Brokerages retained their bullish views on jewellery maker Titan Company post its December quarter results and revised their earnings estimates upwards in anticipation of a strong growth going ahead.
The company, in which ace investor Rakesh Jhunjhunwala holds 5.32 per cent stake as of December quarter, on Wednesday posted an 11.81 per cent year-on-year (YoY) increase in consolidated net profit to Rs 530 crore for the third quarter ended in December 2020, led by income growth in the jewellery division.
Shares of the firm were, however, trading over 3 per cent down at Rs 1,513.50 on the BSE at 12.20 am as investors were concerned about the pressure on margins and weak performance in the watches and eyewear segments.
Since the end of September quarter, the shares of the firm have rallied 30 per cent as against a 35 per cent jump in the BSE barometer Sensex and 37 per cent jump in the BSE Consumer Durables index during the same period.
Analysts believe the company’s competitive edge over peers, healthy balance sheet and strong management commentary bode well for the stock and see up to 21 per cent rise in the stock from current market levels.
Healthy show in jewellery segment to continue
The company posted 16 per cent YoY growth in the jewellery division at 6,249 crore during the quarter under review. Going ahead, the trend might sustain as analysts at ICICI Direct expect the demand for wedding jewellery to perk up since people have cut down on other discretionary spends leading to a higher share of wallet for jewellery. Meanwhile, softness in gold prices may also result in better grammage recovery.
Edge over peers
Despite competition by regional players in terms of higher discounts, Titan has maintained its making charge percentage, translating into higher making charges per gram for its jewellery portfolio. This reflects the inherent strength of the brand to absorb inflation in gold prices, noted I-Direct.
Meanwhile, the company’s expansion and new store openings have continued through the December quarter. Analysts at Motilal Oswal Financial Services said this provides Titan with an opportunity to gain from unorganised and other organized players as they are expected to struggle further going forward.
Margins likely to recover
The earnings before interest, tax, depreciation and amortisation (EBIT) margin for the jewellery segment was at 12 per cent in December quarter, down 100 bps YoY. While this remains a concern, analysts believe that Titan’s ‘war on waste’ program and improvement in the share of studded ratio would help the gross margins recover to pre-Covid levels of 27-28 per cent.
The company returned to positive growth earlier than expected and the management expects strong growth to continue in FY22 as well. The management also expects double-digit growth in wedding demand for the next two quarters.
Outlook & valuations
Analysts at I-Direct said that factoring in the Q3FY21 performance and improvement in demand outlook, we revise our earnings estimates upwards by 3-7 per cent for FY22-23E.
“Healthy balance sheet, sustained focus on market share gains and better earnings visibility prompts us to upgrade from HOLD to BUY with a revised target price of Rs 1,830,” said I-Direct in an earnings note.
Meanwhile, those at Motilal Oswal, see 8 per cent higher EPS growth for FY21E and 2.5 per cent each for FY22E/FY23E. “While valuations of 67.9x/52.2x FY22E/FY23E EPS appear expensive, the long runway for profitable growth deserves premium multiples. Near term valuations appear expensive because of the impact of Covid-19 in FY21. We maintain BUY with a target of Rs 1,800,” they said.
Brokerages Kotak Securities and JM Financial have BUY and HOLD ratings on the stock with a target price of Rs 1,625 and Rs 1,405, respectively.