Markets
FWhen the going got tough, Titan got going, but it came at a cost
Summary
- The company made efforts to drive growth through aggressive exchange offers, brand-building initiatives, and a planned gold rate mark-up rationalization program to gain market share
There is almost always a price to pay. For Titan Co. Ltd, higher gold rates made business conditions challenging in the June quarter (Q1FY24). Amid this and a wedding season in rural market, the jewellery retailer dialed up its gold exchange program to offset the uncertainty in consumer demand. The company made efforts to drive growth through aggressive exchange offers, brand-building initiatives, and a planned gold rate mark-up rationalization program to gain market share. Gold exchange accounted for 50% of the sales last quarter compared to around 40% usually.
The result: While revenue growth was good last quarter, Titan’s profit margins took a hit coming in as a negative surprise to investors and driving cuts in analysts’ earnings estimates. On a standalone basis, Titan’s mainstay jewellery revenue growth stood at 19% year-on-year. But jewellery Ebit margin (excluding bullion sales) fell to 11% last quarter, lower than 13.5% in Q1FY23 which had a one-time diamond price inventory gain. Ebit is short for earnings before interest and tax.
Jewellery accounts for the lion’s share of Titan’s revenue and profits. As such, jewellery Ebit margin for the last two financial years have been over 13%, shows Titan’s investor presentation. The company told analysts in an earnings call that the offers were not necessarily led by high competition but also due to volatile gold prices. Analysts from Kotak Institutional Equities point out, “Clearly, competitive intensity is a tad higher than expected, and we like that Titan is prioritizing growth and share gains over short-term profitability." The broking firm added, “Titan’s initiatives have also revived topline growth that had moderated in March 2023, owing to a sharp rise in gold prices and volatility thereafter."
It also helps that Titan has maintained its full-year guidance for jewellery business margin at 12-13%. However, whether the company can clock margin at the upper end of the band remains to be seen.
Overall, Q1 Ebitda (earnings before interest, tax, depreciation, and amortization) margin contracted by 309 basis points (bps) year-on-year to almost 10% last quarter. One basis point is one-hundredth of a percentage point. This comes at a time when operating revenue growth stood at 19% to Rs10103 crore.
Not surprisingly, lower-than-expected margin performance in Q1 meant Titan's shares were trading lower by about 3% in Thursday's early trade. Still, investors are sitting on handsome returns of around 20% in the past one year. Valuations are pricey. The stock trades at 55 times FY25 estimated earnings, show Bloomberg data.
Outlook is not particularly rosy given that gold prices are elevated. “Normalizing consumer demand plus rising competition plus preference for market share gains amid rising competitive intensity means margins could remain under pressure in the medium term," said analysts from HDFC Securities in a report. “Hence, we’ve realigned our FY25/26 earnings per share estimates (-3% each) to account for higher customer acquisition costs," they added.
