Jewellery and watches giant Titan’s operating profit and net profit for March quarter exceeded analyst estimates. Improved gross margins, lower ad spends and cost saving measures boosted the company’s operating profit in an otherwise weak quarter impacted by the lockdown.

Segment Revenue

Key takeaways:

Revenues: Largely in line with expectations and the guidance given out by the management in their pre-results update. Three factors played out in Titan’s jewellery business performance during the quarter. First, there was some recovery in January and February after months of subdued demand and rising gold prices. Second, the lockdown in the last week of March disrupted operations, hurting both revenues and profits. Finally, the 30 percent increase in gold prices over the last 12 months is still holding back many from purchasing gold jewellery.

The jewellery business grew 16.5 percent in January and February before the lockdown impacted demand in March. For other verticals, a strong demand activation program in watches around Valentines’ Day aided growth in the segment. The eyewear business continued to struggle.

EBITDA: At over Rs 604 crore, quarterly operating profit was significantly ahead of analysts’ estimates. Gross margins expanded over 280 basis points, helped by demand for premium products. Second, the company reduced ad spends by about 32.5 percent during the quarter. Third, War on Waste—a cost control initiative started in February--reduced other expenditure significantly. Finally, base effect too helped, as the company had reported an exceptional loss of Rs 46 crore during the same period the previous year.

EBITDA margin: A combination of subdued sales and strong operating profits expanded quarterly margins by 390 basis points year-on-year. Jewellery business margin rose 140 basis points and that for watches jumped 750 basis points. During the earnings call, the management said it would continue to focus on cost control measures.

Net profit: Surged 21.1 percent, largely on account of higher EBITDA. Also, the exceptional loss in the year-ago quarter made the number look even better.

Management commentary: After being shut for nearly all of April, more than 1400 out of the 1800 stores have opened now. Among the stores that have opened, the recovery in sales has been encouraging. Average daily sales in May have been around 60 percent of pre-COVID levels. June is expected to be even better, but normalcy is expected only by the last quarter of this fiscal. The management sees strong opportunity for growth in jewellery, watches and eyewear purely on account of their strong customer outreach programs and the overarching trust of Titan and Tata brand in these uncertain times.

Valuation: Titan’s stock price almost halved from its February high of Rs 1,390 to Rs 720 in March. Since then, the stock has climbed to around Rs 1020. At current levels, Titan trades at 42 times estimated earnings for FY22.

There is limited room for a re-rating of the company’s price earning multiple. However, the structural story of market share gains from the unorganized jewellery segment, an extensive pan-India network, strong brand recall and a healthy balance sheet should keep investors interested.

First Published:Jun 9, 2020 2:09 PM IST