Titan Q3 strong, but stock still expensive
Premium- Overall, Titan’s Q3 Ebitda has risen by 63% from the year-ago quarter to nearly ₹1,400 crore
- Strong festive demand and wedding sales helped jewellery business’ revenue growth in Q3
In its update last month, Titan Co. Ltd gave investors a good insight into the robust revenue trends seen during the December quarter (Q3FY22). Thus, when the jewellery retailer announced its Q3 financial results on Thursday, margin performance was a key factor to watch out for.
The company has done well on this front. Standalone earnings before interest, taxes, depreciation, and amortization (Ebitda) margin in Q3 came in at 14.7%, up 290 basis points (bps) year-on-year, exceeding many analysts’ estimates. One basis point is one-hundredth of a percentage point. For instance, Emkay Global Financial Services Ltd was expecting Titan’s Q3 Ebitda margin at 13.2%. Overall, Titan’s Q3 Ebitda has increased by 63% from the year-ago quarter to nearly ₹1,400 crore. This is at a time when total operating revenues, including bullion sales, increased by 30.6% year-on-year (y-o-y) to ₹9,515 crore.
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The jewellery business, which contributes the lion’s share of Titan’s revenues, performed well, recording Ebit (earnings before interest and tax) margin of 14.7%. Jewellery business profitability was driven by scale induced healthy operating leverage gains, better product mix and improved realization on account of diamonds’ price appreciation.
As such, jewellery revenues rose 37%, excluding sale of bullion. Wedding jewellery sales were 40% higher y-o-y with increased contribution to overall sales. Studded jewellery ratio stood at 26% in the total mix and improved slightly from the year-ago quarter. Buoyant festive season demand in October and November also helped performance.
Further, Titan’s watch and eyewear segments too put up a good show, although they don’t move the needle significantly for the company given their smaller contribution currently. Even as the Ebit of watch and eyewear divisions declined sequentially, the measure increased by 44% and 55%, respectively, on a y-o-y basis.
Meanwhile, despite robust Q3 margin performance, Titan’s shares were flattish in response to the results on Thursday, a day when the Nifty50 index fell by 1.2%. To be sure, analysts reckon Q3 jewellery Ebit margin is unlikely to sustain ahead. That is because some factors that positively influenced Q3 margin including inventory gain on diamond as prices increased and some write-back of provisions are expected to normalize over the medium term.
Nonetheless, Titan’s investors are sitting on handsome gains. Over the past one year, shares of the company have appreciated as much as 62% vis-à-vis the nearly 19% gain in the Nifty50 during the same time.
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However, valuations of the stock are pricey. Based on Bloomberg data, Titan’s stock trades at around 78 times and 64 times estimated earnings for FY23 and FY24, respectively.
“The Titan stock’s valuations aren’t cheap. However, investors should note that a derating will happen only once the company falters on growth rates. Under the current circumstances (potential absence of severe pandemic-led shutdowns) and given the management’s confidence, outlook remains strong, which may support current valuations," said Shirish Pardeshi, an analyst at Centrum Broking Ltd.
Titan’s management has strong demand visibility over the next few months for its jewellery business. Store network expansion is also expected to pick up pace across the board. The company is also a beneficiary of market share gains from the unorganized jewellery sector. The stock’s high valuations suggest investors are capturing the optimism on growth adequately. Hereon, investors will watch whether the company is able to deliver on revenue growth consistently.
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