Well-poised to shine brighter: Titan Company’s (TTAN) sales for 2QFY22 were in-line (up 64.6%) at INR74.9b, although the operating margin at 12.9% for the quarter (est. 10.7%) came as a positive surprise and stood at its second-highest level since 2QFY06. This led to EBITDA and PAT surpassing our estimates by more than 20%.
What was even more remarkable was that this margin improvement was achieved in a quarter that still did not see the contribution from studded jewellery returning to normal levels and witnessed low margin bullion sales as well. Nevertheless, the sharp increase in sales is likely to have helped TTAN on the operating leverage front. Management has stated that it aims to keep jewellery margins in the 12-13% range. Jewellery outlook remains good as well, given the healthy festive season commentary. Management has also indicated significant expansion plans in the company’s smaller businesses like Eyewear and Taneira. Maintain Buy.
Second-highest operating margin since 2QFY06 drives higher-than estimated EBITDA: 2QFY22 consolidated revenue grew 64.6% YoY to INR74.9b (in-line). Revenue growth excluding bullion sales stood at 78% YoY. EBITDA grew 209% YoY to INR9.7b (est. INR8b). PBT grew 298% YoY to INR8.7b (est. INR7.1b). Recurring PAT grew 268% YoY to INR6.4b (est. INR5.3b). Consol. gross margin contracted by 620bp YoY to 25%. Lower other expenses as a % of sales (down 1150bp YoY to 6.1%) and lower staff costs as a % of sales (down 120bp YoY to 4.2%), coupled with higher ad spends as a % of sales (up 50bp YoY to 1.8%) led to EBITDA margin expanding by 600bp YoY to 12.9% (est. 10.7%) in 2QFY22. 1HFY22 sales/EBITDA grew by 68%/1742%. 1HFY22 PAT stood at INR6.6b as against a loss of INR1.2b in 1HFY21. Segmental performance: (a) Jewellery sales grew 65% YoY to INR65.7b and margin was up 500bp YoY to 12.2%. Jewellery sales excluding bullion sales grew by 77% YoY. (b) Watches sales grew 71.8% YoY to INR6.9b with EBIT margin coming in at 13.1% in 2QFY22 as against -3% in 2QFY21.
Valuation and view: The margin recovery in jewellery was heartening and surpassed expectation, creating further confidence in TTAN’s earnings growth in addition to the already healthy sales outlook. We raise our FY22/FY23 EPS estimates by 13%/3%. TTAN has a strong growth runway, given its market share of less than 10% and the continuing struggles faced by its unorganized and organised peers. The estimated EPS CAGR over FY20-FY24 is also healthy at ~24%. At its current valuation of 79.3x FY23E EPS, the stock’s near-term multiples appear expensive, although its long runway for profitable growth warrants premium multiples. TTAN remains our top pick in the discretionary consumption space. We maintain our Buy rating with a TP of INR2,830 per share (70x FY24 EPS).
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