Analysts doubt the little optimism on Titan

Management remains hopeful of a pick-up in festive demand and gold-harvest-scheme sales

Titan’s performance for the quarter ended September was weak, and below expectations, but still the stock has risen over two per cent, even as markets have inched lower. The management commentary as well as a better second half possibly explains this, but some analysts doubt this optimism.

The September quarter performance was pulled down by the absence of Golden Harvest Scheme (GHS) and delayed festive season. Notably, the GHS was present in the base quarter ended September 2014 and witnessed a surge in redemptions due to its abrupt discontinuation to comply with new regulations. Redemptions indicate the booking of sales from GHS. So, the results are not strictly comparable year-on-year. So, a fall in revenues and profits in was expected.

What could have made markets a bit optimistic is that jewellery sales have picked up around Dussehra. The management also said it was hopeful the coming festive/wedding season and redemptions of new GHS will aid revenues in the second half.

While a lower base effect (normalised for discontinuation of GHS) should push Titan’s overall growth numbers from December quarter, prospects also hinge on the success of the revamped GHS and improvement in demand.

The management believes sales from GHS redemption will be Rs 450 crore in the ongoing quarter, with most redemptions coming in the March quarter. But given the higher ticket size versus the earlier GHS, some consumers may be unable to join the scheme. The fall in revenues, with a 210-basis-point surge in employee costs, hit Ebitda (earnings before interest, tax, depreciation, and amortisation) margin, which contracted 170 basis points year-on-year to 7.6 per cent. Consequently, net profit fell 39.4 per cent year-on-year to Rs 145 crore, lower than expectations of Rs 187 crore.

In the September quarter, jewellery sales (74 per cent of overall revenues) as well as Ebit margins contracted due to high base effect and lower share of high margin diamond jewellery. Intense competition from e-commerce players also hit watches segment (20 per cent of revenues). Lower ad spends aided this segment's Ebit margin, which expanded 192 basis points year-on-year to 15.3 per cent.

"Hope and Titan’s still-solid positioning (as a play on discretionary spend revival) may keep the stock above fundamentals. But, we remain uncomfortable ascribing ‘hope PE’," analysts at Kotak Institutional Equities said, retaining their target price of Rs 320.

At Rs 355, the stock trades at rich valuations of 40 times FY16 estimated earnings.