Titan Industries Limited - Profitable growth in a challenging environment - Antique

Titan Industries during 4QFY13 outperformed our expectations primarily on the profitability front led by lower ad-spends and benefit of custom duty increase. Going ahead we believe that in the current uncertain environment of gold price volatility and moderating discretionary spends, Titan's jewellery division would be able to post 15% sales growth during FY14 backed by 34% higher number of marriage dates over FY13 and the 30% retail space expansion during FY13. Contribution from new stores is also expected to aid and maintain margins during the year. Watch division however we believe would continue to be a drag on the performance.

We are reducing our EPS estimates for FY14 by 2% to INR9.5 while maintaining FY15e estimates at INR12.0. At the CMP of 271, the stock is trading at a PE of 28.4x FY14e and 22.5x FY15e. We maintain HOLD.

Net sales during the quarter grew by 15% to INR26.1bn while EBITDA and PAT grew by 29% and 28% respectively to INR2.67bn and INR1.85bn. The higher EBITDA growth was aided by a 17% drop in ad-spends at INR666m. For the full year ad-spends dropped by 1% to INR3.77bn. Jewellery sales grew by 16% to INR20.9bn led by 9% volume growth while watch sales witnessed lacklustre 1% growth to INR4.2bn. Jewellery was the key driver of profitability during the quarter witnessing EBIT growth of 36% at INR2.49bn while watch EBIT dropped by 15% to INR456m. Jewellery margins were up by 175bps to 11.9% while watch margins dropped by 204bps.

Jewellery margin drives profitability

According to our understanding of the management conf-call, jewellery margins were largely aided by the lower ad-spends. Additionally, benefit of the increase in custom duty also aided jewellery margins. Watch margins were impacted by the higher input cost (almost 50% of input is imported) and increase in excise duty.

Declining ad-spends in a competitive environment could be un-sustainable

Going ahead, Titan management has indicated towards continued lower ad-spends in a subdued environment while expects watch margins to recover with INR depreciation already in the base. In our view, lowering ad-spends in the current environment could be a risk to sales as large regional players are aggressively expanding across the country backed by strong marketing initiatives.

Watches, Operating environment continues to be challenging

In watches the operating environment is expected to remain challenging as discretionary purchases we believe that during FY14, the growth in watches would be a challenge as discretionary spends are witnessing further moderation.

Jewellery valuation may witness some respite

Valuations of jewellery companies and Titan could witness some respite from the partial clarity on the government aimed at primarily restricting speculative and investment related gold imports. RBI's recent guidelines of restricting gold imports through the consignment route according to Titan management will not have any impact on the company and is aimed at controlling the imports in the bullion market.

Source : Equity Bulls

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