Growth in studded jewellery, watch, eyewear segments to aid Titan's margins

The stock of Titan Company (Titan) delivered about 9 per cent returns in the last year, underperforming the BSE Fast Moving Consumer Goods (FMCG) index, which was up 11 per cent. 

However, given the increase in traction expected from its key jewellery business, analysts foresee a 16-17 per cent upside in the stock over the next year.
 

Analysts estimate Titan’s jewellery business, which contributed over 80 per cent to its revenue during April-September 2018, to grow 18-20 per cent annually over FY18-21. The firm’s increased focus on wedding jewellery will drive growth. 

Titan aims to improve contribution of the wedding segment to total jewellery revenue to 50 per cent from 30 per cent at present. In FY18, Titan earned 40 per cent jewellery sales from gold exchange.

After implementation of the goods and services tax, demand for wedding jewellery is seen shifting away from unorganised players to organised ones like Titan, which is also launching new region-focused wedding collections.

Despite receding demand for studded jewellery in the market on account of lower resale value, Titan is expected to continue witnessing good growth in this segment, with an assured resale value for its customers, says an analyst.

Growth in studded jewellery, besides operating leverage, will also help push up operating profit margin, given gross margin earned on this segment is very high compared to plain gold. 

The strong earnings visibility also stems from more expansion through L3 stores in newer cities. L3 store is a franchise-based model, where inventory and operating expenses are borne by the franchisee, pushing Titan’s profitability.

Moreover, an expected acceleration in the watch and eyewear segments should support overall profitability. Watch and eyewear segment earns highest margin among all the businesses of Titan.

Over FY18-21, the Ebitda (earnings before interest, tax, depreciation and amortisation) margin is expected to expand by 185 basis points to around 12 per cent, and net profit to rise 23-25 per cent annually over this period.

Motilal Oswal Securities says premium valuations are fully deserved for a business that has perhaps the best revenue growth potential in the large cap FMCG retail space and also operating leverage-led margins support. 

The stock currently trades at 45 times its FY20 estimated earnings.