Markets
Titan is glittering less in jewellery business
Summary
- In Q4, recurring jewellery business disappointed owing to Omicron’s impact, volatile gold prices
- However, with gold prices settling, jewellery demand can be expected to see a pick up
MUMBAI/BENGALURU : Titan Co. Ltd’s shares fell 3% on Thursday on the National Stock Exchange (NSE). This is after the company’s pre-quarter update for the three months ended 31 March (Q4FY22) disappointed. However, valuations are pricey. The stock trades at 61 times estimated FY24 earnings, according to Bloomberg data.
As such, expectations are lofty and the latest update falls short. For Q4, jewellery revenues, excluding bullion sale, dropped 4% year-on-year (y-o-y). Jewellery contributes more than four-fifths of Titan’s revenues. Note that Q4FY21 benefitted from a large B2B order, which contributed 10% to growth that time. Adjusting for this, recurring jewellery revenues would be flat y-o-y in Q4FY22.
This (flat performance) comes against Kotak Institutional Equities’ and the street’s expectation of 15-16% growth. “It implies deceleration in three-year CAGR (compound annual growth rate) to 15% in Q4 from 22% in Q3," said Kotak’s analysts in a report on 7 April.
As such, FY22’s fourth quarter was not an easy one. First, there were disruptions because of the curbs on account of the Omicron coronavirus variant in January. February did see a strong rebound in sales, but that was followed by a dull March as gold prices remained volatile and high. Plus, geopolitical tensions added uncertainty, affecting consumer sentiment. Sales from the top eight cities grew in single digits whereas the rest of India saw a small drop. Overall, studded jewellery sales fared better.
It is likely that investors will view the dull Q4 show as a temporary blip. Consumers tend to defer purchases when gold prices are rising and volatile and typically wait for stability in prices. “For instance, gold price increased by 14% quarter-on-quarter in the September 19 quarter, resulting in a 2% y-o-y decline in Titan’s jewellery sales. As prices settled, jewellery sales growth bounced back to 15% in the 19 December quarter. Given this, we do expect recovery in demand in Q1FY23," said Kotak’s analysts.Also, auspicious occasions such as Akshaya Tritiya augur well for demand in the current quarter.
Meanwhile, Titan’s watches segment clocked 12% y-o-y revenue growth in Q4. Eyecare revenue growth was 5%. However, these segments are too small to move the needle for the company.
After Thursday’s decline, Titan’s shares are now 11% lower vis-à-vis the 52-week high of ₹2,768 per share seen on 21 March. Even so, the stock is as much as 85% above pre-covid highs seen in February 2020. This is despite sporadic restrictions since early 2020 to curb coronavirus infections. “Titan was able to recoup the sales it lost on account of covid disruptions over the past two years in the subsequent quarters because of strong pent-up demand," said Krishnan Sambamoorthy, analyst at Motilal Oswal Financial Services. In Q3FY22, jewellery revenues were almost 60% higher than Q3FY20 (pre-pandemic quarter). “Post pandemic, the firm has seen tailwinds in terms of market share gains. Also, with curbs on the number of people allowed at weddings during times of restrictions, consumers are said to have used some of the funds allocated for catering and other services for jewellery purchases. Of course, as normalcy resumes, some of these gains may reverse," Sambamoorthy said.
Even so, there is optimism on Titan’s long-term prospects. This should support the stock’s premium valuations. “Titan stock is unlikely to react too negatively unless there is a sustained downgrade in operating metrics. It is among the most expensive consumer stocks in the country. In general, when investors foresee better growth potential, there have been fewer episodes of sharp valuation correction for consumer companies," said Varun Singh, analyst at IDBI Capital Markets & Securities Ltd.
