Titan Industries - 2QFY13 Review : Sales miss; margins better; pinning hopes on festive season :: JPMorgan

Titan’s Q2FY13 performance was a mixed bag with sales growth coming in ~6%
below our and street expectations, while margins were above expectations leading
to in-line EBITDA. Titan posted sales, EBITDA and PAT growth of 10%, 19%
and 18% y/y respectively. Management noted that sustained inflation, subdued
consumer sentiment and challenging macro weighed on sales growth; however
they expect festive sales to be better. Capital employed increased during 1H by
Rs3.2bn owing to higher inventory levels and investments in fixed assets.

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 Jewelry – Sales growth disappoints; margins surprise on upside: Jewelry
division registered 6%y/y sales growth with volumes declining -11% during
2QFY13. Mgmt noted that sales growth moderation to some extent was on
account of de-stocking by franchisees due to the push back in the festive season
by a month and higher inventory levels. Retail sales growth was however 17%.
LTL value sales growth for Tanishq and Goldplus was 12% (retail sales) and -
8%, respectively. Share of studded jewelry was 32% (vs 28% in Q2FY12 and
25% in Q1FY13) and share of gold coins declined significantly (sales of gold
coins declined –30%+ y/y). As a result of significant improvement in product
mix and higher price/margin for diamond jewelry, EBIT margins rose 270bps
y/y to 12.5%. Mgmt however noted that mix could move back more in favor of
gold jewelry in 2H thereby posing downside risk to these margins in 2H.
 Watches – Subdued performance. Watches segment registered sales growth
of 13%, driven by vol growth of 4% and price/mix growth of 9%. World of
Titan, Fastrack, and Helios stores registered LTL sales growth of -1%, 7% and
19%, respectively. Higher input costs (aggravated by rupee depn), excise duty
hike of 2% and investments in formats such as Helios and Fastrack further
weighed on EBIT margins (at 11.6%) declining by -450bp y/y and -240bp q/q.
 Eyewear – Improved performance: Sales for Eyewear grew 32% y/y. Titan
Eye+ format registered LTL sales growth of 19% y/y. This division continues to
make losses with mgmt expecting break even by 2HFY14. The Precision
Engineering business registered healthy sales growth and profit.
 Mgmt Call takeaways. 1) Focus on profitability aided by better product/mix,
price increases for watches, lower losses for eyewear and better cost
management. FY13 PBT is targeted at Rs10bn, 2) Mgmt expects to register sales
growth in Q3 aided by festive sales, though outlook for Q4 is uncertain, 3) Titan
added 34Ksq ft of new space addition for jewelry (61K sq ft in 1H) and
maintained its target of adding 200Ksq ft by FY13 end, 4) Titan expects jewelry
margins to benefit by ~50bp given direct gold imports starting in 2H.