One of the best consumption plays, the company is seeing consumers postponing purchases, thereby impacting revenue and profit growth.
Titan Industries’ stock tanked around 5 per cent on Tuesday (Sensex was up 1.9 per cent) as the company reported a significant slowdown in profit growth for the September 2011 quarter compared to June 2011 quarter as well as the last fiscal. The company also witnessed higher than expected contraction in margins in the September quarter though revenue growth was almost in line with Street expectations.
Analysts expect sales and profit growth to taper down due to expectations of lower volumes in jewellery business (due to high precious metal prices), slowing discretionary spending (in watch business) and margins trending downwards (on the back of store expansion and entry into newer segments) in the short to medium term. However, given the domestic demographics, they maintain their positive view on the stock from the long term perspective.
| SLOWING GROWTH | |||
| In Rs crore | FY11 | Jun ‘11 | Sept ‘11 |
| Sales | 6,522 | 2,021 | 2,097 |
| % chg y-o-y | 39.5 | 61.2 | 36.5 |
| Operating profit | 587 | 185 | 201 |
| % chg y-o-y | 48.2 | 65.6 | 15.2 |
| Adj. net profit | 430 | 143 | 153 |
| % chg y-o-y | 72.0 | 76.4 | 19.5 |
| Source: Company | |||
COST PUSH
Sales growth of 36.5 per cent, though robust, was a tad lower than expected rate of close to 40 per cent partly due to a higher base of same quarter last year (34 per cent) and the July-September period being seasonally ‘off season’.
Jewellery business, which accounts for three-fourth of total sales, continued to be the main growth driver with higher than expected sales growth of 45 per cent but volume growth was significantly lower at 3 per cent (it was 35 per cent in June quarter) thanks to high precious metals prices (average gold prices were up 35 per cent year-on-year in September quarter). It also saw margins inch up a tad.
Watch business reported lower than expected growth at 16 per cent led by decline in realisation though volume growth was robust at 19 per cent thanks to higher sales of lower value brands.
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Overall operating profit margin dropped by 176 basis points to 9.6 per cent due to higher raw material costs and other expenditure followed by 544 basis points drop in earnings before interest and tax (Ebit) margin by watches (20 per cent of total sales). Says Bhaskar Bhat, managing director, Titan Industries, “The company and, in particular, the watch business was affected by input cost increases and adverse currency fluctuations leading to pressure on margins.”
At the net level, profit margin (adjusting for income tax paid for earlier years and other income which more than doubled) declined by 100 basis points to 7.3 per cent thanks to higher taxation (up 32.6 per cent).
DIM OUTLOOK
Analysts are cautious in the medium term as slowdown in consumption is biggest risk for Titan since it affects revenue visibility. Analysts expect the growth momentum to moderate in FY12. Subdued consumer sentiments following high precious metal prices, is expected to restrict growth of jewellery business though December 2011 quarter has started on an encouraging note.
Gautam Duggad, analyst, Prabhudas Lilladher in his earnings’ preview report notes, “Though gold prices are 7 per cent off peak levels in rupee terms, continued volatility will postpone consumer purchases, a key risk going into the festive season.” While it will be interesting to see how the current quarter pans out versus the year ago period, the management expects a recovery in volumes sequentially due to festive demand.
Further, watch business is expected to be affected by slowdown in discretionary spending but price hike of 5-7 per cent in October (27 per cent in gold plated watches) should help support margins.
Besides higher input costs, advertising expenditure, which has remained stable, is also expected to rise. Says Bhat, “Our focus is to introduce exciting products and enhance customer satisfaction. Strategy of investments in advertising and consumer offers has helped keep retail sales growing and thus such investment is likely to continue through Q3 (December quarter).”
Analysts feel the stock’s high valuation of 25 times FY13 estimated earnings do not factor in medium term growth risks. They, however, like the company due to its presence in attractive lifestyle segments (watches, jewellery and eyewear) and investments in future growth drivers.