Jewellery firms may lose some of the Q3 shine after Omicron rub-off

Structural growth story, demand recovery, and market-share gains for Titan, Kalyan Jewellers may persist

Aided by a healthy festival and wedding season demand, listed jewellery companies reported robust domestic sales growth in the October-December quarter (third quarter, or Q3) of 2021-22 (FY22).
 
While the largest listed retailer, Titan Company (Titan), saw 37 per cent year-on-year (YoY) increase in sales, Kalyan Jewellers posted a 15 per cent uptick in the quarter. The rise in sales is significant, given the high base of the year-ago quarter, with Titan posting 16 per cent growth, while Kalyan Jewellers’ growth was in double digits.
 
The Titan management indicated that the festival purchases in October and November were responsible for the uptick in jewellery demand and revenue growth. Given that all stores were open in the quarter, there was a significant increase in walk-ins, and the company was able to achieve strong customer conversions.
 
Including Titan’s jewellery segment performance in Q3, its two-year compound annual growth rate (CAGR) stood at 26 per cent. The strong sales CAGR, according to Ashit Desai and Devanshu Bansal of Emkay Research, was driven by around 15 per cent jump in ticket size, compared to pre-pandemic levels, higher footfalls/conversions, and a 9 per cent CAGR in store count. New store additions in Q3 stood at 14, taking the total store count to 428.
 
While both plain and studded jewellery saw double-digit sales growth, the company indicated that the share of the latter was slightly higher than the year-ago quarter. The share of studded jewellery in the overall sales in the year-ago quarter was 26 per cent, while it was 30 per cent in the July-September quarter. This should be positive from a profit perspective, given that the segment fetches better margins.

 
Lower gold prices, better mix in the jewellery division, and strong recovery in the other divisions will help gross margins to remain high YoY, say analysts at Sharekhan. They expect Titan’s consolidated operating profit margins to be higher by 150 basis points YoY to 12.6 per cent in Q3FY22. Further, the overall operating profit is expected to grow 34 per cent YoY in Q3FY22. The positive for Titan is that sales growth for watches and eyewear at 27-28 per cent YoY was also robust and came in ahead of expectations.
 
Kalyan Jewellers also highlighted that gross margins have improved over the last two quarters and are near pre-Covid levels. The gains on the profitability front were on account of  increased share of revenue from the non-South India market and higher studded jewellery share.
 
In the non-South India market, the higher share of niche segments within plain jewellery, as well as studded jewellery, are the margin drivers. The South India market accounts for 65-70 per cent of Kalyan Jewellers’ revenue.
 
Ramesh Kalyanaraman, executive director at Kalyan Jewellers, believes that higher vaccination and festival demand have resulted in strong sales, with people preferring the organised large format stores. Further, market-share gains continue, given the liquidity and inventory issues for the unorganised players, he adds. The company added five new showrooms in the quarter, taking the total to 151.
 
While the structural growth story, demand recovery, and market-share gains continue, there are near-term headwinds. Increased restrictions in Delhi (stores open on alternate days), Kolkata (open till 5 pm), Bengaluru (shut on weekends), and Chennai (Sunday closed) are impacting walk-ins. Moreover, the January-March quarter last year was a strong period, which could mean a challenging task for companies to outperform, given the spread of the Omicron variant.
 
Despite a strong Q3 and markets being buoyant, the stocks of the larger listed jewellery retailers ended in the negative. While brokerages have raised their earnings estimates for 2022-23 and 2023-24 by 7-9 per cent for Titan, the stock, which is up 15 per cent from the December 20 levels, factors in some of the upsides.
 
Credit Suisse has a 'neutral' rating on the stock, while CLSA has maintained its 'sell' call. The target prices for the stock are in the Rs 2,700-3,000 range, which gives a return of 5-16 per cent, from the current levels.
 
Kalyan Jewellers is up 7 per cent from the December lows, and target prices indicate returns upwards of 15 per cent. Investors can consider both stocks (Titan and Kalyan Jewellers) on dips.