 "Titan: Jewellery fails to dazzle")
Despite delivering higher-than-expected revenues for the June quarter, Titan Industries' (Titan) net profit was largely in line with Street estimates. This was due to the sharp Ebitda margin contraction, a function of unfavourable product mix and lower margins in both jewellery and watches segments. While lower gold prices boosted jewellery sales, slowing discretionary spends continued to hit the relatively higher-margin watches segment.
Looking ahead, the company's growth prospects will hinge on the way consumer demand shapes up in a slowing macroeconomic environment as well as the recent regulatory norms (which will have a bearing on its margins). Says Bhaskar Bhat, managing director, Titan, "For the coming quarter, we are working on our plans to deal with the weak consumer sentiment as well as the impact of recent regulatory measures introduced in the financing of gold imports". In recent moves, the Reserve Bank of India has made gold import funding expensive for jewellery makers such as Titan, which is likely to lead to higher interest burden and, hence, impact their earnings.
After these regulatory changes (in June), the Titan scrip has underperformed both the Sensex and BSE Consumer Durables indices. Of the 17 analysts polled by Bloomberg since July, seven have a buy rating, six have sell and four hold on the stock. Their average target price is Rs 257, indicating that Thursday's closing price of Rs 260 is closer to its fair value. Also, the stock trades at about 30 times FY14 estimated earnings, which is nearly 20 per cent higher than its historical average one-year forward price/earnings ratio of about 25 times.
Weaker rupee, product mix impact margins
For the June quarter, Titan’s jewellery segment (83 per cent of sales) grew by a robust 47 per cent year-on-year to Rs 2,614 crore. A good wedding season and the low-base effect of the June 2012 quarter (which witnessed 21 per cent fall in jewellery volumes) were key factors boosting this segment's sales. However, a sharp fall in gold prices, along with higher proportion of low-margin plain gold jewellery sales, impacted margins, which contracted 135 basis points to 8.8 per cent.
The watch segment performance was also hit by slowing discretionary demand. Sales growth was subdued at 11.4 per cent to Rs 402 crore and margins, too, contracted by a whopping 366 basis points to 10.3 per cent. Since the company procures raw material and components from markets abroad, the weaker rupee added pressure.
Here, the company had raised watch prices when rupee touched 53-54 levels and plans to do more such rises. While the management says it will be able to protect margins in this segment via price rises, its ability to pass on higher costs (in a weak demand environment) will be tested.
Overall, the margin contraction was restricted by reduction in materials cost, advertising spends and employee costs as a per cent of sales by 51-920 basis points. Titan's Ebitda margins, thus, came in at 7.9 per cent (decline of 173 basis points compared to the year ago quarter).
"June quarter registered higher sales of plain gold jewellery and coins that deliver lower margins. Margins in both watch and jewellery businesses were impacted due to change in product mix", said Bhat.
Titan’s other businesses (eyewear, precision engineering and accessories) posted 37.5 per cent sales growth to Rs 123 crore. Positively, this segment reported an operating profit of Rs 3 crore versus an operating loss of Rs 2 crore in the June 2012 quarter.
In the jewellery business, the company has procured gold from State Bank of India last month and is in negotiations with others for future supplies. The Titan management believes they will be able to solve sourcing problems before the festive season starts. However, the margins in this business may remain under pressure. The company has launched discounts schemes in the jewellery segment (in its attempts to push up new customer acquisition), which could have a bearing on the margins. For margins to improve, a pick-up in the high-margin studded jewellery demand is most crucial. The studded/diamond jewellery sales have slowed down over the past few quarters and continue to be under pressure. Among other things, while the weak demand environment is also expected to hurt watch sales and limit pricing power, higher costs will have a bearing on profitability.
Looking ahead, the company's growth prospects will hinge on the way consumer demand shapes up in a slowing macroeconomic environment as well as the recent regulatory norms (which will have a bearing on its margins). Says Bhaskar Bhat, managing director, Titan, "For the coming quarter, we are working on our plans to deal with the weak consumer sentiment as well as the impact of recent regulatory measures introduced in the financing of gold imports". In recent moves, the Reserve Bank of India has made gold import funding expensive for jewellery makers such as Titan, which is likely to lead to higher interest burden and, hence, impact their earnings.
After these regulatory changes (in June), the Titan scrip has underperformed both the Sensex and BSE Consumer Durables indices. Of the 17 analysts polled by Bloomberg since July, seven have a buy rating, six have sell and four hold on the stock. Their average target price is Rs 257, indicating that Thursday's closing price of Rs 260 is closer to its fair value. Also, the stock trades at about 30 times FY14 estimated earnings, which is nearly 20 per cent higher than its historical average one-year forward price/earnings ratio of about 25 times.
Weaker rupee, product mix impact margins
For the June quarter, Titan’s jewellery segment (83 per cent of sales) grew by a robust 47 per cent year-on-year to Rs 2,614 crore. A good wedding season and the low-base effect of the June 2012 quarter (which witnessed 21 per cent fall in jewellery volumes) were key factors boosting this segment's sales. However, a sharp fall in gold prices, along with higher proportion of low-margin plain gold jewellery sales, impacted margins, which contracted 135 basis points to 8.8 per cent.
The watch segment performance was also hit by slowing discretionary demand. Sales growth was subdued at 11.4 per cent to Rs 402 crore and margins, too, contracted by a whopping 366 basis points to 10.3 per cent. Since the company procures raw material and components from markets abroad, the weaker rupee added pressure.
Here, the company had raised watch prices when rupee touched 53-54 levels and plans to do more such rises. While the management says it will be able to protect margins in this segment via price rises, its ability to pass on higher costs (in a weak demand environment) will be tested.
Overall, the margin contraction was restricted by reduction in materials cost, advertising spends and employee costs as a per cent of sales by 51-920 basis points. Titan's Ebitda margins, thus, came in at 7.9 per cent (decline of 173 basis points compared to the year ago quarter).
"June quarter registered higher sales of plain gold jewellery and coins that deliver lower margins. Margins in both watch and jewellery businesses were impacted due to change in product mix", said Bhat.
Titan’s other businesses (eyewear, precision engineering and accessories) posted 37.5 per cent sales growth to Rs 123 crore. Positively, this segment reported an operating profit of Rs 3 crore versus an operating loss of Rs 2 crore in the June 2012 quarter.
In the jewellery business, the company has procured gold from State Bank of India last month and is in negotiations with others for future supplies. The Titan management believes they will be able to solve sourcing problems before the festive season starts. However, the margins in this business may remain under pressure. The company has launched discounts schemes in the jewellery segment (in its attempts to push up new customer acquisition), which could have a bearing on the margins. For margins to improve, a pick-up in the high-margin studded jewellery demand is most crucial. The studded/diamond jewellery sales have slowed down over the past few quarters and continue to be under pressure. Among other things, while the weak demand environment is also expected to hurt watch sales and limit pricing power, higher costs will have a bearing on profitability.