Studded jewellery may come to Titan's aid in Q2

Diamond jewellery could offset weakness in gold, and drive gross margin expansion

Titan Company (Titan) is likely to put up a mixed show in the quarter ended September (Q2). While recent trends haven't been good with reported net profit falling year-on-year in three of the past four quarters, there are certain points that deserve attention.

The company, in an update on the quarter, said sales of gold jewellery remained subdued on the back of a patchy and unpredictable monsoon as well as "consumption fatigue". But, in Q2, it launched its new diamond jewellery collection "Queen of hearts", which is priced around Rs 2.5 lakh.

The company hopes this will help lure customers, when mandatory PAN requirement for purchase of jewellery worth Rs 2 lakh and above has impacted demand. The studded/diamond jewellery offerings could offset some of the weakness in gold jewellery, and drive gross margin expansion in Q2.

  "In Q2, we forecast 47 per cent earnings before interest, taxes, depreciation, and amortization (Ebita) growth driven by a favourable base, lower discounts (in diamond business) and product mix improvement, with upside risks to our estimates," Morgan Stanley wrote in a note on Monday.

Titan's jewellery business (about 76 per cent of revenues) has witnessed slowdown recently as tightening regulation has pulled down demand in a weak macro environment, and Q2 is unlikely to be different. However, this have created a level playing field between organised and unorganised players, allowing those like Titan an opportunity to ramp up market share.

Watches, Titan's second major business, witnessed a decent domestic show thanks to the end of season sale in its Fast Track brand. This growth, though, was pulled down partly by weakness in its key exports market of Asia. Titan has launched an updated version of its smart watch Juxt Pro in the quarter and plans more products in this category going forward.

The company's decision to go slow on store additions in the jewellery business can be partly attributed to the Caratlane acquisition, which will enable Titan to ramp up its online presence. The on-going festive as well as marriage seasons could also rub-off favourably on Titan's consumer facing businesses and aid its performance in the second half of this financial year, believe analysts. Titan's other businesses of precision engineering components and fragrance grew at a healthy clip in Q2.

While there are tailwinds, current valuations of nearly 40 times FY17 estimated earnings could cap further upsides for the stock, which looks fairly valued for now.