Titan Industries Ltd (TITN.NS): Correction: F1Q14: Strong Revenue, Weak Margin; Outlook Murky :Morgan Stanley Research
Quick Comment: Titan reported F1Q revenue, EBITDA and net income growth of 41%, 16% and 17%, respectively, which compares with our expectations of 28%, 24%, and 20%. Gross margin of 22.1% (down 420bp yoy) was the lowest ever for Titan, driven primarily by adverse product mix in both the jewellery (higher plain gold and coins sales) and watch business. Interestingly, even with poor visibility on the jewellery business with recent policy changes governing gold imports, management held to its 25% revenue growth guidance for F2014.
Jewellery Business - Strong revenue growth but at cost of margins: 1)Jewellery revenue growth of 47% YoY (MSe 30%) was driven by the acquisition of a new customer following the recent sharp drop in gold prices. 2) Tanishq and Gold Plus reported SSG of 29% and 37%, respectively. 3) Operating margin contracted by 130bp YoY (MSe 20bp decline), driven by a combination of adverse product mix on lower studded share (16% in F1Q14 vs. 25% in F1Q13) and inventory accounting loss (details on page 2), partially offset by the positive impact of a customs duty hike. 4) Adjusting for the inventory loss (Rs340mn) and duty increase (Rs150mn), jewellery EBIT margin would have declined 50-60bp yoy. 5) Titan added 37k sq feet under the Tanishq format in F1Q and has guided for 75K sq feet of addition in F2014.
Recent policy action by the RBI clouds long-term growth visibility. Our calculations suggest 40 tons of gold export from Domestic Tariff Area (DTA) in F2013. Based on these numbers, the new policy will entail imports of only 160 tons pa (vs. ~573 tons of jewellery demand and ~923 tons of total demand in F2013). However, management has alluded to F2013 gold export of 70 tons. We expect multiples to compress as markets factor in uncertainties around low visibility on long-term growth. We note that Titan management is confident of sufficient gold allocation to meet its operational requirements even against the backdrop of potential lower imports in F2014.
Jewellery Business - Strong revenue growth but at cost of margins: 1)Jewellery revenue growth of 47% YoY (MSe 30%) was driven by the acquisition of a new customer following the recent sharp drop in gold prices. 2) Tanishq and Gold Plus reported SSG of 29% and 37%, respectively. 3) Operating margin contracted by 130bp YoY (MSe 20bp decline), driven by a combination of adverse product mix on lower studded share (16% in F1Q14 vs. 25% in F1Q13) and inventory accounting loss (details on page 2), partially offset by the positive impact of a customs duty hike. 4) Adjusting for the inventory loss (Rs340mn) and duty increase (Rs150mn), jewellery EBIT margin would have declined 50-60bp yoy. 5) Titan added 37k sq feet under the Tanishq format in F1Q and has guided for 75K sq feet of addition in F2014.
Recent policy action by the RBI clouds long-term growth visibility. Our calculations suggest 40 tons of gold export from Domestic Tariff Area (DTA) in F2013. Based on these numbers, the new policy will entail imports of only 160 tons pa (vs. ~573 tons of jewellery demand and ~923 tons of total demand in F2013). However, management has alluded to F2013 gold export of 70 tons. We expect multiples to compress as markets factor in uncertainties around low visibility on long-term growth. We note that Titan management is confident of sufficient gold allocation to meet its operational requirements even against the backdrop of potential lower imports in F2014.
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