Regaining glitter in revenue spinning jewellery biz crucial for Titan

Festive season and expected improvement in consumption sentiment are expected to revive growth in second half of FY20

At a time when the overall consumption sentiment is weak, elevated gold prices are adding to the woes for gold jewellery majors like Titan Company. This is also reflecting on the stock of Titan, which has lost about 16 per cent in the last two months — sharply underperforming the BSE Sensex’s 5-per cent decline during the same period.

Though investors’ scepticism on high gold prices hurting jewellery business and thus, weighing on Titan’s earnings holds true for the ongoing quarter, the performance of its jewellery business in the second half (H2) of 2019-20 (FY20) will be crucial for the stock trading at rich valuation of 45x its 2020-21 estimated earnings — 19 per cent above its five-year average one-year forward valuations.

According to Priyank Chheda, analyst at Reliance Securities, the recent correction in Titan’s stock price factors in the near-term pain amid higher gold prices and slowing consumer demand. However, how the upcoming festive season and the overall jewellery demand in H2FY20 pans out will be a key trigger for the stock.

The jewellery business accounts for over 80 per cent of Titan’s revenue, and over 85-90 per cent of the operating profit.

The management, during the April-June 2019 quarter earnings call, earlier this month, had highlighted the over 20 per cent growth target in H2FY20 with the upcoming festive season and a likely improvement in consumption demand. It also expects gold demand to normalise once the prices settled. The latter would fuel growth of wedding jewellery, which accounts for 20 per cent of its jewellery business revenue.

However, it will be interesting to see Titan achieving its FY20 revenue growth target of over 20 per cent, given the feeble demand during the first two quarters of FY20.

The top line growth of around 15 per cent year-on-year (YoY) to Rs 4,885 crore in the April-June 2019 quarter was below its own internal target, mainly due to feeble jewellery demand amid surge in gold prices and weak consumer sentiment. This also pulled down the overall earnings before interest, tax, depreciation, and amortisation margin by 106 basis points YoY to 10.4 per cent, excluding Ind AS 116 impact. In the jewellery business, volumes typically drive margin.

Overall, the management commentary after the September 2019 quarter results on the jewellery segment and gold price trend would be crucial for Titan’s investors.