Stock Fundamentals

Why Titan is a good long-term bet despite its recent slump

Rajalakshmi Nirmal | Updated on April 04, 2020 Published on April 04, 2020

Market share gains, Tanishq store expansion bode well for Titan, when demand recovers

Investors in Titan, the largest organised jewellery retailer in India, have had a rocky time over the past month, with the stock losing 30 per cent in value.

With Titan closing down most of its manufacturing units and retail stores amid the Covid 19- led lockdown, the company’s growth for the fiscal is likely to fall way short of its earlier guidance. The growth for FY21 is also expected to recover only gradually.

That said, long-term investors can continue to hold the stock.

 

 

When the consumer sentiment improves, Titan will be among the first few to draw benefits. In the second half of FY21, the rescheduled weddings that were postponed due to the lockdown and the pent-up demand will help the company.

In domestic gold jewellery demand, weddings account for 59 per cent and special occasions including festivals account for 14 per cent.

Given that the company easily acquires new customers through its exchange programme — old gold exchanges contribute 40 per cent to its revenue now — there is room for upselling when demand revives and customer footfall increases.

At the current market price of ₹862 a share, the stock trades at a PE of 35 times, its expected earnings of 2021-22. Six months ago, the one-year forward multiple was 51 times.

If there is correction in the stock price hereon, it may also be a good strategy to accumulate the stock.

Gold prices, which hit a high of $1,680/ounce in the beginning of March, are at $1,580/ounce now. Weakening of the rupee against the US dollar has though been adding to the cost of gold for consumers in India.

Going ahead, if either gold prices rise or the rupee weakens, it may negatively impact demand. But this could be temporary — gold demand is not price-sensitive in India as weddings and festivals are the key demand drivers for gold jewellery.

 

Ongoing turmoil

In the near term, demand is likely to remain weak, owing to risk of job loss and pay cuts.

Also, jewellery being a discretionary spend, demand can take some time to recover.

Titan Company has closed most of its manufacturing units due to the national lockdown. Also, because of the shutdown of shopping malls and trade centres, the retail stores of the company — Tanishq, CaratLane and World of Titan — have also been closed in many places. Thus, the earnings in the fourth quarter of 2019-20 is likely to take a hit. The 11-13 per cent revenue guidance given by the company for the March quarter looks impossible now.

The growth in the first nine months of FY20, though above industry, has been lower than what Titan has had in the past. A drop in discretionary consumer spending saw revenue in terms of grammage sold drop sharply in Q2 and Q3 — down 14 per cent and 5 per cent, respectively, year-on-year. The slowdown was not only in the jewellery business but also in eyewear and watches.

In watches (the segment contributes 12 per cent to revenues), the volume growth was 13 per cent y-o-y in Q1, but volumes declined by 1 per cent and a sharp 10 per cent in Q2 and Q3, respectively.

 

 

Revenues grew 9 per cent in Q3 (to ₹6,206 crore), y-o-y. While this was better than the Q2 growth of 1 per cent, in Q1, revenue growth was stronger at 14 per cent. CaratLane, a subsidiary of Titan, recorded a strong 63 per cent revenue growth in Q3 and turned profitable at the EBIT level.

In the first nine months of FY20, the company’s earnings reported a growth of 8 per cent. Given the current weak demand, earnings for the full year FY20 is expected to grow by 5 per cent.

For FY21, the earnings growth is estimated at 9 per cent, with demand revival in the second half of the year during the wedding season. In FY22, from the low base, a strong earnings recovery is expected.

Titan is well placed to ride the recovery in demand in the medium term. It has continued to show market share gains in the last one year, thanks to the aggressive selling of the ‘Golden Harvest’ scheme (a gold savings scheme) and also acceleration in expansion of Tanishq stores. The number of Tanishq stores stood at 321 at the end of December 2019. Sales growth through Tanishq stores in the nine months of FY20 was 13 per cent. CaratLane stores,too, did well. Golden Harvest Scheme-based revenue was 21 per cent of sales in the nine months of FY20.

Margin outlook

In the first nine months of FY20, operating profit margins was 12.3 per cent, up from 11.6 per cent in the same period last year. Th expansion in margins is thanks to cost savings (lower discounts) and higher sales.

If the high price of gold sustains, Titan may give discounts on price to lure customers and maintain market share, in which case, margins may come under pressure. Weak demand may further weigh on margins in the coming quarters.

Published on April 04, 2020

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