Titan: Investors advised to wait until more clarity emerges on recovery

Titan reported a 62.3 per cent year-on-year decline in revenue in Q1 at Rs 1,862 crore

Titan’s top-line performance in the June 2020 quarter (Q1) and business recovery updates look good on a reported basis, but a close look indicates that good times are far away. Unsurprisingly, Titan's stock fell 3.7 per cent on Tuesday, even as the Sensex was up 0.6 per cent.

On a standalone basis, Titan reported a 62.3 per cent year-on-year  (YoY) decline in revenue in Q1 toRs 1,862 crore, which was better than the consensus estimate of Rs 1,815 crore. This was partly supported by other operating income of Rs 601 crore from sale of gold ingots. Excluding gold ingot sales, Titan’s Q1 top line would have been Rs 1,261 crore, around 74 per cent lower than the year-ago quarter and short of expectations. However, buying of gold ingots is likely to sustain.

The reported loss before tax of Rs 335 crore was also worse than the consensus pre-tax loss estimate of Rs 77 crore. Feeble operating leverage led by a dismal top-line performance hurt the bottom line. All business segments of Titan, including jewellery (over 80-88 per cent of the overall revenue and operating profit), posted a loss at the operating level itself.

Further, according to the management, it has seen 101 per cent recovery in the jewellery business in July, vis-à-vis year-ago level. However, this was mainly driven by the lower base of July 2019 when jewellery sales were affected by higher gold prices and due to the advancement of studded jewellery activation (discount offer). Excluding these factors, the recovery is 80 per cent.

 

 

In fact, the management's expectation of the overall business reaching the pre-Covid level by the March 2021 quarter is likely helped by a lower base (the pandemic impact had started in the March 2020 quarter) and aided by higher gold prices. Therefore, analysts say, investors should not go gung-ho about the management’ recovery expectations.

Vishal Gutka, vice-president, PhillipCapital, says: “Though higher gold prices would support the overall recovery, a volume recovery would be very difficult for Titan, which has been trading at pricey valuation (52 times FY22 estimated earnings).” The analyst continues to maintain a 'negative' outlook on the stock. In Q1 also jewellery business volumes were down 81 per cent YoY.

Therefore, how consumer sentiment shapes up amid high gold prices is crucial. The management is also sceptical of sustaining the recovery momentum seen in July and expects the offtake of high-margin studded jewellery to remain low. Among a few silver linings are the pre-buying of jewellery by some consumers amid fear of a further increase in gold prices and liquidity pressure faced by unorganised/ smaller gold players, which is helping Titan gain market share. 

Also, because of the high discretionary nature of Titan's other businesses like watches and eyewear, a demand rebound for them would take time.

Overall, investors are recommended to wait until more clarity on demand recovery emerges.