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Titan: Spike in jewellery sales - Views on News from Equitymaster
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Titan: Spike in jewellery sales
Nov 3, 2014

Titan Industries declared its results for the second quarter of financial year 2015 (2QFY15). The company reported 56% YoY growth in sales, while net profit grew by 29% YoY for the quarter. Here is our analysis of the results.

Performance summary
  • Net sales grew by 56% YoY during the quarter. Segment wise, jewellery revenue grew by 65% YoY, Watches segment grew by 20% YoY. ‘Others' segment which includes precision engineering, eyewear and accessories grew by 21% YoY.
  • Operating expenditure grew 58% YoY, faster than the pace of revenue growth. This led to operating profits growing by only 37% YoY, and a consequent fall in operating margins from 9.7% in 2QFY14 to 8.5% in the current quarter.
  • A steep 34% YoY fall in other income, along with spike in depreciation charges further led to the bottomline growing at a still slower pace of 29% YoY during the quarter.

Titan Company
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 22,900 35,647 55.7% 53,778 64,183 19.3%
Expenditure 20,672 32,600 57.7% 49,300 58,771 19.2%
Operating profit (EBDITA) 2,228 3,047 36.8% 4,478 5,413 20.9%
EBDITA margin (%) 9.7% 8.5%   8.3% 8.4%  
Other income 693 460 -33.7% 1,274 1,094 -14.1%
Interest 200 109 -45.5%  370  459 24.1%
Depreciation & amortisation 149 197 32.0%  295  442 49.8%
Profit before tax 2,573 3,201 24.4% 5,087 5,606 10.2%
Tax 706 801 13.5% 1,397 1,433 2.6%
Profit after tax 1,867 2,400 28.6% 3,691 4,173 13.1%
Net profit margin (%) 8.2% 6.7%   6.9% 6.5%  
No. of shares (m)         888.7  
Reportedearnings per share (Rs)*         8.9  
P/E (x)*         44.2  
(*trailing twelve months)

What has driven performance in 2QFY15?
  • The seemingly robust performance in the jewellery segment was due to the low base effect of the same quarter in the previous financial year, wherein the segment had witnessed just a 4% growth in sales. This was on the back of gold prices falling sharply in the quarter preceding 2QFY14, leading to many buyers of jewellery proponing their purchases to the first quarter of the previous year. This has led to the effect of seemingly higher sales growth during the current quarter. A clearer picture arises when one looks at the revenue growth for the first half of FY15, which stood at 20% YoY. This evens about the lumpiness of sales growth in the jewellery business during 1QFY15 and 2QFY15.

  • Another important factor contributing to the high revenue growth during the quarter was that the jewellery business saw redemption of the Golden Harvest accounts of its existing customers which had to be closed due to regulatory changes. Most of the company's customers have chosen to redeem their accounts by way of jewellery purchases rather than cash refunds.

  • The Watches segment did well during the quarter on the back of good sales of both Titan and Fastrack brands. The quarter saw a new brand campaign based on ‘gifting of time' go on air.

    Standalone segment wise break up
      2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Watches
    Revenue (Rs m) 4,391 5,275 20.1% 8,378 9,674 15.5%
    % of total revenues 18.8% 14.7%   15.3% 14.9%  
    EBIT margin 9.8% 12.6%   9.7% 11.9%  
    Jewellery
    Revenue (Rs m) 17,774 29,294 64.8% 43,840 52,547 19.9%
    % of total revenues 76.3% 81.5%   80.3% 80.7%  
    EBIT margin 12.4% 8.8%   9.7% 9.2%  
    Others
    Revenue (Rs m) 1,140 1,379 20.9% 2,372 2,857 20.5%
    % of total revenues 4.9% 3.8%   4.3% 4.4%  
    EBIT margin -0.3% 0.6%   1.0% 0.5%  
    Total* 23,305 35,947   54,590 65,078  
    * Excluding unallocated items
What to expect?

The company's retail expansion drive continued with a net addition of 36 stores across all its businesses during the quarter, thus ending the period with a retail area of over 1.53 mn sq ft across the country for all its brands. With this, the company's retail presence is now 1,136 stores strong. This is further going to see a rise as the management has in place growth plans for all its retail businesses of watches, jewellery and eyewear.

The management has indicated that it has seen an improvement in consumer sentiment during the quarter. Many of the company's brands ran successful campaigns during this time to capitalize on the positive sentiment and festive mood. The management is of the opinion that gold prices being stable and falling inflation will likely give a further lift to the economy going forward. However, some of its distribution channels are beginning to witness lower footfalls, and company hopes to tackle this being aggressive on launching new campaigns for its brands in the coming quarters.

At the current price of Rs 393, the stock is trading at 35 times our FY17 earnings estimates. Considering these valuations, we recommend investors avoid buying the stock at these levels.

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