 "Titan: Weakness to continue in FY16")
Net profit stood at Rs 215 crore and grew 4.4% year-on-year. Both net sales and net profit thus came in significantly below Bloomberg consensus estimates of Rs 3,042 crore and Rs 230 crore, respectively.
Not surprisingly, leading brokerage Credit Suisse has downgraded Titan to Neutral from Outperform earlier. It has also cut target price by 9% to Rs 390 and earnings estimates for FY16-17 by 13-14%. CLSA too has trimmed its earnings estimated by 3-4% and target price to Rs 315 from Rs 325 earlier. The Titan scrip closed at Rs 370 on Thursday.
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Absence of gold harvest scheme hit Titan’s jewellery business severely in the quarter. As per management, net sales growth could have been 17% in the quarter if the gold harvest scheme was continued. Also, customer demand remained weak in the first two months of the quarter in anticipation of customs duty cut.
While the gold harvest scheme could return only in the December 2015 quarter, management remains optimistic of a positive response to the same from customers.
Studded diamond jewellery has witnessed slightly improved performance in April and indicates uptick in discretionary demand. Titan’s EBITDA margins improved 30 basis points year-on-year to 10.9% in the quarter and was largely driven by hedging gains of about Rs 53 crore in the quarter.
Meanwhile, the company remains focused on chasing top-line growth and finding new avenues of gaining market share. In this attempt, Titan has taken price cuts across all products in its plain jewellery segment and has reduced making charges on jewellery.
The company plans to invest heavily in advertising and promotions in order to boost jewellery sales. Thus, FY16 will be a year of consolidation with management chasing revenue growth and continuing to invest behind the brand. Clearly, the company is not focused on margins in the near term.
“Sales growth challenge is big given that gold harvest will not be there in large part of FY16 plus we have done some re-pricing at the entry point. Both these factors will affect margins and hence it will be a challenge to hold on to current margins”, management said in a post results call with analysts. In this backdrop, management expects revenues, margins to witness improvement only in FY17. However, this will be contingent on successful implementation of its growth initiatives.
Titan has ramped up jewellery production at its Pantnagar plant in Uttarakhand and enjoys higher tax exemptions. This has resulted in a sharp fall in tax rate in the quarter as well as for the full year. Management expects FY16 tax rate to be similar to that in FY15 at about 22%.
Titan’s watches segment (about 21% of revenues) too continued to be weak and posted 6% volume decline. Price hikes though led to a 1.8% year-on-year growth in this segment’s revenues to Rs 511 crore. However, margins of watches segments shrinked 240 basis points to 9.6% on account of higher operating expenses.
Management though remains optimistic. They believe “Fast Track” brand of watches has a lot of potential and expect its growth to revive in FY16.
Titan’s smaller segments such as eyewear and precision equipment segments posted healthy revenue growth of 19% and 15% in the quarter. Eyewear business achieved break-even in the quarter and was launched in Sri Lanka market in the quarter.