Muted demand, hedges hit Titan's jewellery sales, Q2 revenues down 2%

Analysts estimate a 60-100 bps compression in operating margin

On a day when leading market indices like the BSE Sensex were up by 1.7 per cent, the stock of jewellery major, Titan, shed over 6 per cent in intra-day trading before closing with a 2.4 per cent loss at Rs 1,230. Worries over FY20 growth outlook post two consecutive quarters of dismal performance in the key jewellery segment weighed on investor sentiment.

The company on Monday, post market hours, had reported an about two per cent year-on-year decline in jewellery revenue for July - September period (Q2) in its quarterly update. In the June quarter (Q1), year-on-year jewellery revenue growth had drifted down to 13.3 per cent from 21.1 per cent a quarter ago (see chart). Indian markets were shut on Tuesday on account of Dusshera. The performance of jewellery business is crucial for Titan as it accounts for 80-85 per cent of its overall sales as well as profits.

While the overall muted consumer demand amid higher gold prices continued to hit jewellery off-take till July (which has recovered in August and September), the adverse impact of hedges in Q2 took a toll on the overall jewellery revenue growth, as per the company. Analysts say that even after excluding the impact on account of hedges, retail jewellery sales would have grown by around seven per cent year-on-year in Q2. This, along with scepticism over Titan achieving its jewellery revenue growth target, hints at potentially lower revenue growth for FY20.

According to Abneesh Roy, analyst at Edelweiss Securities, Titan is unlikely to meet its H2FY20 (October 2019 to March 2020) growth target of 20 per cent in the jewellery business. This is also because of higher base in the year ago period, he added. The company had clocked about 29 per cent jewellery revenue growth in H2FY19. Notably, though the on-going festive season and the upcoming wedding days should auger well, growth of jewellery business hinges a lot on gold prices, which are currently unstable with an upward bias.

Not only jewellery, but lower offtake in the watch segment too weighed on topline in Q2. Amid feeble consumer sentiment, Titan’s revenue from watches segment, accounting for around 11-15 per cent of total sales, rose by just 7 per cent year-on-year in Q2 against a sharp 20.5 per cent growth in the June quarter. Analysts thus estimate Titan’s topline to have risen by up to one per cent year-on-year in Q2.

Poor revenue growth along with higher promotional activities could lead to pressure on profitability, albeit marginally. Analysts estimate around 60-100 basis point year-on-year contraction in EBITDA (earnings before interest, tax, depreciation and amortisation) margin in Q2, excluding the impact of change in accounting norm IND-AS 116. EBITDA margin was 10.6 per cent in Q2FY19. Jewellery margin is also estimated to witness the impact of adverse sales mix with more share of low-margin plain gold.

Having said that, the company’s focus on store expansion and new launches continued even in Q2, which suggests that its long-term growth potential remains intact. Factors such as goods and services tax, strong brand equity are among other positives.

As per Priyank Chheda, analyst at Reliance Securities, Titan remains the biggest beneficiary with its jewellery division gaining market share from the unorganised players. Also, increasing female working class, strong brand recall, trust and transparency are the key factors that are likely to drive above-industry growth for the company, he adds.

For now, the management’s commentary on hedging and overall demand in Q2’s earnings call remains key. Investors are recommended to wait till then as the stock isn’t cheap, trading at 49 times its FY21 estimated earnings.