Titan Industries’ stock closed with gains of 2.1% compared to a flattish Sensex and FMCG index. While the year-on-year growth in sales at 23.7% was in line with expectations and far better than the disappointing single-digit growth witnessed in first half of FY13, net profit growth of 24.2% was impressive despite the pressures witnessed by watches division and unfavourable mix in jewellery business. Profit growth (even at operational level) was the best in past three quarters.
Jewellery business reported a significantly better than expected growth of 27% in revenues despite a higher base due to improved consumer sentiments on account of festive and wedding seasons, leading to a healthy grammage growth (read volumes) of 12%. However, watches segment reported a 10-quarter low sales growth of 10.6% despite improvement in like-to-like growth in its key brands (both, year-on-year and sequentially) and price hikes in last one year.
Overall, operating profit margin has been almost maintained but could have been better by 20-25 basis points had Titan availed the facility of direct gold imports. Jewellery business’ segment margins have been maintained even as the share of studded jewellery (high-margin business) declined significantly by 420 basis points year-on-year (10% points sequentially) to 22% in December quarter on account of lower off-take. But watches saw a decline of 45 basis points in margin due to higher material cost and excise duty hike.
The company sees improving consumer sentiments as retail stores are experiencing an increase in footfall and hopes the momentum to continue in current quarter. But demand pressures are not ruled out completely. Festive season was good for all brands but demand had to be stimulated through investments in mass communication. Further, in the post results conference call, the management said, demand in January was little lower than December quarter for jewellery business. Demand for discretionary items (watch and eyewear) also remains under pressure.
Titan will continue to expand and launch new products to sustain growth, but the two means higher depreciation and advertising costs. Reversal of decline in share of studded jewellery seen in December quarter is imperative for margins to improve. If Titan gets permission for direct import of gold on 180 days credit (RBI restricts it to 90 days), margins can further expand by 50 basis points but approval from RBI is uncertain as of now. Given the challenges, valuation of 27 times FY14 estimated earnings appears rich.