Lower margins let down Titan despite demand gains in December quarter

January sales indicates strong growth momentum in the current quarter

Led by a robust recovery in the jewellery segment, Titan posted 17 per cent growth in consolidated revenues for the December quarter (Q3). The return to positive territory, after three consecutive quarters of decline, was aided by a 16 per cent year-on-year (YoY) jump in core jewellery sales. 

Bullion and coin sales, too, were strong, taking the overall segment sales up 22 per cent. The recovery was led by festival demand, with the studded segment witnessing good growth. Walk-ins into stores saw an uptrend, with footfalls in metros rising.

The management remains confident on growth; jewellery sales in January rose 28 per cent. 

One segment that could aid growth is 'wedding', in which growth stood at 16 per cent in January. The management expects double-digit growth over the next two quarters. 

The disappointment for the Street, however, was operating performance. The company posted operating profit growth of 8.2 per cent, while margins at 11.1 per cent were 90 basis points lower than the year-ago quarter. “Profit performance in jewellery was a let-down, given that the operating leverage benefit was missing on margins, despite the 15-16 per cent intrinsic growth in the business and the organisation’s war on waste programme,” say analysts at JM Financial Research. 

The firm indicated a higher share of coins and relatively lower share of studded jewellery led to lower margins. JM Financial says higher costs on sales promotions — to improve growth trajectory — could have been responsible for the margin pressure. In addition to revenue growth, a higher share of studded jewellery — along with stable costs — is key to higher profitability. 

While segment margins for watches and eyewear rose significantly on the back of a demand recovery, overall margins were hit owing to the jewellery segment, which accounts for 90-96 per cent of sales and operating profits. 

Despite the strong top line growth in Q3 and robust outlook, the stock was down 2.5 per cent on margin worries. Further, the 39 per cent gain in share prices since the start of September has factored in the upside on the demand front. Investors are advised to wait for a better entry point.