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Home / Markets / Mark To Market /  Titan’s Jun quarter glitters and so do the stock’s valuations, limiting upsides

Titan Co. Ltd’s results for the June quarter (Q1FY22) are impressive, given the tough business conditions due to the second wave of covid-19. The jewellery retailer’s standalone Ebitda stood at 144 crore, exceeding analysts’ expectations by a good margin. Ebitda is earnings before interest, tax, depreciation and amortization. This compares favourably with an Ebitda loss of 246 crore last year when the first covid-19 lockdown dealt a far more severe impact on the business. But investors should also note that Q1FY22 Ebitda is nearly 75% lower than Q1FY20.

Titan maintains that with the gradual lifting of restrictions on stores, sales bounced back strongly towards the end of Q1, and the momentum has continued into the September quarter so far.

Wax and wane
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Wax and wane

Be that as it may, the pertinent issue for Titan’s investors is that the valuations of its shares are pricey. This would mean room for meaningful expansion hereon is limited. Currently, the stock trades at nearly 64 times estimated earnings for financial year 2023, based on Bloomberg data.

“We find the stock fully valued at current valuations and retain ‘hold’ (rating)," said analysts from Jefferies India Pvt. Ltd in a report on 4 August. The broker’s target price for the Titan stock is 1,740 per share. This is lower than the stock’s closing price of around 1,800 on Thursday on the National Stock Exchange. The broker further added, “We raise our FY22-24 earnings estimates by 3-10% to factor in stronger 1Q and management commentary on store operations."

Coming to the June quarter, Titan’s sales took a small beating until the third week of April as stores were temporarily closed in some key states. “Thereafter, most stores were shut within a short span of time and could reopen gradually in June only, with several restrictions on operating hours and days of the week," said the company in its presentation.

The company’s operating revenue more than doubled year-on-year (y-o-y) to 2,780 crore. Of course, this is much lower than the 7,000 crore each seen in the March and December quarters.

Excluding bullion sales, Titan’s mainstay, jewellery revenues rose by 109% y-o-y. This growth was also facilitated by zero sales in the month of April last year.

Commenting on the jewellery business profitability, JM Financial Institutional Securities Ltd said, “We found it quite surprising for a business that has been clocking around 12% steady-state margin to still be able to earn 8.4% when topline is around 60% below more ‘normal’ levels." The broker further added, “Whilst this helped the June quarter, what it also likely implies is that the sheer lack of operating leverage could also prevent margin from moving significantly upwards during the revenue build-back phase."

The watch business, which contributes most of Titan’s remaining revenues, saw its earnings before interest and tax (Ebit) losses reduce vis-à-vis Q1FY21, although the segment had posted a profit in Q4FY21.

To be sure, some analysts believe in Titan’s future growth potential.

“Titan’s medium- to long-term earnings growth opportunity is the best-of-breed, which is reflected in the earnings per share CAGR of around 24% over the past three years before the covid-19 impact in FY21," said analysts from Motilal Oswal Financial Services Ltd in a report on 4 August. CAGR is compounded annual growth rate.

Even so, as mentioned earlier, valuations are not cheap and seem to be factoring a good share of the optimism. This should limit meaningful upsides from a near-term perspective.

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