After disappointing in the December 2011 quarter, Titan Industries reported better-than-expected financial performance in the March quarter, helped by higher gold realisations and better control over expenses. Though the company is best placed in the jewellery retailing space, there are medium-term headwinds that will restrict growth and put pressure on margins.
At 29 times FY13 estimated earnings, the stock’s valuation is also above its five-year average of 25 times one-year forward PE and does not factor in the downside risks. In other words, the risk-reward ratio is not favourable for the stock (now at Rs 233), which has gained 33 per cent year-to-date and outperformed the Sensex (up 12 per cent) with a huge margin, and its outperformance is likely to face resistance.
Q4: Robust performance
Sales growth in the March quarter (Q4) was better compared to the year-ago quarter, helped by a 29.6 per cent rise in jewellery business (though volumes are estimated to have fallen by about seven per cent) followed by 25 per cent in the watches segment.
| GROWTH MODERATES | ||||
| Q4' FY12 | FY12 | FY13E | FY14E | |
| Net sales (Rs cr) | 2,282 | 8,839 | 10,311 | 12,279 |
| Change (%) | 28.3 | 35.5 | 16.5 | 19.1 |
| Operating profit (Rs cr) | 208 | 834 | 985 | 1,229 |
| Change (%) | 83.4 | 36.1 | 18.1 | 24.7 |
| Net profit (Rs cr) | 144 | 600 | 744 | 927 |
| Change (%) | 72.2 | 39.2 | 23.9 | 24.6 |
| E:Estimates Source: Company, Analyst reports | ||||
Higher gold realisations (average prices were up 35 per cent year-on-year) in jewellery business, price rises in watches segment (five to seven per cent in the December quarter) and healthy growth of ‘Fastrack’ helped the two segments report better-than-expected sales growth in Q4. Even other businesses, including eyewear and precision engineering, reported healthy sales growth of 16.5 per cent.
The operating profit margin jumped 273 basis points to nine per cent even as raw material expenses, as a percentage of sales, increased to 74.34 per cent, compared to 71.03 per cent in the year ago quarter. Savings in advertising and other overheads helped prop up margins. Additionally, lower employee costs due to one-offs also helped. Pritesh Chheda and Prashant Kutty of Emkay Global, who have a ‘Buy’ on Titan, note in their report, “Ebitda grew 84 per cent year-on-year to Rs 210 crore, with Ebitda margins improving 270 basis points to 9.1 per cent, largely due to one-off impact of employee cost provision in the comparable quarter.”
In terms of individual businesses, profit before interest and tax margin in the jewellery business (78 per cent of overall revenues) was stable at 10.1 per cent, while the same jumped 3.6 times to 12.9 per cent in watches despite the expansion phase of Helios and rupee depreciation (most raw materials are imported). Losses of other business also reduced from Rs 10 crore to Rs 4.7 crore.
But, lower growth in other income (up just five per cent), higher interest (up 60 per cent), depreciation (up 37 per cent) and taxes (up 74 per cent), partly restricted net profit growth to 72.2 per cent. Hence, net profit margin expanded at a slower pace of 160 basis points to 6.3 per cent.
Slower growth ahead
Despite the better-than-expected performance, the trend of tapering sales growth expected by analysts in the previous quarter continues. Analysts expect 18 per cent and 24 per cent CAGR in sales and net profit, respectively, over the next two years (FY12-14), lower than the 37.5 per cent and 55 per cent clocked during FY10-12.
Sales growth has a downside risk due to demand slowdown in the jewellery business, led by tepid consumer sentiments on account of higher import duties, requirements like one per cent TDS (tax deducted at source) on cash purchases above Rs 2 lakh, PAN to be provided for purchases above Rs 5 lakh and volatility in gold prices. Also, spending on discretionary items like watches and eyewear are likely to be affected due to the slowdown and price hikes (in watches).
Operating performance may witness some pressure due to higher advertising (store expansion and expected new ventures like belts, bags, wallets, motorcycle helmets, bicycles, footwear and apparel) and employee costs. The company has drawn up aggressive expansion plans (250,000 square feet across 50 jewellery stores, 55 ‘World of Titan’, 40 ‘Helios’, 100 ‘Titan One’ and 165 ‘Fastrack’ stores) in FY13, which will help grow sales in the long run but will add to pressure on margins and cash flow in the near term. Emkay analysts say, “Aggressive roll-outs could play spoilsport in the short term. Hence, behind the promise of robust revenue growth through aggressive expansion and market share gains runs the risk of lower Ebitda margins.”
Cabinet approval for amendment to the Bureau of Indian Standards Act (awaiting Parliament approval), which will make hallmarking compulsory for all jewellery items and the company getting an approval to import gold directly and diversification initiatives are some positives.
