Jewellery business continues to shine… • Titan :: ICICI Securities, report

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Jewellery business continues to shine… • Titan’s Q3FY15 results were better than our estimates on the revenue, EBITDA and PAT front. However, the operating margin was lower than our estimates • Revenues grew 9% YoY to | 2898.3 crore. The jewellery segment posted growth of 10% YoY to | 2,347.4 crore while the watches segment declined marginally by 2% YoY to | 442.6 crore • Though the operating margin expanded 27 bps to 9.4%, it was lower than our expectation of 9.7%. Operating margin was negatively impacted by higher sales of gold coins that have a lower margin. EBIT margin for the watch segment declined 70 bps YoY to 9.7% whereas for jewellery EBIT margins declined 59 bps to 9.9% • PAT increased 15.2% YoY to | 190.7 crore vs. our expectation of | 171.1 crore Jewellery segment continues strong performance; watches disappoint Titan reported 10% growth in jewellery revenues driven by higher sales of gold coins and strong performance in the Gold Plus category. The grammage growth excluding gold coin sales was ~11% YoY while the share of studded jewellery remained constant at 26% vs. 27% in Q3FY14. Margins set to improve The management indicated that benefits of international hedging have not yet been absorbed and the majority benefit of the same would be visible from Q4FY15 that would aid in improvement of margins. Also, the company has started diamond activation (which has significantly higher margin than gold jewellery) in Q4, which should further boost margins. Shift from unorganised to organised segment to benefit Titan Over the next two to 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. The company 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. Strong earning growth over FY16E, FY17E; upgrade to BUY With most regulatory concerns reducing and gold supply gradually improving, we expect revenue growth to revive from FY16E onwards driven by enhanced retail presence and an improved product mix. Also, lower discounts, an improvement in watch margins and benefits of international hedging of gold should aid in boosting margins. In FY14, Titan had stood tall amid a tough regulatory environment and weak consumer sentiments. As the regulatory situation begins to ease and consumer sentiments improve, 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 and upgrade our FY16 and FY17 earning estimates for Titan by 6.1% and 9.5%, respectively. We have revised the target price from | 430 to | 500 (based on 32.0x FY17E EPS of | 15.7) and recommend BUY on Titan Company.

LINK
 http://content.icicidirect.com/mailimages/IDirect_TitanCo_Q3FY15.pdf