Titan: Poor show to weigh on valuations

Weak show by the plain gold jewellery segment pulled down Titan Company's (Titan) results for the September 2016 quarter (Q2). The company posted sales of Rs 2,660 crore (down 0.1 per cent year-on-year) and missed Bloomberg consensus estimate of Rs 3,040 crore by a mile. But for the healthy traction in studded/diamond jewellery, Titan's revenues would have come in even lower. The miss assumes significance given that the Street had already mellowed down its expectations to factor in Titan's revenue warning issued a month back.

Healthy expansion in gross margin though aided the company's earnings which grew 24 per cent to Rs 181 crore in Q2. Higher gold prices, improved revenue mix in favor of studded jewellery, focus on reducing overhead costs and effective sourcing of gold in the spot market aided Titan's margins in Q2. Consequently, operating margins of the jewellery business (75 per cent of revenues) expanded 490 basis points to 11 per cent. The earnings though still lagged Bloomberg estimates of Rs 192 crore.

Demand environment continued to remain muted in Q2 partly due to deferment of jewellery purchases to Q3. Though the company witnessed good momentum in the Diwali season, it also reiterated that footfalls are increasing only due to new launches, deals and discounts. High gold prices, rising KYC around jewellery purchases are key factors impacting jewellery demand for most companies, believe analysts. In this backdrop the company continues to focus on innovations and plans to reinvest most of the margin gains to recover lost revenue momentum. Thus, despite healthy margins, Titan management maintained full year guidance of 10 per cent in the jewellery business rather than increasing the same.

Titan's watch business (about one-fifth of revenues) was impacted by decline in exports and service businesses in Q2. Though better product mix in this segment aided gross margins, costs towards voluntary retirement scheme pulled down this segment's operating margins to 12.7 per cent (down 240 basis points). Titan launched its second smart watch Juxt Pro in the quarter which has received a good response so far. Among smaller businesses, fall in sunglasses business pulled down margins of the eyewear segment even as prescription glasses did well.

Going forward, company remains focused on market share gains and improving sales through new collection launches and promotions. Investors would also keenly watch out for details regarding performance of the Carat Lane acquisition as it is a key part of Titan's on-line strategy. At current levels, the stock trades at 38 times one-year forward estimated earnings which cannot be justified in the wake of continued weakness in financial performance.