Titan's Q4 margin surprise fails to impress over pressure in jewellery biz

Expectations of margin pressure, mainly in jewellery business, which contributes over 80% of Titan's overall operating profit, is a key reason why the Street is worried.

Titan’s March 2020 quarter (Q4) numbers, announced on Monday after market hours, provided mild comfort. The jewellery-to-watch major recorded sharp improvement in operating profit margin, even with a 5.2 per cent year-on-year (YoY) decline in revenue to Rs 4,429 crore.  
 

Even as the top line was in line with analysts’ estimate of Rs 4,425 crore, reported Ebitda margin expanded by 388 basis points YoY to 13.6 per cent — ahead of estimates of around 10 per cent.

Key segments including jewellery, watches, and eyewear saw improvement in margins. Therefore, profit before tax rose 10.9 per cent YoY to Rs 515.6 crore, which was, once again, way higher than consensus estimates of Rs 373 crore. 

Yet, the Titan stock — which gained 3 per cent intra-day on Tuesday — closed the day down 2.3 per cent.

However, what worried the Street most was the expectation of margin pressure, mainly in its jewellery business. This contributes over 80 per cent to overall operating profit. 
 

Rajiv Anand, analyst at Narnolia Financial Advisors, says: “We believe Titan’s margins will remain under pressure as a likely revenue fall in FY21 will lead to weak operating leverage. Cost control, however, may limit the pressure.” Titan’s enhanced focus on recovery is the right step, he adds. 

 

 

The Titan management, in an analyst call on Tuesday, highlighted its aggressive focus on stimulating demand, and on market share gains. 

Given the current situation — in which demand for discretionary items has taken a backseat — analysts believe Titan will need to raise its promotional and trade offers to revive growth and gain market share.

The management added there would be some margin compression in FY21, on account of rising competitive intensity and lower demand for the more-profitable studded jewellery.  Given the slowdown and impact on individual income, recovery in sales of discretionary items such as jewellery, watches, and eyewear will be gradual.

Meanwhile, Titan clocked nil revenue in April, while May saw just 10-15 per cent recovery, compared to March. Further, the figure for June was estimated at 30-40 per cent. All these indicate how bad the June quarter could be.

Close to 75 per cent of stores have been re-opened, and around 90 per cent of Tanishq stores likely to be re-opened by June-end. While retail expansion is currently on hold, 8-9 stores (pending from the Q4 target of 50) will be opened in the next few months. The management expects full recovery by March 2021, with the December and March quarters expected to see good demand for jewellery. The Street will be watching developments closely.