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Event update: Titan Company (Outperformer) - High gold prices dent jewellery division performance

Event

Titan released its 1QFY20 quarterly operational update. The key takeaways are as follows:

Jewellery division – High gold prices impacts consumer demand - The division has seen 13% revenue growth for 1QFY20, which is below our and management expectations. Tough macro environment and sharp moderation in consumer demand, especially in June on account of higher gold prices, resulted in overall muted performance for the quarter. Division added 12 Tanishq stores during the quarter. Given Titan plans to add 70 stores in FY20E, remaining quarters should see uptick in pace of store additions in our view.

Watches division – Institutional order drives double digit growth: sales grew by 19% yoy partly led by execution of large institutional order from TCS and also semi-annual activations of Titan & Fastrack brands. In terms of key channels, LFS, trade and e-commerce saw healthy growth.

Eyewear – Sales grew by 13% yoy for the quarter aided by activations during the quarter. Trade channel grew faster than overall division.

Our view

We expect overall sales growth of 14% for the quarter led by 13%/19% revenue growth in Jewellery & watches business. This is lower than our earlier expectations of 18% overall revenue growth with a 20% growth in jewellery business. We note that division saw ~19% growth till 10^th May 2019 (as indicated in Titan’s annual investor meet), indicative of sharp moderation in second half of the quarter, particularly in June. Hedging gains and control over other overheads should curtail the impact on margins resulting in EBITDA/PAT growth of 13%/14% for the quarter. We are building in a 20% revenue for the Jewellery division in FY20E but given the weak start and a high base in three coming quarters (grew by 29%, asking rate now at 22% yoy), earnings are likely to see a cut (~4% for FY20E/21E as per our initial estimates). However, we would await management’s commentary on demand trends/overall guidance and whether higher wedding days and higher store additions in coming quarters can partially offset the miss in 1QFY20E. Expect stock to remain under pressure in near term, however, medium-to-long term structural drivers remain intact coupled with Titan’s strong execution skills, we maintain our outperformer rating on the stock.