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Titan Company's Q2FY20 results (Downgrade to Neutral) Weak outlook, expensive valuation...

Q2FY20 result highlights

• Standalone net rev. grew by 0.6% yoy at Rs44.4bn (est: Rs44.2bn), EBITDA grew 9.9% yoy at Rs5.13bn (IDFCe: Rs4.5bn) and PAT was up 2% yoy at Rs3.2bn. (IDFCe: Rs3.2bn). We estimate a positive impact of Rs ~450m at EBITDA level because of IndAS 116 (at PBT level impact is minimal at Rs38.4m), adj. for this impact, EBITDA would be flat yoy.
• Jewellery sales fell 1.5% yoy despite Retail growth of 7% due to –ve impact of Rs1.2bn on hedging of gold as prices increased sharply during Q2FY20. SSG (at secondary sales level) stood at 2% for Tanishq. Gold grammage decline was 14% yoy. Jewellery EBIT fell by 2% yoy with flat margin yoy at 10.9%, adj. for hedging impact, margin fell 40bp yoy as it had to induce consumers to drive purchases.
• Watch sales grew 6.4% yoy, EBIT fell 7% yoy with margin contraction of 220bps yoy to 15.8%. Eyewear sales were up 28.5% yoy, division reported EBIT profit of Rs19.9m vs loss of Rs10m in base quarter.
• Overall, GM improved by 140bp yoy to 29.2%. Staff cost was up by 29% yoy (due to actuarial revisions to the extent of Rs150m), ad spends fell by 8% yoy and other expenses (includes IND AS benefit) fell by 6% yoy. Resultant EBITDA margin was up 100bp yoy to 11.6%.
• D&A was up 97% yoy & interest cost was up 3.9x due to IND AS 116. OI was up 15% yoy. PBT fell by 4% yoy. ETR came in at 25.4% (exp: 20%).
• Jewellery revenue guidance cut again: Season sales grew by 10% yoy and was lower than management’s earlier guidance of 20% for H2FY20E, as a result Titan has lowered the revenue growth guidance for the jewellery segment to 11-13% yoy got H2FY20E (vs 20% earlier).

Key negatives: Underperformance in Jewellery division growth.

Impact on financials: Cut earnings by 4.5%/4% each for FY20E/21E.

Valuations & view

Titan has further revised its jewellery segment growth guidance downward (to 11-13% in H2FY20E versus 20% earlier) as consumer sentiment continues to remain weak and higher gold prices lead to delay in discretionary purchases; this lower growth is also being achieved after higher investments. As a result, we cut our earnings estimates by 4.5%/4% for FY20E/21E despite cut in corporate tax cuts. The stock has returned 24% since Q1FY20 results and at our new earnings, it trades at 56x FY21E which we believe is full given worsened growth outlook. Despite being a strong believer in Titan’s long-term story (low market-share in a highly unorganized, large market with best in class consumer understanding and offering); we downgrade it to Neutral as we await a pick-up in consumer sentiments and better entry point.