Titan’s growth recovers, but margins see pressure

Rakesh Jhunjhunwala’s suggestion to increase dividends, if accepted, could improve sentiment

The March quarter results of Titan show the company has bounced back strongly from demonetisation blues. This was reflected in the strong year-on-year (yo-y) growth of 43 per cent in net revenue to ~3,430 crore for the March quarter (Q4). The number was much ahead of the Bloomberg consensus estimate of ~3,218 crore and was driven by healthy growth in the jewellery business (83 per cent of overall revenues). Interestingly, grammage (volume) growth of 37 per cent in Q4 was the highest in the past 10 quarters and was partly driven by a strong wedding season. Increasing shift of consumers towards organised players (pushing up the new customer acquisition rate) and healthy momentum in the golden harvest scheme were other factors driving jewellery sales in Q4. The watches division, too, witnessed good growth of 10 per cent (highest since Q2FY15) on the back of domestic demand.

But, Titan's Ebitda margin was pulled down due to a host of factors. Stronger growth in the gold jewellery segment, with relatively lower margins compared to high-margin studded jewellery, was one such factor. Rising advertising costs towards the launch of a host of new products and collections was another. Higher employee costs on account of a one-time bonus as well as exceptional costs towards the voluntary retirement scheme also pulled down profitability. Lastly, lower margins in the watches segment due to elevated ad spends, too, added some pressure. Titan's net profit, thus, grew at a slower pace than its revenues, at 7.4 per cent y-o-y to ~201 crore and lagged estimates of ~220 crore.

Since the impact on profitability is not structural in nature and if Titan can sustain robust top line growth, it could boost investor sentiment further. The Titan scrip scaled to its all-time high of ~505.65 on Friday in anticipation of a good show before closing 1.4 per cent down. The results came after market hours, so expect some action on Monday.

Another factor influencing the stock was news reports suggesting the GST rate on gold and silver could be around four per cent — much lower than the 12 per cent-plus rate feared by the Street. This rate, though higher than the prevailing rate of 2-2.5 per cent, is quite reasonable, said the Titan management in an investors’ call after the results. But, Rakesh Jhunjhunwala didn’t seem to be pleased with the management’s comment on the higher rate. Nonetheless, Titan, which is already benefitting from an increased customer base after demonetisation, can further push up its market share after GST as the shift away from the unorganised sector accelerates.

In this backdrop, most analysts are positive on Titan. Although current valuations of 43x FY18 estimated earnings are on the higher side (historical average of about 30x), it may not come down in a rush if the company continues to perform well. The management is confident of delivering good growth and maintain margins in FY18 as well, and is also investing in newer growth opportunities presented in the wearables segment and online sales channels. Given strong growth and nearly debt-free status, any increase in dividends from the current 30 per cent (of profit) levels, as suggested by Jhunjhunwala, would help improve return ratios and sentiment further.