MOSL: TITAN COMPANY (Buy)-Near-term uncertainty leads to earnings cut
TITAN COMPANY: Near-term uncertainty leads to earnings cut; Investment case intact
(TTAN IN, Mkt Cap USD13b, CMP INR1038, TP INR1210, 17% Upside, Buy)
- 1QFY20 consolidated revenue grew 15.7% YoY to INR51.5b (v/s est. of INR50.7b). EBITDA increased 18.8% YoY to INR5.7b (v/s est. of INR5.3b) and recurring PAT was up 11% YoY to INR3.6b (in-line).
- gross margins remained flat YoY to 27.4%. Increase in other expenses as % of sales (+20bp YoY to 7.8%) and staff cost as % of sales (+10bp YoY to 5.5%) was offset by lower ad spends as % of sales (-50bp YoY to 2.9%). Thus, EBITDA margin expanded 30bp YoY to 11.1% in 1QFY20 (v/s est. of 10.3%).
- segmental performance: (a) Reported Jewelry sales were up 14.3% YoY (6% volume growth, 10% SSSG growth) to INR41.6b with EBIT margins down 10bp YoY to 10.5%. (b) Sales of Watches grew 20.1% YoY (13% volume growth) to INR7.2b with EBIT margin down 10bp to 16.6% in 1QFY20.
- Concall highlights: (1) Management has reiterated confidence in its target of +20% sales growth for 2HFY20, but it is cautious on 2QFY20 growth; (2) Once gold prices stabilize, management expects demand to recover.
- Valuation view: Uncertainty surrounding gold prices has led to an EPS cut of ~6% each for FY20/FY21. However, the longer-term investment case remains strong as Titan is well placed to grow its share in the largely unorganized jewelry market in India from the current level of ~8%. A combination of its own initiatives and regulatory tailwinds should result in resumption of plus 20% growth in jewelry revenues. With over 60% of the jewelry segment growth continuing to come from SSSG, operating margins are also likely to improve. This should result in resumption of robust earnings growth once gold price uncertainty recedes. It is noteworthy that even in a rising gold price environment between FY07-FY13, topline and earnings grew over 30% CAGR for Titan. Targeting 50x FY21 EPS, we get a TP of INR1,210. Maintain Buy.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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