Q2FY13 profit beat as margins surprise, revenue slight miss: Overall revenue at Rs 22.8bn grew 9% and was 5% lower than consensus expectations, PAT (profit after tax) increased 21% to Rs 1.8 bn and was 4% ahead of consensus expectations. Watches’ revenue and volumes grew 13% and 4%. Jewellery registered revenue growth 6%, but an impressive PBIT (profit before interest and taxes) growth 35% led by 274bp expansion in Ebit (earnings before interest and taxes) margin to 12.5% as higher-margin studded jewellery share was 32% (up from 28%) and decline in low margin coins.
But revenue trends are encouraging: Overall revenue growth at 9% was below estimates as jewellery revenues grew 6%. But a closer look reveals much more encouraging picture: (i) Retail sales growth in jewellery came in at 17%, more than reported 6% as dealers delayed purchases, a trend that is likely to reverse in Q3. Tanishq revenue growth was at 19%. (ii). Gammage (volume) growth was—11% as expected, but this was due to 30% decline in low margin coins segment, and plain gold jewellery volumes fell just 1- 2%, which in our view was much better than expected.
(iii) Early trends of festive demand have been quite encouraging and the management appears upbeat about a pick-up in the jewellery demand in Q3. (iv) Titan added about 34K retailer areas in Q2 and bulk of the expansion was in self-owned stores. Aggressive retail expansion is progressing well in Q3 and the target of adding 200K jewellery retail areas this year remains on track. Despite the overall jewellery market’s stubborn demand weakness, this quality of results both at revenue mix and margins highlights Titan’s competitive advantage and pull. This increases our conviction in Titan as the long-term structural winner in the growing branded jewellery market.
Segment performance Jewellery
Segment sales increased by 6% to R17.2 bn as high gold prices continue to support top line growth momentum despite volume decline. Retail sales growth in jewellery came in at 17%, more than reported 6% as dealers delayed purchases, a trend that is likely to reverse in Q3. Tanishq revenue growth was impressive at 19%.
Studded jewellery share increased to 32% from 28% last year and helped in 274bp margin expansion y-o-y. We expect Titan will continue to focus on product mix changes in favour of studded jewellery.
Grammage(volume) growth was -11% as expected, and plain gold jewellery volumes fell by 1-2%, which was much