For Titan, demand remains elusive

Results miss estimates on muted sales volume, one-off expenses

The past few quarters have been turbulent for Titan Company and the June quarter also saw the company miss Street estimates. Although the quarter was good on the profitability front, the weak demand scenario is likely to weigh on sentiments.

Net sales inched up by 3.6 per cent year-on-year (y-o-y) to Rs 2,783 crore and were much lower than Bloomberg estimate of Rs 3,088 crore, as all three divisions — jewellery, watches and eyewears — reported muted 1-4 per cent increase in top line. Watches grew the least due to weak export sales.

The silver lining was the operating profit margin, which spiked to 10.5 per cent against 8.5 per cent in the year-ago quarter. Higher margins are primarily on account of effective curtailment of raw material costs. Despite gold prices spiralling in the recent quarters, raw material costs inched up three per cent y-o-y to Rs 1,974 crore. As Titan did not purchase gold at spot rates and half of its procurement came from its gold exchange programme, raw material cost as a percentage of sales fell from 74 per cent in the first quarter (Q1) of FY16 to 71 per cent in Q1’FY17. Some of it was on account of the company rolling over the hedged positions, leading to a gain of Rs 24 crore. Excluding hedging gains and one-offs, jewellery segment’s profit before interest and tax (PBIT) margin was up 29 basis points y-o-y to 9.1 per cent in Q1’FY17.

Titan also saw its advertisement expenses and other costs fall 20 per cent and seven per cent, respectively, y-o-y in Q1 to Rs 103 crore and Rs 238 crore. Excluding one-off costs pertaining to employee voluntary retirement scheme (VRS), PBIT margin of watches segment (18 per cent of revenues) expanded to 14 per cent, up 400 basis points y-o-y, while eyewears surged 450 basis points y-o-y to 6.4 per cent in Q1.

Net profit declined 17 per cent to Rs 127 crore, missing estimates of Rs 189 crore. However, adjusted for VRS cost of Rs 97 crore, net profit would have come a little ahead of expectations.

While the cost reduction measures helped Titan improve its blended margins, the trend might not sustain. Its management, too, has stuck to its earlier margin guidance of 9-10 per cent and feels this range is more sustainable. While analysts say Q1 results excluding for VRS expenses were not off the mark, sticky demand scenario continues to be the big concern. “Sales and volume growth remains muted for Titan and that is the major issue,” says Amnish Aggarwal of Prabhudas Lilladher.

With the management guiding for soft demand scenario, analysts expect Titan’s stock, which fell two per cent on Wednesday after results, to see further pressure.