Titan reports dip in profit, but investors have reason to keep the faith

Jewellery retailer's exceptional performance is expected to continue in the coming quarters as it scales up and takes further share from unorganised segment.

Titan Company missed its on margins in the September quarter, but investors are not complaining. The jewellery retailer declared its results for the quarter after market hours on Friday, and on Monday its share price jumped a little over five per cent. Pushed by robust revenue growth in that quarter and, more importantly, a strong outlook for the second half of the current financial year.

The reason the Street is not too worried about its lower profit is the company's strong performance on sales, in an environment where a number of other consumer goods companies are struggling to drive volumes. In the September quarter, Titan's jewellery segment (80 per cent of its revenue) grew 28.5 per cent (wholesale) over the year-ago period. At the retail level, the company indicated, growth was even stronger at 38 per cent.

Sharp outperformance, as other larger jewellery retailers are expected to have grown at about 15 per cent. The higher growth in jewellery was on account of continued momentum in its Golden Harvest plan (fixed monthly payments), gold exchange programmes and market share gains from the unorganised segment.

Growth forecast

What is key is the positive management commentary about the sales growth in the second half of 2018-19. The company expects to maintain 25 per cent growth, on the back of market share gains, launch of new collections and stores. The company has announced plans for 31 new Tanishq stores in the second half, after having added 14 (aggregating to 35,000 sq ft) in the first half.

While sales growth improved, the margins did disappoint. This is because the plain jewellery segment grew faster than the studded jewellery one which fetches higher margin. Analysts at JM Financial estimate studded jewellery sales grew 22 per cent; the plain gold one rose 33 per cent. Titan acquired two large stores from a franchisee in Hyderabad for Rs 2.5 billion and it's spending on marketing was higher than usual in the quarter. A key one-off the Street will keep an eye on is the Rs 290-million write-off the company took, given the Rs 1.45-bn exposure to inter-corporate deposits from the suddenly ill-liquid IL&FS group. The company will further decide on the exposure over the next two quarters, once more clarity emerges on the issue.

Among other businesses, watches continues to post strong growth. It was 17 per cent in the September quarter, with new launches and products to fill gaps in its portfolio. Analysts expect margins of the segment to improve, on the back of operating leverage and ongoing cost optimisation. For the eyewear business, Titan expects strong volume growth (focus on lower value items) and hopes to breakeven at the Ebit (operating profit) level by the end of the current financial year.

While the stock's valuation at 45 times the FY20 earnings estimate is at a premium, brokerages believe the company deserves this. Analysts at Motilal Oswal Securities say the premium valuation is for a business that has perhaps the best revenue growth potential among large-cap fast moving consumer goods retailers. The brokerage estimates 20 per cent annual average growth for jewellery, Titan's largest segment, over the next five years. This, coupled with the healthy margin outlook on operating leverage, higher share of studded jewellery and in-house manufacturing of eyewear frames, should percolate to the net profit level.