Titan missed Street expectations for the quarter ended December 2013 on all fronts---sales, net profit and margins. The company reported net sales of Rs 2,650 crore, down 11.1 per cent year-on-year. Its net profit fell 18.8 per cent to Rs 166 crore, while the earnings before interest, tax, depreciation and amortisation (Ebitda) margin contracted 25 basis points to 9.3 per cent year-on-year. Bloomberg consensus estimates had pegged sales, net profit and Ebitda margin at Rs 2,971 crore, Rs 200 crore and 10 per cent, respectively.
While margin contraction was restricted due to an 11 per cent fall in total expenses, higher tax (up 53 basis points to 27.5 per cent) and finance costs (up 2.3 times to Rs 27 crore) hit the company's profits. The management expects finance costs to settle at these levels on an annual basis (+/- five-10 per cent). The company's expansion plans are on track, though it has reduced store sizes. Titan also plans to invest in branding and advertising activities, which could keep margins in check.
Managing Director Bhaskar Bhat said, "In the last quarter of this financial year, we have planned aggressive sales promotions for both watches and jewellery to stimulate demand and generate consumer interest in these categories. We will continue to make adequate investments in mass communication and build our brands."
Most brokerages had fairly muted expectations from the company, given the continued weak performance in the watches segment and the regulatory overhang on Titan's jewellery business. Revival in demand is vital for an improvement in the company's performance. Withdrawal of a ban on gold-on-lease will trigger stock performance, believe analysts.
Analysts hold a mixed view on the Titan stock. Of the 10 analysts polled by Bloomberg so far this month, three each have 'buy' and 'sell' ratings, while four have a 'neutral' rating on the stock. Their average target price stands at Rs 254, indicating upside potential of 18.3 per cent on Wednesday's closing price of Rs 214.5.
After the dismal performance, most analysts are likely to trim their full-year earnings estimates for the company. Many believe the stock is likely to fall on Thursday, factoring in the weak numbers that came after market hours on Wednesday. Currently, the stock is trading at 22.3 times the FY15 estimated earnings.
"We believe Titan's near-term stock performance will be a function of the reversal of regulatory actions and a revival in underlying demand. We maintain 'neutral'; our target price is Rs 240," says Gautam Duggad, fast-moving consumer goods analyst at Motilal Oswal Securities.
From a longer-term perspective, Titan stands to gain from consumers upgrading to branded products. A strong brand name and good execution track record are some of the company's strengths.
Poor demand for watches, jewellery
In the festive season, demand was muted and this impacted the company's business in the December quarter. In addition to weak demand, the jewellery segment was also impacted by regulatory measures to restrict gold imports.
The jewellery business witnessed a revenue decline of 15.4 per cent over last year at Rs 2,127 crore; it was hit by poor demand, lower gold prices (down 10 per cent year-on-year) and regulatory challenges. Even after excluding gold coins, sales fell three per cent, reflecting an inherent weakness in demand. The profit before interest and tax margin, however, improved 40 basis points to 10.2 per cent, led by a higher proportion of studded jewellery (26 per cent, against 22 per cent) and discontinuation of gold coin sales. Recently, the company resumed selling gold coins. This could provide some support to revenue growth.
Revenue from watches rise 7.5 per cent year-on-year to Rs 455 crore, but volumes declined 10 per cent. Weak consumer sentiment, low walk-ins and a volume decline affected this business. The Helios watches segment (premium watches) saw a rise in sales, as the company started an equated monthly instalment facility and emphasised on improving the conversion of promotions into sales. The Fastrack portfolio, however, continued to be under pressure. The profit before interest and tax margin in this segment declined to 11.3 per cent from 12.1 per cent last year.
The precision engineering (B2B segment) and eye care businesses continued to fare well in the December quarter, with sales growth of 18.6 per cent at Rs 117 crore. Though the company withdrew sales promotion in the eyewear segment, this segment's revenues increased three per cent, on a low base. The precision engineering division grew 46 per cent during the December quarter.
While margin contraction was restricted due to an 11 per cent fall in total expenses, higher tax (up 53 basis points to 27.5 per cent) and finance costs (up 2.3 times to Rs 27 crore) hit the company's profits. The management expects finance costs to settle at these levels on an annual basis (+/- five-10 per cent). The company's expansion plans are on track, though it has reduced store sizes. Titan also plans to invest in branding and advertising activities, which could keep margins in check.
Managing Director Bhaskar Bhat said, "In the last quarter of this financial year, we have planned aggressive sales promotions for both watches and jewellery to stimulate demand and generate consumer interest in these categories. We will continue to make adequate investments in mass communication and build our brands."
Most brokerages had fairly muted expectations from the company, given the continued weak performance in the watches segment and the regulatory overhang on Titan's jewellery business. Revival in demand is vital for an improvement in the company's performance. Withdrawal of a ban on gold-on-lease will trigger stock performance, believe analysts.
Analysts hold a mixed view on the Titan stock. Of the 10 analysts polled by Bloomberg so far this month, three each have 'buy' and 'sell' ratings, while four have a 'neutral' rating on the stock. Their average target price stands at Rs 254, indicating upside potential of 18.3 per cent on Wednesday's closing price of Rs 214.5.
After the dismal performance, most analysts are likely to trim their full-year earnings estimates for the company. Many believe the stock is likely to fall on Thursday, factoring in the weak numbers that came after market hours on Wednesday. Currently, the stock is trading at 22.3 times the FY15 estimated earnings.
"We believe Titan's near-term stock performance will be a function of the reversal of regulatory actions and a revival in underlying demand. We maintain 'neutral'; our target price is Rs 240," says Gautam Duggad, fast-moving consumer goods analyst at Motilal Oswal Securities.
From a longer-term perspective, Titan stands to gain from consumers upgrading to branded products. A strong brand name and good execution track record are some of the company's strengths.
Poor demand for watches, jewellery
In the festive season, demand was muted and this impacted the company's business in the December quarter. In addition to weak demand, the jewellery segment was also impacted by regulatory measures to restrict gold imports.
The jewellery business witnessed a revenue decline of 15.4 per cent over last year at Rs 2,127 crore; it was hit by poor demand, lower gold prices (down 10 per cent year-on-year) and regulatory challenges. Even after excluding gold coins, sales fell three per cent, reflecting an inherent weakness in demand. The profit before interest and tax margin, however, improved 40 basis points to 10.2 per cent, led by a higher proportion of studded jewellery (26 per cent, against 22 per cent) and discontinuation of gold coin sales. Recently, the company resumed selling gold coins. This could provide some support to revenue growth.
Revenue from watches rise 7.5 per cent year-on-year to Rs 455 crore, but volumes declined 10 per cent. Weak consumer sentiment, low walk-ins and a volume decline affected this business. The Helios watches segment (premium watches) saw a rise in sales, as the company started an equated monthly instalment facility and emphasised on improving the conversion of promotions into sales. The Fastrack portfolio, however, continued to be under pressure. The profit before interest and tax margin in this segment declined to 11.3 per cent from 12.1 per cent last year.
The precision engineering (B2B segment) and eye care businesses continued to fare well in the December quarter, with sales growth of 18.6 per cent at Rs 117 crore. Though the company withdrew sales promotion in the eyewear segment, this segment's revenues increased three per cent, on a low base. The precision engineering division grew 46 per cent during the December quarter.
