TITAN INDUSTRIES Another blowout quarter, but speed breaker ahead :: Edelweiss

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TITAN INDUSTRIES Another blowout quarter, but speed breaker ahead


􀂃 Stellar performance; net profit jumps 65%; margins expand 187bps
Titan Industries’ (Titan) Q2FY11 revenues, at INR 15,360 mn, jumped ~34% Yo-
Y, in line with our estimate of INR 14,909 mn. Titan posted a commendable
EBIDTA of INR 1,736 mn for the quarter vis-à-vis INR 1,082 mn for Q2FY10.
EBITDA margin jumped 187bps Y-o-Y, to 11.3%. Lower COGS contributed
127bps Y-o-Y, ad spend 49bps and employee cost 32bps, to margin expansion,
which was partly offset by higher other expenses of 22bps. PAT catapulted 65%
to INR 1,278 mn, surpassing our estimate of INR 1,009 mn, backed by greater
urban sales than rural.
􀂃 Buoyant demand: Robust jewellery volume growth of 19%
Buoyancy in consumer demand contributed to 19% growth in volumes. Together
with this and 18% price hike, jewellery grew a robust 37%, to INR ~11.2 bn.
Margins ballooned 186bps in jewellery, backed by improved product mix
(studded jewellery contributed 30% to sales) and better operating leverage.
􀂃 Watches continue to surprise on the upside
Watches grew at an astounding 21%, to INR 3.5 bn. During the current quarter,
the low end brand, Sonata, grew at a slower pace vis-à-vis the premium brands,
thereby improving the product mix. This led to 159bps Y-o-Y expansion in
margins. The company has not taken price increase in past one year, which
gives it enough flexibility to maintain margins.
􀂃 ‘Others’ drag on profitability; potential driver for future growth
The others segment grew at 92% due to low base, to INR 612 mn; it, however,
suffered PBIT loss of INR 46 mn in Q2FY11. The segment had posted positive
growth in Q1 as profitability of sunglasses offset precision and engineering losses.
Its growth is, however, unlikely to remain positive in the coming quarters as
recovery could be only moderate in precision and engineering (US, Europe centric).
􀂃 Outlook and valuations: Robust; maintain ‘BUY’
Jewellery business continued its robust performance in Q2FY11. Owing to betterthan-
expected numbers in watches and jewellery segments, we are now
confident of further uptick due to higher discretionary spending and improving
consumer sentiment and upgrade the EPS by 9.3% in FY11E and 8.9% in FY12E.
However, in the absence of low base effect in the coming quarters, growth rate
is unlikely to be maintained. We maintain ‘BUY’ on the stock and rate it ‘Sector
Outperformer’ on relative return basis.