Downgrade to REDUCE on Titan - P&L Print reasonable; Capital base inching up! - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities.

Titan (Q4FY20): P&L Print reasonable; Capital base inching up! Downgrade to REDUCE
(TP Rs 900, CMP Rs 997, MCap Rs 885bn)

FY20 was all about soaring gold prices impacting fresh jewellery purchases. Demand unpredictability meant reliance on Gold loan reduced and focus increased on pushing sales via the capital heavy-gold exchange scheme. Note: While Jewellery biz' sales grew 5.7% to Rs. 173.2bn, its capital employed ballooned to ~1.6x YoY to Rs. ~41bn in FY20 partly led by the shift to IND-AS 116. However, core cash conversion (CC) cycle (120 to 130 days) and capex has inched up too. FY21 is likely to follow the same capital-heavy template as gold exchange is revved up to salvage jewellery demand in the COVID19 era. Ergo, Return profile is likely to shrink at a time when cost of operations is likely to inch up (as the lower cost Gold Loan sourcing reduces in mix). We have cut our DCF-based TP by 17% to Rs. 900/sh (implying 49x F22 earnings), to factor in the demand destruction and its second order impact on the balance sheet. EBITDA cuts for FY21/22 are 24/22% respectively. We downgrade the stock to a REDUCE (Earlier ADD) given the uncertainty in demand recovery.

Pre-COVID Print remained robust: Consol. revenue declined 3.6% YoY to Rs. 47.1bn (in-line). Note: Revenue growth for Jan+Feb-2020 was at 16.2 YoY. Margins surprised positively across segments. GMs expanded 315bp YoY to 30.3% (HSIE: 26.5%). EBIT margins expanded 249bp YoY to 10.8% (HSIE: 7.5%) largely led by the trickle-down effect of higher-than-expected gross margins. APAT declined 1.5% YoY to Rs. 3.43bn (HSIE: Rs. 3.22bn).

Jewellery growth gets dearer, margins surprise: Jewellery biz' revenue declined 5% YoY to Rs. 39bn (in-line, HSIE: Rs. 39.28bn). Note: Revenue growth for Jan+Feb-2020 was at 16.5% YoY. Grammage declined by 20% YoY in 4Q (in-line, HSIE: -20.9%) Adj. EBIT margin improved 32bp YoY to Rs. 13.6%. EBIT growth was primarily a function of 1. GM trickle-down effect, 2. Ad spend cuts. Studded ratio stood at 37% (vs 36% in 4QFY20, HSIE: 36%). Tanishq added 40 stores (net) in FY20, (Store Count: 327).

...Capital base continues to balloon: Despite top-line decline, the reliance on capital heavy gold exchange scheme continues to increase primarily to salvage volumes. (Jewellery net assets up 63% YoY). The jump is primarily a function of 1. Deteriorating core CC cycle, 2. Higher capex, 3. IND-AS accounting changes. This trend is likely to continue as the WC-light Gold on lease instrument is reined in given the unpredictability in demand in FY21.

Non-Jewellery print better-than-expected: Non-jewellery sales were largely in-line, but surprised on the margin front. Watch/Eyewear grew 5/-16 resp. While adj. EBIT margins improved expanded 100bp for Watches to 9.7%. Eyewear hit operational profitability in 4Q.

Shares of Titan Company Limited was last trading in BSE at Rs.951 as compared to the previous close of Rs. 977.55. The total number of shares traded during the day was 129336 in over 5292 trades.

The stock hit an intraday high of Rs. 998 and intraday low of 949. The net turnover during the day was Rs. 124419360.

Source : Equity Bulls

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