Titan: Jewellery demand, margins to boost profit

The strong growth came despite the impact of regulatory changes on account of PMLA and the implementation of GST

The Titan stock hit its all-time high last week, on expectations of strong growth for its jewellery business and steady expansion of the watches segment. The company expects the jewellery business, which clocked 36 per cent year-on-year growth in the September quarter (Q2), to end FY18 with a growth of 25 per cent. This business accounts for three-fourths of its overall revenue and 78 per cent of operating profit. The strong growth came despite the impact of regulatory changes on account of the Prevention of Money Laundering Act (PMLA) and the implementation of goods and services tax (GST). 

The prospects for the jewellery business look good, given that Titan expects it to grow by two and a half times over the next five years. This is expected to be driven by robust uptick in demand for wedding and high-value studded categories (35-40 per cent of the jewellery segment) and market share gains. While analysts believe overall jewellery market declined, Titan, given its growth, has gained share. Analysts at Geojit Financial Services expect the jewellery segment revenue to grow at an annual rate of 22.8 per cent over FY17-20 on the back of market share gains given the launch of new collections, higher focus on wedding and studded jewellery and store expansion. What adds to the revenue growth is increasing ticket size (up 10 per cent year-on-year in Q2) and customer retention ratio, now pegged at 50 per cent. 

Growth in the jewellery business also augurs well for margins, which hit an all-time high of 13.6 per cent in Q2. The 260 basis points y-o-y expansion came on the back of a sharp 69 per cent growth in segment’s operating profit. 

The watch segment, too, witnessed a healthy 15 per cent growth, with margin expansion (up 376 bps to 16 per cent) despite compensation to trade partners and no price hikes. Analysts at Bank of America Merrill Lynch believe there is room for margin expansion once the situation stabilises. The two key risks for Titan is the sharp correction in gold prices and a reversal of customs duties by the government resulting in lower gold prices and inventory loss. 

At Rs 833, the stock is trading at over 45 times its FY19 earnings estimates, a 10 per cent premium over past five years average PE of 40. Most analysts are positive on the stock, given the 35 per cent annual earnings growth expectations over FY17-20.