Titan Industries’ stock closed with gains of 2.1 per cent, compared to a flattish Sensex and FMCG index. While the year-on-year (y-o-y) growth in sales at 23.7 per cent was in line with expectations and far better than the disappointing single-digit growth witnessed in the first half of FY13, net profit growth of 24.2 per cent was impressive, despite the pressures witnessed by the watches division and unfavourable mix in jewellery business. Profit growth (even at operational level) was the best in the past three quarters.
The jewellery business reported a significantly better-than-expected growth of 27 per cent in revenue despite a higher base, due to improved consumer sentiment on account of festive and wedding seasons, leading to a healthy grammage growth (read volumes) of 12 per cent. However, the watches segment reported a 10-quarter low in sales growth of 10.6 per cent, despite improvement in like-to-like growth in its key brands (both, y-o-y and sequentially) and price hikes in the last one year.
Overall, operating profit margin has been almost maintained but could have been better by 20-25 basis points (bps) had Titan availed the facility of direct gold imports. Jewellery business segment margins have been maintained, even as the share of studded jewellery (high-margin business) declined significantly by 420 bps y-o-y (10 percentage points sequentially) to 22 per cent in the December quarter on account of lower offtake. But watches saw a decline of 45 bps in margin due to higher material cost and excise duty hike.
The company sees improving consumer sentiment as retail stores are experiencing an increase in footfall and hopes the momentum to continue in the current quarter. But demand pressures are not ruled out completely. The festive season was good for all brands but demand had to be stimulated through investments in mass communication. Further, in the post-results conference call, the management said, demand in January was a little lower than in the December quarter for the jewellery business. Demand for discretionary items (watches and eyewear) also remains under pressure.
Titan will continue to expand and launch new products to sustain growth. But that would mean higher depreciation and advertising costs. Reversal of the decline in share of studded jewellery in the December quarter is imperative for margins to improve. If Titan gets permission for direct import of gold on 180 days credit (RBI restricts it to 90 days), margins can further expand by 50 bps. But, an RBI approval is uncertain as of now. Given the challenges, the valuation of 27 times FY14 estimated earnings appears rich.
