HOLD Titan Company CMP* (Rs) 1,284 Upside/ (Downside) (%) (5) Bloomberg Ticker TTAN IN Market Cap. (Rs bn) 1,140 Free Float (%) 47 Shares O/S (mn) 888 Retail | India Institutional Equity Research 2QFY20 Result Update | November 6, 2019 1 Target Price: Rs1,220 Share price (%) 1 mth 3 mth 12 mth Absolute performance 2.0 23.8 48.6 Relative to Nifty (4.9) 13.9 35.1 Shareholding Pattern (%) Sep-19 Jun-19 Promoter 52.9 52.9 Public 47.1 47.1 Sailing through Rough Waters; Maintain HOLD Titan (TTAN) reported 2QFY20 results with marginal miss on operating performance. Its revenue grew by a muted 0.6% YoY (+7.4% YoY in 1HFY20) on the back of 1.5% YoY decline in jewellery segment and 6.4% YoY growth in watches segment. Revenue recognition of jewellery segment declined due to adverse impact of gold hedges (revenue impact of Rs1.2bn or ~280bps). The Management has cut revenue growth guidance to 11-13% in 2HFY20 considering current weak consumer sentiments. Notably, TTAN managed to grow by 10% YoY in 33days of festive season. While we are enthused by TTAN’s market share gain during though times, we do not rule out its ability to grow >20% as consumer sentiments improve, going ahead. Consistent RoE of ~25% in the coming years and strong cash flow generation ability is likely to aid Titan to trade at premium valuation of 55x of FY21E, based on CMP. Incorporating our revised estimates, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs1,220, valuing it at 52x based on FY21E EPS. Retail Jewellery Sales Pick-up; Financials Impacted due to Gold Hedges Total sales remained flat at Rs44.35bn (+0.6% YoY) led by subdued jewellery sales (Rs35.3bn; -1.5% YoY), partially impacted by gold hedges (revenue loss of Rs1.2bn). Though retail sales declined in Jul’19 due to sudden surge in gold prices, retail sales growth picked up to 15%/11% YoY during Aug’19/Sept’19. Revenue from the watches segment grew by 6.4% YoY to Rs7.18bn (volume down 1% YoY) owing to weak consumer sentiment. Eyewear division grew by 28.5% YoY to Rs1.5bn led by attractive promotional offers. Higher Gross Margin offset by Lower Operating Leverage Titan’s gross margin grew by 142bps YoY to 29.2% mainly led by inventory gains (vs. our estimate of 27.2%). While reported EBITDA rose by 3.4% YoY to Rs5.13bn, reported EBITDA margin expanded by 31bps YoY to 11.6% mainly due to IND-AS116 adjustments partially offset by lower operating leverage. Whilst EBIT margin of the jewellery segment remained flat on YoY basis at 10.9%, adjusted for revenue loss on gold hedge, it would have been lower by 40bps. EBIT margin of the watches segment declined by 225bps YoY to 15.8%. Adjusted PBT (pre-IND AS116) declined by 3% YoY to Rs4.33 (vs. our estimate of Rs4.6bn) mainly due to higher interest cost and lower other income. Adjusted net profit declined by 3.2% YoY to Rs3.2bn. Outlook & Valuation – Maintain HOLD TTAN remains the biggest beneficiary of the formalisation theme, while increasing female working class, strong brand recall, trust and transparency are the key sector tailwinds favoring TTAN to outperform the industry growth. Consumer sentiment which has been subdued on the back of sharp surge in gold prices (>24% YoY in 2QFY20, highest in last 28 quarters) is likely to improve, as the gold prices stabilise at current levels. Indian consumer jewellery market provides huge headroom for TTAN to grow in longer term given <8-9% market share. We arrive at fair value of Rs1,220 based on PE multiple of 52x based on FY21E EPS and hence maintain HOLD recommendation leaving 5% downside from the CMP with positive bias. Change of Estimates (%) FY20E FY21E Net Sales (3.0) (1.5) EBITDA (3.8) (1.5) EBITDA Margins (bps) (9.0) 0.4 Adj PAT (4.0) (1.6) Adj EPS (Rs) (4.0) (1.6) Quarterly Performance (Rs mn) 2QFY20 2QFY19 % YoY 1QFY20 % QoQ Net Sales 44,350 44,068 0.6 49,397 (10.2) Adj EBITDA 5,132 4,961 3.4 5,543 (7.4) Adj EBITDA Margin (%) 11.6 11.3 31bps 11.2 35bps Depreciation (737.0) (374.8) 96.6 (351) 109.9 Interest (407.5) (105.3) 287.0 (103) 294.5 Other Income 307 268 14.6 560 (45.2) Adj PBT 4,318 4,749 (9.1) 5,648 (23.6) PBT after exceptionals 4,318 4,459 (3.2) 5,648 (23.6) Provision for Tax (1,093) (1,315) (16.9) (1,521) (28.2) Reported PAT 3,201 3,144 1.8 4,127 (22.4) Adjusted PAT 3,240 3,348 (3.2) 4,127 (21.5) Source: Company, RSec Research 1 Year Stock Price Performance Note: * CMP as on Nov. 05, 2019 Priyank Chheda, CFA Research Analyst Contact: 022 4303 4625 Email: [email protected]Naveen Kulkarni Head of Research 022 - 4303 4660 [email protected]Key Financials (Rs mn) FY19 FY20E FY21E Net Sales 190,700 210,367 247,182 EBIDTA 21,472 23,113 28,022 Net Profit 15,277 17,157 20,832 EPS (Rs) 15.5 19.3 23.5 PER (x) 73.5 66.4 54.7 EV/EBIDTA (x) 46.9 48.7 39.7 P/BV (x) 16.3 15.5 12.9 ROE (%) 24 25 26 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19
Transcript
HOLDTitan CompanyCMP* (Rs) 1,284
Upside/ (Downside) (%) (5)
Bloomberg Ticker TTAN IN
Market Cap. (Rs bn) 1,140
Free Float (%) 47
Shares O/S (mn) 888
Retail | India
Institutional Equity Research
2QFY20 Result Update | November 6, 2019
1
Target Price: Rs1,220
Share price (%) 1 mth 3 mth 12 mth
Absolute performance 2.0 23.8 48.6
Relative to Nifty (4.9) 13.9 35.1
Shareholding Pattern (%) Sep-19 Jun-19
Promoter 52.9 52.9
Public 47.1 47.1
Sailing through Rough Waters; Maintain HOLD Titan (TTAN) reported 2QFY20 results with marginal miss on operating performance. Its revenue grew by a muted 0.6% YoY (+7.4% YoY in 1HFY20) on the back of 1.5% YoY decline in jewellery segment and 6.4% YoY growth in watches segment. Revenue recognition of jewellery segment declined due to adverse impact of gold hedges (revenue impact of Rs1.2bn or ~280bps). The Management has cut revenue growth guidance to 11-13% in 2HFY20 considering current weak consumer sentiments. Notably, TTAN managed to grow by 10% YoY in 33days of festive season. While we are enthused by TTAN’s market share gain during though times, we do not rule out its ability to grow >20% as consumer sentiments improve, going ahead. Consistent RoE of ~25% in the coming years and strong cash flow generation ability is likely to aid Titan to trade at premium valuation of 55x of FY21E, based on CMP. Incorporating our revised estimates, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs1,220, valuing it at 52x based on FY21E EPS.
Retail Jewellery Sales Pick-up; Financials Impacted due to Gold HedgesTotal sales remained flat at Rs44.35bn (+0.6% YoY) led by subdued jewellery sales (Rs35.3bn; -1.5% YoY), partially impacted by gold hedges (revenue loss of Rs1.2bn). Though retail sales declined in Jul’19 due to sudden surge in gold prices, retail sales growth picked up to 15%/11% YoY during Aug’19/Sept’19. Revenue from the watches segment grew by 6.4% YoY to Rs7.18bn (volume down 1% YoY) owing to weak consumer sentiment. Eyewear division grew by 28.5% YoY to Rs1.5bn led by attractive promotional offers.
Higher Gross Margin offset by Lower Operating Leverage Titan’s gross margin grew by 142bps YoY to 29.2% mainly led by inventory gains (vs. our estimate of 27.2%). While reported EBITDA rose by 3.4% YoY to Rs5.13bn, reported EBITDA margin expanded by 31bps YoY to 11.6% mainly due to IND-AS116 adjustments partially offset by lower operating leverage. Whilst EBIT margin of the jewellery segment remained flat on YoY basis at 10.9%, adjusted for revenue loss on gold hedge, it would have been lower by 40bps. EBIT margin of the watches segment declined by 225bps YoY to 15.8%. Adjusted PBT (pre-IND AS116) declined by 3% YoY to Rs4.33 (vs. our estimate of Rs4.6bn) mainly due to higher interest cost and lower other income. Adjusted net profit declined by 3.2% YoY to Rs3.2bn.
Outlook & Valuation – Maintain HOLDTTAN remains the biggest beneficiary of the formalisation theme, while increasing female working class, strong brand recall, trust and transparency are the key sector tailwinds favoring TTAN to outperform the industry growth. Consumer sentiment which has been subdued on the back of sharp surge in gold prices (>24% YoY in 2QFY20, highest in last 28 quarters) is likely to improve, as the gold prices stabilise at current levels. Indian consumer jewellery market provides huge headroom for TTAN to grow in longer term given <8-9% market share. We arrive at fair value of Rs1,220 based on PE multiple of 52x based on FY21E EPS and hence maintain HOLD recommendation leaving 5% downside from the CMP with positive bias.
Source: Company, RSec Research; *Numbers not comparable due to IND AS116 impact in the reported numbers.
Exhibit 2: Revised vs. Old Estimates
% Change Old Revised
Year (Rs mn) FY20E FY21E FY20E FY21E FY20E FY21E
Net Sales -3.0 -1.5 216,855 250,932 210,367 247,182
EBITDA -3.8 -1.5 24,022 28,436 23,113 28,022
EBITDA Margins (bps) -9.0 0.4 11.1 11.3 11.0 11.3
Adj PAT -4.0 -1.6 17,878 21,173 17,157 20,832
Adj EPS (Rs) -4.0 -1.6 20.1 23.8 19.3 23.5
Source: RSec Research
Titan CompanyRetail | India
Institutional Equity Research
3
CMP* (Rs) 1,284
Upside/ (Downside) (%) (5)
Bloomberg Ticker TTAN IN Target Price: Rs1,220
HOLD
Key Upside Risk: f Strong re-bound in jewellery / wedding jewellery demand.
f Higher market share gains from competitors / unorganized players.
f Higher growth to result in higher operating leverage.
Key Downside Risk:
f Volatile gold prices.
f Slower new store addition.
f Higher consumer discounts to impact operating margins.
Other Segmental Updates:
f Jewellery: The division added a net of 21 Tanishq stores, with the addition of retail space admeasuring ~67,000sqft.
f Watches: Titan Clocks were launched exclusively on Flipkart and was well received. The division added 17 WOT stores and closed 14, added 14 Fastrack s.tores, while closing 6 and for Helios added 12 stores, while closing 2 stores during the quarter. The trend of Multi brand outlets (MBO) growing at much faster clip compared to exclusive brand outlets continued. E-commerce sales witnessed strong growth during the quarter
f Eyewear: The division added 43 stores during the year to date and closed 19 stores, ending up with a net increase of about 16,000 sq. feet of retail space.
f Fragrance: Skinn continues to increase its distribution reach and witnessed good growth during the quarter. The brand opened a large new segment by launching premium deodorants which have been well received in the markets
f Taneria: ‘Taneira’ opened its third store in Bengaluru and its first store in Pune, taking the total store count for the business to seven in four metros.
f Caratlane (72.3% Subsidiary): Segment reported 75% YoY growth in revenues (+67% YTD). It added 8 new stores during the quarter, taking the total store count to 70. It purchased 0.94mn equity shares from one of the shareholders of CaratLane, thereby increasing its stake in the subsidiary by 2.8% to 72.3%.
f Titan Engineering and Automation Ltd (TEAL – 100% Subsidiary): It grew by 9% YoY in 2QFY20 (+33% YoY in 1HFY20). Business outlook for 2HFY20 looks to be positive with large orders to be executed. Caratlane added 16 stores to its network, in YTD’20, taking the total store count to 71.
Titan CompanyRetail | India
Institutional Equity Research
4
CMP* (Rs) 1,284
Upside/ (Downside) (%) (5)
Bloomberg Ticker TTAN IN Target Price: Rs1,220
HOLD
Conference Call – Key Takeaways f Retail sales grew by 15% YoY and 11% YoY in August and September, respectively leading
to 7% YoY growth in total retail sales in 2QFY20. Notably, the last 33days of festive days witnessed 10% YoY revenue growth. As per the Management, the industry dynamics continue to remain challenging with few regional retailers witnessing >15-20% fall in sales during the festive season with the industry retail sales remaining flat.
f The Management revised 2HFY20 growth guidance to 11%-13% in-line with the recent trends. Considering huge market opportunity, the Management retains the growth guidance of in the excess of 20%, to be confirmed in 3QFY20 earnings call.
f Discount in jewellery segment as a percentage of sales jumped mainly due to increased price differential among TTAN and other jewellers.
f TTAN witnessed 30% YoY growth in wedding jewellery (~22% contribution in 1HFY20). It launched wedding campaign to attract consumers. The Management remains optimistic to achieve the set targets in 2HFY20 wedding days.
f The Company witnessed higher impact of slowdown in lower ticket size jewellery with middle class customers reeling under pressure, while the studded jewellery sales looked to be less affected.
f Jewellery sales loss due to hedging was Rs1.2bn with no impact on gross margin. Current hedge losses can be attributed to sharp surge in gold prices (to be considered as one-off).
f Share of gold from exchange stood at ~34% in 1HFY20.
f Negative OCF can be attributed to (1) lower-than-budged inventory; and (2) stocking ahead of festive season at higher gold prices. Capital employed is expected to come down, going ahead.
f As the Watches segment is witnessing demand revival, the Management expects the segment to witness double-digit growth in 2HFY20.
f Other income was lower due to lower average cash balances available.
f New store opening guidance FY20E maintained at 60.
Titan CompanyRetail | India
Institutional Equity Research
5
CMP* (Rs) 1,284
Upside/ (Downside) (%) (5)
Bloomberg Ticker TTAN IN Target Price: Rs1,220
HOLD
-1%
7%
-7%
6%
35%
-10%
0%
10%
20%
30%
40%
50%
World of Titan Tanishq Fastrack LFS -watches Titan eye+
Sales Value growth YoY
2QFY19 3QFY19 4QFY19 1QFY20 2QFY20
Exhibit 3: Jewellery division continues to be important driver to revenue growth
Exhibit 4: Tanshiq growth has moderated
Source: Company, RSec Research Source: Company, RSec Research
Exhibit 5: LTL growth has moderated for Tanishq Exhibit 6: Store Addition remains robust for Tanshiq
Source: Company, RSec Research Source: Company, RSec Research
Exhibit 7: Jewellery volumes declined by 14% YoY in 2QFY20 Exhibit 8: Volumes for Watches declined by 1%
Source: Company, RSec Research Source: Company, RSec Research
77 76 84 82 83 80 84 84 82 8179 84 81 79
0
20
40
60
80
100
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
19
4QFY
19
1QFY
20
2QFY
20
Segment wise Revenue contribution %
Watches % Jewellery % Eye Wear %
9%
32%
6%
26%
8%
-2%
27%
-1%
15%13%
7%
14%
2%
16% 14%
6%10%
1%
12%
14%
-3%
2%
-12%
1%
28%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
World of Titan Tanishq Fastrack LFS -watches Titan eye+
Liquidity ratiosCurrent ratio (x) 1.8 1.7 1.8 1.8 1.8
Quick ratio (x) 0.7 0.7 1.0 1.2 1.2
Interest cover (x) 35.9 49.2 38.5 38.0 35.5
Net debt/Equity (%) (9.0) (5.9) (19.1) (29.4) (29.4)
ValuationPER (x) 71.9 73.5 66.4 54.7 52.8
Price/Book (x) 16.1 16.3 15.5 12.9 12.5
EV/Net sales (x) 5.3 5.3 5.4 4.5 4.3
EV/EBITDA (x) 47.9 46.9 48.7 39.7 38.4
EV/EBIT (x) 48.6 46.0 47.8 39.0 37.5
Titan CompanyRetail | India
Institutional Equity Research
8
CMP* (Rs) 1,284
Upside/ (Downside) (%) (5)
Bloomberg Ticker TTAN IN Target Price: Rs1,220
HOLD
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Rating Guides
Rating Expected absolute returns (%) over 12 months
BUY >10%
HOLD -5% to 10%
REDUCE >-5%
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