Improvement in margins to drive growth… • Titan:: ICICI Securities PDF link

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Improvement in margins to drive growth…
• Titan’s Q2FY15 results were better than our estimates on the
revenue, EBITDA and PAT front but operating margin was lower than
our estimates
• Revenues grew 54% YoY to | 3564.7 crore. The jewellery segment
showed extraordinary growth of 62.9% YoY to | 2,929.4 crore while
the watches segment grew 19.2% YoY to | 527.5 crore
• The operating margin declined 210 bps to 9.3%. The operating
margin was negatively impacted by higher discount on jewellery and
higher gold premiums. The EBIT margin for the watch segment
improved 212 bps YoY to 12.6% whereas the jewellery segment EBIT
margin declined 425 bps to 9.2%
• PAT increased 28.6% YoY to | 240 crore vs. our expectation of
| 230.3 crore
Bumper Q2 performance, H2FY15 revenue growth to be tepid…
Titan reported a stupendous growth of 62.9% in jewellery revenues
driven by premature redemption of Golden Harvest accounts of existing
customers, which had to be foreclosed due to regulatory changes. The
management indicated that like-to-like jewellery growth was ~ 20%,
which was on a low base in Q2FY14. Also, as ~ 95% redemptions have
happened of Golden Harvest Scheme and the company will be launching
a new scheme in November - the impact of which will be visible after two
quarters -, hence, sales growth is expected to remain tepid in H2FY15.
Margins to improve
Q2FY15 jewellery margins were impacted by the dual impact of higher
than normal discounts and higher premium on gold purchase. Going
ahead, we expect margins to improve as the premium on gold has
reduced and discount quantum normalises. Also, the benefits of
international hedging of gold would aid in improving margins.
Shift from unorganised to organised segment to benefit Titan
Over the next two or three years, Titan aims to increase its share in the
jewellery market from the current 5% to 10%. This is expected to be
possible largely owing to the shift from the unorganised to the organised
segment. Titan is well poised to capture this demand considering the
strong brand patronage and pan-India presence. As more people
continue to migrate for jobs, the association with family jewellers has
been reducing, thereby benefiting Titan.
Earnings growth to accelerate in FY16E, FY17E; maintain HOLD
Though the near term revenue growth remains a challenge in the absence
of Golden Harvest Scheme, we expect revenue growth to revive from
FY16E onwards coupled with margin improvement due to lower
discounts, improving watch margins and benefits of international hedging
of gold. In FY14, Titan had stood tall in the tough regulatory environment
and weak consumer sentiment. As the regulatory situation begins to ease
and the consumer sentiment improves, we remain positive on Titan
considering (a) the shift in demand to the organised segment; (b) healthy
financials; (c) continuing retail expansion and entry into new product
segments. We maintain our positive stance on Titan with a revised target
price of | 430 (based on 30.0x FY17E EPS of | 14.3). We recommend
HOLD on Titan Company

LINK
http://content.icicidirect.com/mailimages/IDirect_TitanCo_Q2FY15.pdf