All that glitters is gold for Titan

Strong 54% growth in jewellery business lifts share price by 10% to all-time high

Over three quarters, better than expected results have pushed Titan Company’s stock to a high. The June quarter (Q1 of 2017-18) results were no different. The stock gained about 10 per cent to end the day at Rs 610.45, a new high.

 Two events earlier thought detrimental for the company – demonetisation in November 2016 and rollout of the goods and services tax (GST) on July 1 — have both worked in favour of Titan. Revenue in Q1 at Rs 3,910 crore rose 42 per cent year-on-year, the best growth rate thus far by a consumer goods company in the quarter. Net profit growth also maintained this momentum, up 46 per cent to Rs 277 crore.

The segments of watches and eyewear, 15 per cent of total revenue, have posted weak numbers in recent times. But, the jewellery business, 83 per cent of revenue, was a showstopper in an otherwise lacklustre quarter for most consumer goods entities. Segment revenue at Rs 339 crore showed 54 per cent growth over a year before, one of the best in recent times. 

Strong sales were aided by healthy Akshaya Tritiya sales (a period considered auspicious for buying gold in India), a successful gold exchange programme, improvement in realisation and an element of advancement of sales on account of GST implementation to the extent of Rs 250 crore. Therefore even jewellery volume growth was strong (up 49 per cent on grammages), while the share of studded ornaments expanded by 23 per cent.

However, while volumes are growing at a healthy pace, it is not getting converted into such profitable growth. Operating margins remained under stress in Q1 at 9.9 per cent versus 10.4 per cent a year before. With the right growth levers still missing, the question is whether the Q1 numbers are sustainable. Analysts at SBICap Securities feel much of the jewellery segment’s growth in Q1 was driven by a one-off, the impact of which might not last. “Post the strong outperformance, we believe most positives are already priced-in and valuations at 41 times the FY19 (estimated) earnings appear expensive,” they add.

Those at Kotak Institutional Securities feel the stock prices-in sustenance of the current strong growth momentum for a very long time, leaving little margin of safety. Therefore, while Titan’s management is keen on expanding the jewellery business by 2.5 times in the next five years, the expensive valuations after the year-to-date stock price jump might restrict the near-term investor confidence.