Investors who have the stock of Titan Company in their portfolio can continue to hold it. The company’s June quarter results were not up to expectations. However, the company’s medium-term prospects seem bright.

The good monsoon this year, which may revive rural demand; the company’s aggressive efforts to increase market share; sales from the newly acquired online jewellery retail brand, CaratLane; and the increasing revenue share from studded jewellery should help sales and profit growth. With limits on raising deposits under gold savings schemes increased to 35 per cent of net worth, revenues should pick up further.

High gold prices are keeping demand for jewellery under check now, but if prices continue to rule high for a long time, the pent up demand for the yellow metal should come back. From our ‘buy’ call in March, the stock is up 16 per cent. At the current price of ₹406, the stock discounts its estimated earnings for 2016-17 by 40 times, which is at the higher end of its trading band in the last three years. Existing investors can hold the stock and others can buy it on dips.

In the June quarter, the company recorded a sales growth of 3.6 per cent. The profit after tax dropped 16 per cent due to an exceptional item (payment on voluntary retirement scheme).

Promising business

The long-term prospects for Titan are bright given the growing income of the country’s middle class and the company’s aggressive store additions to gain market share. Further, the current year’s good monsoon and the result of the many regulatory changes should also start to show up.

In the Companies (Acceptance of Deposits) Amendment Rules, 2016 released recently, the Centre increased the limit on the deposits that companies can raise to 35 per cent of networth from 25 per cent. This is advantageous, especially for gold jewellers, as they rely on gold savings schemes for working capital; the scheme also brings assured sales.

Currently, Titan’s gold savings scheme contributes 11-12 per cent of revenue for the jewellery segment. But this may increase over the next year. Titan’s management says that at present it has used only half the limit allowed by the new regulation.

The actual sales to customers who come through the gold savings scheme are at least 50 per cent higher than the amount of gold saved by them. So, the increase in the limit for raising deposits may support revenue growth.

GST is also likely to have a positive impact on the sector. By helping jewellers claim input tax credit, it will help them save on tax. But if the GST rate is fixed at around 4-6 per cent (for gold jewellery), then organised industry may lose out as some portion of the demand will shift to the grey market.

Titan’s jewellery business accounts for over 70 per cent of its overall revenue with the balance largely from watches and eyewear.

In the recent June quarter, the jewellery segment recorded a revenue increase of 3.2 per cent over the same period last year. Revenue growth was stunted because of higher base and lower retail demand. However, the performance was better relative to the industry — India’s gold imports dropped by 50 per cent in the June quarter. Titan also continued to expand its reach through the addition of 11 stores (the total count hit 1,293 store as of end-June). In the coming quarters, launches across categories, including watches, have been planned. The watches segment too didn’t do well in the June quarter.

But it is expected to improve once consumer sentiment revives. The newly launched smart and sports watches should help sales growth.

Margins to improve

The operating profit margin for the June quarter was 10.5 per cent, up from 8.2 per cent last year. But the results are not comparable due to a one-off inventory adjustment last year. The current margins seem reasonable, given that the company has also reduced making charges on some category of jewellery to become more competitive.

Studded jewellery, which made about 27 per cent of revenue in 2015-16 is expected to contribute a higher chunk to revenues in 2016-17, indicates the management.

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