Despite weak demand, Titan's glittering stock valuation unlikely to fade

Strong brand equity and network expansion will help the company gain market share, even as local unorganised players are struggling and many peers are facing demand and liquidity pressures

At a time when the overall consumption theme is losing sheen, Titan’s optimistic outlook has helped the firm gain investor trust, even as its March quarter (Q4) earnings missed expectations.

Therefore, the stock, currently valued at 54-55 times its FY20 estimated earnings, will continue enjoying higher valuation and deliver a decent upside, say analysts. In fact, it has risen over 6 per cent after its Q4 results (on May 8), as compared to a 1 per cent fall each in the Sensex and the BSE FMCG indices.

Amid several one-offs on account of provisioning for impairment of investments in a subsidiary as well as the IL&FS group, inventory valuation, and ex-gratia payouts to employees, Titan’s net profit was up just 4 per cent year-on-year (YoY) to Rs 294.6 crore, way below Bloomberg’s consensus estimates of Rs 400 crore. 

Adjusting for one-offs, net profit was in line with estimates, say analysts. Titan’s strong brand equity (Tanishq) will continue to help gain market share for its jewellery segment (84 per cent of revenues), when local unorganised players are struggling and many peers are facing demand and liquidity pressures.

Analysts at ICICI Securities say the enriched jewellery portfolio — with the launch of new collections (wedding space) and sustained investment in brand building — is enabling better-than-industry revenue growth for Titan. The strong 19 per cent growth in Titan’s jewellery segment since April, despite overall consumption demand moderating, shows the brand’s strength.

Factors such as higher number of wedding dates in FY20, new launches, and network expansion should all help Titan achieve the targeted revenue growth of over 20 per cent in its jewellery segment. The management says wedding dates in FY20 are 40 per cent higher than FY19. 

In addition, its gold exchange and gold harvest schemes should propel customer acquisition. These factors will also help improve traction of the high-margin studded jewellery sales (30 per cent of total jewellery sales in FY19) and other premium collections such as Zoya.

Titan’s store expansion plans should help the firm leverage upon these opportunities. Titan plans to add 71 stores to its flagship Tanishq in FY20, more than double the 30-34 stores it added in FY19. 

Any surprises from the watches segment, which saw revenue increase 7.5 per cent and earnings before interest and tax margin dip by 165 basis points YoY in Q4, and the eyewear business, would be welcome.

Overall, investors with some risk appetite (given high valuations) can consider the stock, which is estimated to clock 25 per cent earnings growth in FY20.