2QFY20 results of Titan, Dabur and Divi’s Laboratories

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1.  TITAN COMPANY: Guidance cut, expensive valuations lead to downgrade 

(TTAN IN, Mkt Cap USD16.1b, CMP INR1284, TP INR1275, 1% Downside, Downgrade to Neutral)

–      Consol. revenue increased 2.1% YoY to INR46.6b (our estimate: INR48.2b) in 2QFY20. EBITDA rose 11.4% YoY to INR5.2b (our estimate: INR5.2b), PBT declined 3% YoY to INR4.3b (our estimate: INR4.4b), while recurring PAT grew 3.8% YoY to INR3.1b (our estimate: INR3.2b). For 1HFY20, sales/EBITDA/adj. PAT were up 8.8%/15.1%/7.5% YoY.

–      Consol. gross margin expanded 130bp YoY to 29.7%. Lower other expenses (-60bp YoY) and ad spends (-20bp YoY) were offset by higher staff costs (+120bp YoY to 6.5%). EBITDA margin expanded 90bp YoY to 11.2% (our estimate: 10.8%).

–      Consol. segmental performance: (a) Reported Jewelry sales stood flat YoY at INR36.5b (volume down 14% YoY, SSSG up 2% YoY), with the EBIT margin flat YoY at 10.4%. (b) Sales of Watches grew 6.1% YoY (volumes down 1% YoY) to INR7.2b, with the EBIT margin down 200bp YoY to 14.4%.

–      Concall highlights: (1) Jewelry sales growth guided at 11-13% YoY for 2HFY20. (revised down from +20% previously). (2) INR1.2b impact on sales of hedging losses in 2Q would not be reversed but the incremental impact will be much lower. (3) Inventory increase has been because of higher gold prices and early Dussehra this year.

–      Valuation view: Revised jewelry sales guidance of 11-13% for 2HFY20 is a near-term negative. Demand trends are improving albeit not at the pace originally envisaged, leading to 8-10% cut in EPS forecasts. The longer-term investment case remains promising as TTAN is well placed to grow its share in the largely unorganized jewelry market in India from the current level of ~8%. This makes it one of the most attractive candidates in terms of top line and earnings from a three-year perspective. However, the stock has almost doubled since our upgrade at INR660 two years ago and also rallied by 12% since the corporate tax cut. This in turn makes it appear expensive at 57.6x FY21E EPS, leading us to downgrade to Neutral (targeting 50x Sep’21E EPS, we get a TP of INR1,275).

  1. DABUR: Earnings in line; Growth prospects muted

(DABUR IN, Mkt Cap USD12.0b, CMP INR482, TP INR455, 6% Downside, Neutral)

–       2QFY20 consolidated sales grew 4.1% YoY to INR22.1b (v/s est. INR22.4b). EBITDA grew 8.6% YoY to INR4.9b (v/s est. INR4.8b). PBT grew 6% YoY to INR5b (v/s est. INR5b). Adj. PAT increased 15.5% YoY to INR4.4b (v/s est. INR3.9b). Domestic FMCG business grew 4.9% with underlying volume growth of 4.8% (v/s est. +4%).

–       Gross margin expanded 140bp YoY to 50.8%. Along with lower staff costs as a % of sales (down 10bp YoY to 10.9%), higher ad spends (up 20bp YoY to 6.5%) and higher other expenses (up 40bp YoY to 11.2%), translated to consol. EBITDA margin expanding 90bp YoY to 22.1%.

–       1HFY20 consol. sales/ EBITDA/ Adj. PAT grew 6.6%/ 13.2%/ 15.3% YoY.

–       Standalone: sales/EBITDA/Adj. PAT grew 4.9%/6.6%/16.4%. EBITDA margins expanded 40bp YoY to 23.3%.

–       Concall highlights: (1) Maintained guidance of mid-high single-digit volume growth for domestic business; (2) Seeing long and protracted slowdown in rural market; (3) Facing liquidity crunch in the market – selectively extending credit to distributors (credit days extended from 6 days to 15-20 days).

–       Valuation and view: Results were in line with estimates, but volume growth was better than expected. We have marginally raised our full-year EPS estimates for FY20/FY21E by ~1.8%/1.1%. Valuations are fair at 47.3x FY21, particularly for a business with moderate earnings growth prospects (~9.5% CAGR over FY19-21 on top of 6.3% CAGR in the past 3 years) and ROCEs in the mid-20s, which is also inferior to peers. We maintain Neutral rating on the stock with a target price of INR455 (targeting 40x Sep’21 EPS).

3.  DIVI’S LABORATORIES: Sales impressive, higher RM cost hurts margins

(DIVI IN, Mkt Cap USD6.3b, CMP INR1687, TP INR1655, 2% Downside, Neutral)

–      Highest-ever quarterly revenue run-rate: DIVI’s sales were up 9.2% YoY to INR14.5b (our estimate: INR13.5b) in 2QFY20, led by 13% YoY growth in the CRAMS segment (59% of sales) and supported by strong 43% YoY Nutraceutical sales to INR1.6b. However, Customer Synthesis segment grew moderately by 4% YoY (61% of sales), impacting overall growth. Change in the product mix with a shift toward generics (59% v/s 57% YoY) and increased RM cost led to gross margin contraction of 390bp YoY to 59%. DIVI incurred non-recurring operational expense of INR200m related to power & fuel, consultancy and other regulatory costs. Adjusting for this, the EBITDA margin shrank 410bp YoY to 35.3% (our estimate: 34.2%). Accordingly, EBITDA declined 2% YoY to INR5.1b (our estimate: INR4.6b). DIVI had a forex gain of INR132m for the quarter. Adjusting for the same, PAT was down marginally by 1% YoY to INR3.6b (our estimate: INR3.4b). For 1HFY20, sales/EBITDA/PAT grew 12.5%/1.3%/ 1% YoY to INR26b/INR9b/INR6.4b.

–      Key highlights: (1) Strong ramp up in Nutraceutical sales led by the start of second-line operations. (2) Inventory build-up is largely to secure RM availability. (3) Backward integration to manufacture key starting materials/intermediates is on track and the benefit would accrue from 4Q. (4) DIVI is progressing well on brownfield expansion with INR2b spent in 1HFY20 and INR9.4b towards CWIP. (5) Post capex, DIVI would take 6-9 months for regulatory validation before beginning commercial operations.

–      Valuation and view: We lower our earnings estimate by 5% for FY20 to factor in higher RM cost, impacting profitability over the near term. However, we maintain our FY21 estimates as the benefit of backward integration would accrue gradually 4QFY20 onwards. We roll to 23x (unchanged) 12M forward earnings and arrive at a TP of INR1,655 (prior INR1,590). With the strong chemistry skillset in place, DIVI remains on track to benefit from the CRAMS (contract research and manufacturing services) opportunity. It also on track in terms of capex to cater to future needs of customers, providing visibility of robust growth in earnings. However, the current valuation largely factors in the positives. Maintain Neutral.