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Titan’s operating margin beats estimates for Q2FY22

What’s Buzzing:Titan’s Q2FY22 results were better than our estimates owing to higher EBITDA margins on the back of stringent cost control measures and improved product mix. The healthy recovery was driven by postponement of avenues like gift purchases, occasion buying and wedding-wear jewellery from Q1 to Q2FY22. The stock price has rallied ~ 63% in the last six months and currently trades at premium valuations of 60x FY24E EPS.

Context:Titan’s jewellery division (excluding gold bullion sale in both the quarters) reported 78% YoY revenue growth with an impressive two-year CAGR of 32% in Q2FY22. It surpassed pre-Covid levels in H1FY22 with growth of 16% vs. FY20 levels. Overall jewellery sales (including gold bullion worth Rs.192 crore) were at Rs. 6571.0 crore (up 65% YoY). Share of studded ratio was 400 bps higher on a YoY basis at 30% but still continues to remains below pre-Covid levels. Watches division also witnessed healthy recovery with revenue growth of 72% YoY to | 689 crore (~96% of Q2FY20 base). Overall revenue grew 65% YoY to Rs.7493 crore. Tight leash on operating overheads (employee and other expenses as a percentage to sales down 231 bps and 286 bps respectively compared to FY20 levels) resulted in the company reporting one of its highest ever EBITDA margin of 12.9% in Q2FY22. Absolute EBITDA was at Rs.968.0 crore. Robust operational performance resulted in company reporting its highest ever quarterly PAT of Rs.641.0 crore (vs. Rs.174.0 crore in Q2FY21, I-direct estimate: Rs. 585.0 crore)

Our perspective:Titan has benefitted from the pent up demand after the second wave of the pandemic due to shift in demand from Q1FY22 to Q2FY22. Consumers who had postponed their purchases of gold jewellery in Q1FY22 exhibited strong buying behaviour in Q2FY22 amid lower gold prices (down 8% QoQ) and enhanced interest in the precious metal owing to the impending wedding and festival season. Also Titan appears to have benefitted from the financial and operational stress witnessed by unorganised players (during the pandemic) who are still grappling with the negative impact on their business. We believe that Titan is well placed to continue to gain market share from unorganised players and recent regulatory changes like compulsory gold hallmarking is likely to accelerate the pace of market share gain for organised players. We build in revenue and earnings CAGR of 23% and 55% respectively, in FY21-24E. Robust business model (30%+ RoCE) and strong earnings visibility will enable Titan to sustain its premium valuations, going forward.