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Titan Company rating – Buy: Multiple headwinds impacted growth in Q4

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Jewellery saw good growth; Q4 a blip as structural story is intact; ‘Buy’ retained with target price cut to Rs 2,900

Q4 standalone sales of Rs 72.8 bn were up 2% y-o-y (already guided by Titan in its Q4 operating update). Ebitda was down 2% while clean PAT was up 2% y-o-y and, on headline basis, were 20% and 18% below consensus, respectively. The earnings were impacted by several one-offs: Titan recognised one-time expenses of VRS and ex-gratia payments aggregating to Rs 1.23 bn, but also benefitted from inventory gains to the tune of Rs 1.30 bn in Q4.

Jewellery revenue growth was good in a disrupted quarter: Jewellery declined by 4%, though it still grew 28% on a two-year CAGR, due to COVID-19 disruptions in January and a sharp surge in gold prices in March deferring demand. Headline jewellery Ebit margins of 12.5% seemed impressive, but carried the Rs 1.30-bn inventory gain, excluding which jewellery margins were c10.5%.

Jewellery growth has rebounded in April: The gold price surge in March impacted demand but according to Titan, demand was fairly strong in April and issues appear to be transient. Titan aims for an ambitious growth delivery target for FY23e.

Watches and wearables saw a moderation to 12% y-o-y as the demand environment was challenging due to the third COVID-19 wave and high inflation impacting purchases. Excluding one-offs, normalised EBIT margin was 6.7% in Q4 (-154bp y-o-y). Eyewear sales were modest at 5% y-o-y. Normalised EBIT margin was 2.2% in Q4 (-16ppt y-o-y).

Network expansion continued at a rapid pace: Titan added 25 new jewellery stores, 34 stores for watches and 51 new Titan Eye+ stores, on a net basis.

Why should investors continue to stay bullish? (i) Q4 demand weakness has been temporary. (ii) Titan (6-7% market share) is well placed to gain market share from the jewellery sector’s large unorganised pie. (iii) Structurally, network rollout remains aggressive (40+ Tanishq stores per annum). (iv) Titan is also building long-term growth options (international foray, Taneira). (v) The current valuation builds in long-term earnings growth expectations of c13%, well within the structural growth opportunity. We stay at Buy with a new TP of Rs 2,900 (from Rs 3,000) as we revise estimates.

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