y. That’s nothing to sneeze at. Even so, it’s worth remembering that the base for the current quarter is favourable as jewellery revenues had declined by 5.8% in last year’s March quarter.

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But investors did not budge. Titan’s shares fell by 2.5% on Thursday on the NSE. “One reason for the drop is that valuations of the Titan stock were already pricey," said analysts. “Strong stock price rally since Sep-Q’s result likely captures the pick-up in sales momentum already, though margin progression is one area that could need some monitoring, in our view," said analysts from JM Financial Institutional Securities Ltd in a report on 10 February.

As such, while December quarter jewellery margin improved sequentially, it is underwhelming y-o-y. Adjusted for bullion sales, jewellery earnings before interest and tax (Ebit) margin declined by 100 basis points y-o-y to 12%. One basis point is 0.01%.

Jewellery margin was impacted on account of poor mix—lower studded share plus higher coin sales. Although, reduction in fixed expenses helped to an extent.

“We reckon there are also possibly higher costs involved from a sales promotions perspective to acquire growth," point out JM Financial analysts.

Meanwhile, the much smaller watch business fared well on the recovery front and posted profit at the Ebit level after two consecutive quarters of losses. Watch revenues fell by 12% y-o-y last quarter. This compares quite well with a drop of 44% and 90% in the September and June quarters, respectively. Separately, recovery in eye-wear revenues was better, and that’s encouraging.

Overall, Titan’s pre-tax and exceptional items profit increased by 20% y-o-y.

But Titan’s shares are already up 15% from the pre-covid highs seen in February 2020. As such, valuations are pricey and that means scope for meaningful upsides could well be limited from a near-to-medium term perspective. Currently, the stock trades at almost 68 times estimated earnings for financial year 2022, based on Bloomberg data. “While Titan is a strong growth story, rich valuation keeps us on the sideline," said analysts from Jefferies India Pvt. Ltd in a report on 11 February.

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