Titan disappoints on margin front in Q4; near-term outlook looks dull

Titan has told analysts that half its stores are shut owing to the pandemic.Premium
Titan has told analysts that half its stores are shut owing to the pandemic.
 2 min read . Updated: 03 May 2021, 12:11 AM IST Pallavi Pengonda

Shares of Titan Co. Ltd have underperformed the broader market this calendar year. On a year-to-date basis, the stock has declined by nearly 5% compared with a 5% gain in the Nifty 100. For investors, the stock’s pricey valuations have always been a concern and that’s one reason why its shares have underperformed so far this year.

What’s more, with the ongoing second wave, covid-19 has returned to haunt Titan again. The company told analysts that half of its jewellery stores are shut owing to the pandemic. JM Financial Institutional Securities Ltd said in its March quarter results review note, “Near-term demand condition is also uncertain, with around 50% of Tanishq stores closed for business for now, following the re-imposition of localized lockdowns in the country in recent weeks."

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Jefferies India Pvt. Ltd has cut its FY22-23 earnings estimates by 5-8% to factor in the impact of the second covid-19 wave and resultant lockdowns and store closures. “Forecasting FY22 is particularly tough and we expect a volatile trend," said Jefferies analysts in a report on 29 April.

It’s worth noting that Titan’s March quarter results have disappointed on the margin front. Standalone reported earnings before interest and tax (Ebit) margin of the jewellery business have declined by 330 basis points year-on-year to 10.9% last quarter. One basis point is one-hundredth of a percentage point.

Ebit margin is down sequentially as well. For Titan, the jewellery business is its mainstay, contributing the lion’s share of revenues and profits. In the March quarter, jewellery Ebit margin was hit by the lower share of studded jewellery in the mix, loss from customs duty cut on gold and lower margin on B2B sale.

JM Financial analysts said, “There is also an element of competitive intensity involved and this could continue to drive needs for higher promotions and customer-acquisition costs in the business in the short term, with attendant impact on margin." As such, margin outlook remains muted as well in the near future.

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To be sure, reported jewellery revenue growth was as high as 71% year-on-year. This was helped by underlying retail growth of 32% in January-February, 10% growth contribution by a B2B order and a weak base of March month in 2020.

The jewellery segment accounted for 89.5% of Titan’s overall revenues, which increased by around 60%. The much smaller watch business saw flat revenues year-on-year and decline in Ebit margins.

Overall, investors remained unimpressed with Titan’s March quarter earnings report that came post market hours on Thursday. The stock fell by 1% on the National Stock Exchange on Friday. Currently, the shares trade at 64 times estimated earnings for financial year 2022, based on Bloomberg data. Valuations, thus, remain pricey.

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