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Titan Co’s Q1 glitters and so do the stock’s valuations, limiting upsides

05 Aug , 2021   By : Kanchan Joshi


Titan Co’s Q1 glitters and so do the stock’s valuations, limiting upsides

Titan Co. Ltd’s June quarter results (Q1FY22) are impressive given the tough business conditions the jewellery retailer faced because of the second covid wave’s adverse impact. What’s more, the firm maintains with the gradual lifting of restrictions on stores, the sales bounced back strongly towards Q1 quarter-end and the momentum has continued so far into the September quarter (Q2FY22).


Be that as it may, the pertinent issue for Titan’s investors is that the valuations of its shares are pricey. This would mean room for meaningful expansion hereon is limited. Currently, the stock trades at 63 times the estimated earnings for financial year 2023, based on Bloomberg data.


“We find the stock fully valued at current valuations and retain Hold (rating)," said analysts from Jefferies India Pvt. Ltd in a report on 4 August. The broker’s target price for the Titan stock is Rs1740 per share, lower than the closing price of around Rs1800 apiece on Wednesday on the National Stock Exchange. The broker further added, “We raise our FY22-24 earnings estimates by 3-10% to factor in stronger 1Q and management commentary on store operations."


Coming to the June quarter, Titan’s sales took a small beating until the third week of April as stores were temporarily closed in some key states. “Thereafter, most stores were shut within a short span of time and could re-open gradually in June only, with several restrictions on operating hours and days of the week," said the company in its presentation.


The upshot: on a standalone basis, Titan reported a profit at the Ebitda level of Rs144 crore versus a loss of Rs246 crore in Q1FY21 when the impact of the pandemic was far more severe. Ebitda is earnings before interest, tax, depreciation and amortization. Even so, last quarter’s Ebitda is nearly 75% lower than Q1FY20.


The company’s operating revenues have more than doubled on a year-on-year basis to Rs2780 crore. For perspective: revenues in the March and December quarter stood at Rs6900 crore.


Excluding bullion sales, Titan’s mainstay, jewellery revenues rose by 109% year-on-year, helped by zero sales in the month of April last year. Commenting on the Jewellery business profitability, JM Financial Institutional Securities Ltd said, “We found it quite surprising for a business that has been clocking around 12% steady-state margin to still be able to earn 8.4% when topline is around 60?low more ‘normal’ levels." The broker further added, “Whilst this helped the June quarter, what it also likely implies is that the sheer lack of operating leverage could also prevent margin from moving significantly upwards during the revenue build-back phase."


The watch business, which contributes most of Titan’s remaining revenues, saw its earnings before interest and tax (Ebit) losses reduce vis-à-vis the same period last year.


To be sure, analysts believe in the growth opportunity for Titan in the future. Even so, as mentioned earlier, valuations are not cheap and seem to be factoring a good share of the optimism.

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