Demand concerns for Titan

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Titan Co. Ltd, which derives a large share of its revenue from jewellery, failed to shine last quarter. Overall revenue growth was particularly weak at 3% year-on-year to at Rs.2,799 crore.

Further, the company had announced a voluntary retirement scheme (VRS) for employees fulfilling certain criteria. The one-time financial impact of the scheme was Rs.97 crore for the June quarter, which affected reported net profit growth. But pre-tax earnings before exceptional items increased by nearly a third to Rs.270.6 crore, helped by operating profit margin expansion, decline in finance costs and slower rate of increase in depreciation.

Jewellery revenue, forming three-fourths of Titan’s June quarter revenue, increased at an uninspiring 3% compared with the same period last year. One reason for the muted performance is the absence of activation (of promotions)—studded jewellery activation had begun in June last year as against July this year. Plus, the wedding season was shorter this time. Sure, gross margin improved due to gains from rollover of hedging positions from last year. However, underlying jewellery demand has essentially remained weak.

Titan’s watch business performance too was disappointing. Watch revenue increased by a mere 1%. The company attributes low revenue growth to weaker exports despite 11% domestic sales growth. Watch segment profitability was also affected on account of VRS cost of Rs.61 crore, thus depressing reported earnings before interest and tax to Rs.9 crore.

But investors don’t seem to be losing sleep over muted consumer demand. Interestingly, Titan shares have outperformed the benchmark Sensex so far this fiscal year. But the outlook isn’t rosy. “Even though we expect respectable 16% earnings CAGR over FY16-18E (delivered 4% over FY12-16) on a lower base and a healthy contribution of Golden Harvest Scheme, we see risks emanating from the still subdued demand environment,” wrote analysts from Motilal Oswal Securities Ltd in a report on 3 August.