The Titan Co. Ltd stock jumped 7% on Wednesday to close at Rs491.75, the highest level in the last one year. On Tuesday, a trading holiday, the company had announced its sales were good across all business segments in varying degrees during the March quarter (Q4).
It said retail growth for Tanishq, its chief brand in jewellery business, for the March quarter was 40%-plus. Titan derives the lion’s share of its revenues from the jewellery business, which was helped by studded jewellery activation and a favourable base effect last quarter. The company said its watch business (second main revenue contributor) also had a good quarter, thanks to good sales growth in domestic watches and spares sales.
In a note to clients on 5 April, IIFL Institutional Equities reckoned Titan is building in 34% year-on-year sales growth for the March quarter. This along with higher gross margin (increase in share of high-margin studded jewellery sales) and cost control should drive 66% pre-tax profit growth in the March quarter, according to IIFL.
In the past one year, the Titan stock has appreciated 42%; it’s currently trading at 42 times estimated earnings for fiscal year 2018. That’s not cheap.
Analysts say sustaining these valuations would require the demand momentum to be steady. But taking a call on consumer demand is tough at present. Titan acknowledges that the goods and services tax (GST) rates are yet to be announced and a high rate for jewellery might have some effect on its growth. However, it also believes that the formalization of the economy augurs well for its businesses and with many initiatives planned for this year, the company is confident of achieving revenue growth in the high teens for this fiscal year.
IIFL believes Titan’s current valuations fail to adequately factor in uncertainty on the likely GST rate and implementation risks, given limited incentives to the consumer to drive GST enforcement. In that backdrop, there could be risks for the company to meet its guidance.
