Titan loses sheen as Street wakes up to reality of weak Q1 earnings

The Titan Co. Ltd stock lost some more of its shine after reporting lacklustre results for the June quarter. Total operating revenue (including bullion sales) declined by 62% year-on-year (y-o-y) to ₹1,862 crore, primarily due to a 71% drop in Titan’s mainstay jewellery business. But Titan had already indicated how revenues panned out for the quarter in a pre-earnings update. The Street was disappointed that cost savings turned out to be lower than anticipated.

More importantly, the reported 1% growth in retail jewellery for July and the management outlook were weaker than expected. “The management is not as sanguine about a quick recovery in the jewellery business; down-trading and price competition from local players are some of the near-term headwinds that need to be dealt with,” JM Financial Institutional Securities Ltd analysts said in a note.

Prima facie, the fact that sales reached year-ago levels in July seems impressive, after the sharp decline in Q1. But note that sales in the year-ago period had declined considerably, and represent a low base. What’s more, last month’s sales were boosted by advance buying for the wedding season. On a like-to-like basis, sales were down roughly 20% in July. “The rate of recovery is less than what was expected. This has hurt investor sentiment,” said an analyst of a domestic brokerage, requesting anonymity.

While the outlook is a bit weak, Q1 earnings disappointed as well. The company made a loss of ₹246 crore at the earnings before interest, tax, depreciation and amortization (Ebitda) level. Last quarter revenues included the sale of bullion worth ₹601 crore at market rates to reduce inventory. Besides, the share of higher-margin studded jewellery fell.

Also, employee expenses declined at a slower-than-expected pace of 9%. Other expenses rose on the back of accounting losses on hedges. So, despite an 88% drop in advertising expenses, these factors weighed on overall profit.

Performance of other business segments was nothing to write home about. Revenue from watches and eyewear fell by 90% and 80%, respectively, hit by the closure of stores. But these businesses don’t move the needle materially for Titan.

The Titan management said it is targeting for a full recovery in the jewellery segment in the March quarter (Q4FY21). But, most of it depends on how consumers respond to the rising gold prices. Besides, weddings will certainly be less elaborate and discretionary spending is being cut; although some analysts said the outlay for jewellery may be increased since other wedding costs will be lower owing to the coronavirus pandemic.

Even as the stock saw an impressive recovery from its March lows, Titan’s shares are still almost 20% away from its pre-covid highs seen in February. Nonetheless, valuations are not cheap. Based on Bloomberg data, the stock trades at 49 times estimated earnings for the financial year 2022.