Jewellery shines, watches disappoint - Titan’s 3QFY15 review :: HDFC Securities

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Jewellery shines, watches disappoint
Titan’s 3QFY15 revenues of Rs 29.2bn were ahead of
our estimate of Rs 27.2bn owing to decent 11% YoY
growth in jewellery revenues (25% YoY volume
growth) in spite of absence of redemptions under the
Golden Harvest Scheme (GHS). However, watch
revenues disappointed with a 2% YoY decline owing
to 4% YoY volume decline (after three consecutive
quarters of strong volume growth).
Consequently, PAT of Rs 1.9bn was ahead of
estimated Rs 1.8bn on account of EBITDA margin of
9.4% (est. 9.2%) and lower tax rate of 22% (gains
from shifting production to Pantnagar jewellery
plant). While jewellery EBIT margins improved 48bps
QoQ to 9.6%, watch margins declined 295bps QoQ to
9.7% on account of negative operating leverage.
As per Titan’s management, demand uptick may
remain muted in 1HCY15 owing to absence of GHS
sales and consumer discretionary spends yet to see a
noticeable improvement. However, we believe that
Titan remains the best long term play on an urban
consumption revival and retain our BUY rating with
TP of Rs 450 based on 30x FY17E EPS of Rs 15.0.
 Gold on lease yet to fully normalise : Although the
20:80 export import rule has been done away with,
Titan continues to rely on a mix of gold sourced from
domestic entities and outright purchases. As a result,
Titan’s jewellery margins are expected to see benefits
of international hedging gains from 4QFY15E onwards
until supply resumes under the gold-on-lease model.
 Response to GHS relaunch a key monitorable :
Titan had discontinued the Golden Harvest Scheme
that had historically accounted for 25-30% of Titan’s
annual jewellery revenues and was also a significant
source of working capital for the company. Although
Titan has relaunched the scheme in Nov-14 at IRRs of
~12% (17% earlier) , Titan’s customers are adjusting to
the lower returns on the new Scheme and Titan is not
marketing the scheme aggressively owing to
restrictions of 25% of net worth.

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