Titan Company's Q3FY18 results (Outperformer) - Weak revenues offset by higher margins
Q3FY18 result highlights
- Titan’s net revenues increased by 7.8% yoy at Rs41bn (est: Rs43.9bn), EBITDA grew by 21% yoy at Rs4.4bn(est: Rs4.4bn) and PAT grew by 22% yoy at Rs3.08bn(est:Rs3.1bn).
- Watch sales increased 4.7% yoy, jewellery sales were up 7.4% yoy while Eyewear sales were down 0.3% yoy. Watches EBIT was up 56% yoy; margins expanded 510bps to 15.5%. Jewellery EBIT was up 15.1% yoy with margins expanding by 70bps to 11%.
- Gross margins improved by 120bps. Staff cost, advertising spends and other expenses increased by 8%/14%/4% respectively. Resultant EBITDA increased by 21% yoy with EBITDA margin expansion of 120bp to 10.8%.
- Other income was up 45%; depreciation and Interest expense were up 24% & 23% yoy resulting in PAT growth of 22% yoy.
Key positives: Expansion in gross margins
Key negatives: Lower primary growth in Jewellery business
Impact on financials: Factoring improved margins and higher jewellery revenue growth in coming years, we increase FY18E/19E/20E earnings by 6%/8%/8%.
Valuations & view
Though revenues in Q3 have been below expectations, underlying jewellery trends continue to be strong and we expect Titan to revert to 20%+ revenue growth in the segment from Q4FY18. The watches business will be the beneficiary of lower retail prices and higher import duties on international brands on the revenue side and cost optimization initiatives on the margin side. We believe in an environment which is conducive for leading organized jewelry players to capture a greater share of the market, Titan stands to be the biggest beneficiary. Further, with mix led margin improvement in jewellery and operating leverage and cost control led margin improvement in watches; we expect Titan’s earnings to compound at a CAGR of 27% over FY17-20E. We believe any correction in the stock price on current results provides an opportunity to buy the stock. Maintain Outperformer with a revised target price of Rs900 based on 45xFY20E EPS.
Titan is engaged in the watch division where Co. manufactures and sells a variety of watches with varying price range within India and overseas; in the jewelry division where Co. works through Tanishq and Zoya. Tanishq has a range of jewelry studded with diamonds or coloured gems in 18 kt gold, 22 kt pure gold and platinum; and Zoya is a chain of luxury jewelry boutiques; in the eyewear division where Titan Eye+ retails products which showcase contemporary designs, coupled with optical exams with Sankara Nethralaya; and in the precision engineering division, Co. sells its components globally and helps build machinery.
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