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Titan Company's Q1FY20 results (Outperformer) - Even the best falter...

Q1FY20 result highlights

• Standalone net rev. grew by 14% yoy at Rs49.4bn (est: Rs49.2bn), reported EBITDA grew by 14% yoy at Rs5.65bn (est: Rs5.6bn) and reported PAT grew by 6% yoy at Rs3.7bn. (est: Rs3.98bn).
• Reported EBITDA had a positive impact of Rs510m due to IND AS 116 and negative impact of Rs400m expenses due to biennial business associate meet, adj for these, EBITDA would be Rs5.54bn, a growth of 12% yoy with a margin of 11.2%, down 30bp yoy. This would also benefit from part reversal in inventory loss booked in Q4FY18 but it would be largely neutralised by wage settlement with employees.
• Jewellery segment sales were up 13.3% yoy (secondary sales grew by 16% yoy, grammage growth was 6% yoy). Jewellery EBIT was up 12.4% yoy with margin contraction of 10bps to 10.9%.
• Watch sales grew by 20% yoy helped by large order from TCS, adj. for same rev. growth would have been 11%; EBIT was up 14.7% yoy with margin contraction of 90bps yoy (institutional orders have lower margins). Eyewear sales were up 13.1% yoy, division reported EBIT loss of Rs114m vs profit of Rs17.4m in base quarter.
• Jewellery guidance downward revised: July sales have declined yoy and management is hopeful of growth picking up from Sep’19 onwards as it maintains 20% growth guidance for H2FY20E; however, H1FY20 shortfall cannot be recovered to meet its earlier full year growth guidance of 20%.

Key negatives: Sharp deceleration in Jewellery division growth in June.

Impact on financials: Cut earnings by 9% each for FY20E/21E.

Valuations & view

Titan’s growth has decelerated sharply towards the end of Q1FY20 and weakness continues in July, as a result Q2FY20E is also expected to be lackluster. Management is confident of growth picking up sharply from Sep’19 onwards and will not shy away from investing margins, if the need be. We believe the long-term building blocks (low market-share in a highly unorganized, large market with best in class consumer understanding and offering) are in place but high gold prices and weak consumer sentiment is hurting the near-term growth trajectory. Post our cut, Titan’s earnings are exp. to post a CAGR of 16% (vs 21% earlier) over FY19-21E with 25% growth in FY21E. We also cut our target multiple by 5% to account for the near-term underperformance but continue to include Titan in our ‘leader target multiple group (of 47-50x FY21E earnings)’ as we expect rev. growth to pick up from Q3FY20E onwards. Retain OP with revised PT of Rs1130 (47.5x FY21E EPS).