Titan: Evergreen but Expensive
Posted on March 25, 2021 by Ventura Securities Leave a comment
While most businesses are feeling the heat of rising input costs owing to higher commodity prices, Jewellery businesses are rather witnessing the reverse trend.
Gold prices in the international markets have corrected almost 17% from their August 2020 highs. Also, the Indian government has reduced the import duty from 12.5% to 10.75%, which translates into cheaper imports.
Is gold losing its sheen?
(Source: World Gold Council)
Are falling gold prices good or bad for the jewellery business?
Usually, investment demand tends to fall with declining gold prices but consumption demand rises substantially when the prices stabilize (after rallying ferociously). In other words, depending on the price trend, consumers either prepone or delay their buying decisions.
This time, there's one more twist to this equation. With the second-wave of COVID-19 surfacing, several states may impose stricter social distancing restrictions, going forward.
Will that be a double whammy for jewellery businesses as it affects wedding-related jewellery demand along with severely affecting the footfall at stores?
On this backdrop we decided to evaluate Titan.
Titan has been investors' favourite for a long time. Over the past 5 years it has done exceptionally well as compared to the performance of broader markets.
Despite mounting pressure on companies depending on discretionary spends during the pandemic year, Titan has remained relatively unaffected.
Titan Vs BSE Sensex
Chart displays how the investment of Rs 1 lakh in Titan would have performed over the last 5 years vis-à-vis that in BSE Sensex
(Source: ACE Equity)
What drives Titan's success?
Titan has 1,854 stores spread across 292 cities with total retailing space of 2.1 million square feet. The net additions during 9MFY21 have been 23 stores aggregating to a retailing space of 1.1 lakh square feet.
Titan: Ever-growing store count
(Source: Company records)
Titan classifies its business operations into four verticals:
Watches and wearables
Others, which include accessories, fragrances and Indian dress wear
Heavy reliance on Jewellery business
The jewellery segment is the mainstay of Titan. In FY21, the company's reliance on its jewellery business has increase even more.
As a result of lockdowns and the emergence of Working-From-Home (WFH), the contribution of non-jewellery businesses went down. That said, the investment demand for gold improved the performance of the jewellery segment in relative terms. For instance, the sale of coins accounted for 14% and 8% respectively in Q2FY21 and Q3FY21, whereas their proportion in the jewellery revenue was just 5% in Q3FY20.
Titan: Report card…
Studded jewellery made up 26% of the revenue in Q3FY21 versus 29% in Q3FY20. It's noteworthy that, coins fetch lower margins and studded jewellery segment operates at a much higher margin. Titan's brand appeal has allowed the company to stick to their rate card of making charges even during challenging times.
Other segments, viz. watches and wearables, and eyewear, recovered 88% and 93% in Q3FY21, respectively, in comparison to levels in Q3FY20.
The company has clocked a double digit growth in the store walk-ins as well as in sales value in January 2021.
Post Q3FY21 earnings, the Titan management had exuded confidence in carrying over the strong momentum of double-digit growth in the jewellery segment in FY22. Now that COVID-19 cases have started rising again, it remains crucial to see how the management is reading the present situation with respect to the future demand trends.
As you are aware, the densely populated states such as Maharashtra and Tamil Nadu have been discouraging people from organizing and attending social and religious gatherings—a potential negative for the growth of the wedding jewellery segment.
Q4FY21 is coming to an end. Within the next 10-15 days, companies will start reporting their last quarter earnings. While you track Titan's numbers, you may like to pay attention to the developments on trends below.
Focus on primary business and proprietary brands
In Q3FY21, Titan decided to bite the bullet and significantly reduced operations of a wholly owned subsidiary, Favre Leuba AG (FLAG). The company wrote off Rs 137 crore and reported it as an exceptional loss during Q3FY21. As clarified by the management, FLAG will continue to operate in India, however, the global expansion plans have been kept on the backburner considering the pandemic situation globally.
Moreover, the company expressed its intent of divesting from Montblanc India Retail Private Limited. However, it continued to classify it as an "asset for sale" in its accounts in Q3. The company has guided that the transaction would be completed in Q4FY21.
How long will the restructuring plan take to deliver better return ratios? That needs to be tracked closely.
Eyewear business is expected to deliver significant improvements in future
The management has been confident about turning around the eyewear business significantly by FY23. As divulged by the management, the company has revisited channel mix, channel cost, in-house production, share, non-profitable stores and manufacturing consolidation amongst others to make eyewear a significant revenue contributor and clock double digit EBITDA margins.
Q4FY21 earnings of the eyewear segment need to be scrutinized minutely to see if there're any green shoots.
Noticeable shift from unorganized to organized
Supply side challenges coupled with difficulty in managing working capital has created a lot of stress for the unorganized sector during pandemic times. As against that, factors such as changing consumer preferences and innovative strategies adopted by large brands like Tanishq have been accelerating the shift of market share from unorganized players to organized ones.
For instance, CaratLane stores witnessed an addition of 70% physical space over the last 12-15 months. The results have been tangible—top line of CaratLane grew 33% Year-on-Year in Q3FY21 and EBITDA improved from mere Rs 3 crore to Rs 21 crore on Y-o-Y basis.
Digital jewellery revenues including remote shopping account for 7.5%-8% and are seeing a strong traction.
Management's guidance on these emerging trends will be crucial.
Significant part of cost savings may continue
During the times of pandemic, the company implemented a cost reengineering program—War on Waste. Titan is hopeful that a substantial part of cost savings, especially on the procurement side, are sustainable even in the post-COVID era.
Lower operating cost will be margin accretive.
Evergreen and expensive…
Investors have shown unwavering confidence in Titan thanks to the management pedigree. The company's deep connection with Indian consumers and its impeccable track record has helped it enjoy rich valuations so far.
Titan: Sky-high expectations
# Bloomberg's consensus estimates
(Source: Bloomberg)
At the P/E multiple of 88 on FY20 earnings, the stock is expensive. As per Bloomberg's consensus estimates, the company's earnings are likely to grow 120% in FY22 and 23% in FY23 on a Y-o-Y basis. The stock isn't cheap on FY22 and FY23 earnings as well.
Can Titan live up to investors' expectations?
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
You may also like to read: Blue Star: Conditioned well to the market conditions?
tagged with Eyewear, Gold Jewellery, Tanishq, Titan, TitanEye+, Watches, Wearables