Covid restrictions, competitive pressures may impact Titan's growth

Margin pressures, valuations too weigh on the stock

While Titan’s revenue performance in the March quarter was robust and on expected lines, its operating performance missed street estimates. The company reported a 250-basis-point dip in operating profit margins which was lower than a flattish margin trajectory the street was working with. The decline in profitability, according to the company, was largely due to lower gross margins in the jewellery and watch segments as both segments reported a higher share of lower margin products. 

In the jewellery segment, a 70 per cent revenue growth was supported by lower prices of gold, a weak year ago base and wedding-related purchases. Despite growth across regions and price bands, segment margins were lower as the share of higher margin studded jewellery slipped to 30 per cent in the quarter as compared to 37 per cent a year ago. What added to the dip in profitability was inventory loss from the cut in customs duty on gold, higher proportion of gold coin sales and a large institutional sale. 

There are a few headwinds for the company in the near term both on the revenue as well as on the margin front. While the company saw good demand in the first half of April, the imposition of a lockdown across multiple locations and closure of 50 per cent of Titan’s jewellery stores will impact demand. The management however is confident of a recovery due to pent up demand as was the case last year when restrictions were eased after the first lockdown.  

On the profitability front, there is a concern related to the increase in competitive intensity with other national and regional players upping the ante. This could drive the need for higher promotions and spending on customer acquisition and weigh on margins in the near term, according to JM Financial. Jewellery segment margins which slipped 327 basis points to just under 11 per cent could thus be under pressure from deteriorating mix as well as competition.

Given the pressures on margins and expensive valuations, analysts at CLSA continue to have a sell rating on the stock. While the stock shed a per cent in trade on Friday, valuations at 53 times FY23 earnings estimates are above its five year averages. Given the likely dip in retail demand, lower margins and valuations, investors should await signs of recovery before considering the stock.