Market share gains, margins and store network expansion to support Titan

Valuations may continue to trade at a premium

From its lows this month, the stock of India’s largest listed jewellery maker Titan Company gained 10 per cent and in the process crossed the Rs 3 lakh crore mark.

Upward revision in earnings estimates post strong September quarter (Q2FY24) performance and a robust growth outlook led to a positive sentiment for the stock. Though the stock trades at premium valuations, brokerages remain positive given the structural growth story of the organised jewellery market and incremental gains from new businesses.

The company delivered a better-than-expected performance in Q2FY24 on the back of healthy revenue growth and expansion in operating profit margins. Standalone or domestic operations reported a growth of 20 per cent led by double-digit growth of buyers, as well as average bill value per buyer during this period. 

While store-level growth was higher at 27 per cent, reported growth was lower on account of discounting, accounting adjustments and lower sales to franchisees.

Jewellery growth picked up pace in Q2 as the four-year revenue growth rate at 24.9 per cent was better than the 22.4 per cent recorded in Q4FY23.

Similarly, overall four-year average growth was better post-Q2 at 27.3 per cent as compared to 22.6 per cent at the end of Q4FY23.

Analysts led by Gaurang Kakkad of Haitong Securities expect revenue growth of 20.1 per cent annually over the next three years as compared to 19.7 annual growth over the FY19-23 period. This would be driven by market share gains, store network expansion, scaling up of new businesses such as women's ethnic wear, purses, fragrances, accessories and international expansion, says the brokerage.

The margin trajectory is another area the Street will track given the strong sequential growth expansion in the September quarter. The company’s Q2 margin expanded by 300 basis points to 14.1 per cent, largely aided by the higher margin studded segment. This was above the management’s guidance of 12-13 per cent. The margins were lower Y-o-Y on account of the base quarter one-off.

Says PhillipCapital Research, “Jewellery segment margins were strong despite the 125 basis points fall Y-o-Y given the one-off diamond price inventory gains in base quarter. This was on account of the impact of 'Shraadh' being delayed from September last year to October month in the current year and improvement in studded share to 33 per cent in 2QFY24 vs 32 per cent in 2QFY23.”

While watch segment growth was strong at 32 per cent and revenues crossed the Rs 1,000 crore mark in a quarter for the first time, higher contribution of the wearables segment impacted the segment margins which came in at 14.7 per cent. Lower gross margins of wearables and higher promotional costs weighed on the segment margins. 

Though there are multiple positives, Haitong Research highlights high inflation impacting consumer discretionary spending, increased competitive intensity, as well as a sharp increase in gold prices impacting volume growth for jewellery as key risks for the stock. 

PhillipCapital Research, however, has maintained its neutral rating for the stock even as it expects the earnings growth to be a robust 19 per cent over the FY23-26 period.

The rating reflects near-term margin pressure with expectations of 100 basis points fall Y-o-Y in FY24 and rich valuations of 59 times its two-year forward P/E. These are most likely to limit any meaningful stock price appreciation given the highly volatile demand environment, says the brokerage.