Titan’s June recovery comforts, but stock’s valuation remains high

In these uncertain times, Titan Co. Ltd’s recovery in June was reassuring. After a complete loss of business in April due to the covid-19 lockdown, and an 80% drop in retail jewellery sales in May, the company said the year-on-year fall in jewellery revenue in June was around 30%. “The recovery in June was better than expected,” said an analyst at a domestic brokerage, requesting anonymity.

Jewellery is Titan’s mainstay, and accounted for 83% of its revenue in 2019-20.

Based on the numbers provided by the company in its quarterly update, retail jewellery revenue for the June quarter are set to witness a sharp decline of around 70% year-on-year. However, the segment also sold gold in the bullion market worth ₹610 crore at market rates in order to get rid of excess inventory.

This should soften the blow on the overall revenue growth rate to some extent, said analysts. Still, analysts at CLSA estimated a 62% drop in overall Q1 revenue.

The recovery in June, Titan said, was owing to a higher share of wedding jewellery sales (despite the deferment of many weddings), better sales from the golden harvest scheme and demand for gold coins.

Meanwhile, other businesses are still under stress. Titan’s second highest revenue contributor is watches. The segment’s May and June revenue fell about 95% and a shade under 80%, respectively, year-on-year. Eyewear business revenues in May and June fell 85% and 65%, respectively, compared to the same months of 2019.

These businesses are likely to see a sharp drop in revenue for the June quarter.

Moreover, recovery from hereon is envisaged to be relatively slower than the jewellery business.

As of June-end, Titan re-opened around 83% of its stores across all businesses.

Even as Titan shares appreciated significantly from the lows of 2020 on the NSE, the stock is still around 25% lower than its highs seen in February.

Nonetheless, valuations remain pricey. Based on Bloomberg data, the stock trades at about 46 times estimated earnings for the financial year 2022.

The valuations suggest a decent recovery is on the cards. Commenting on the company’s June quarter update, a report by Motilal Oswal Financial Services Ltd on 7 July said: “Although recovery in the jewellery division is encouraging, we are cautious on the near-term demand outlook in light of the ongoing coronavirus crisis. Furthermore, the likely lower share of high-value studded jewellery would weigh on profitability in FY21.”

There is, however, some hope that the second half of the financial year could bring meaningful revival in demand backed by the festive and wedding seasons.

How that pans out would be crucial for investor sentiment.