Muted show at Titan no cause for worry, rebound likely in H2
No large-cap company in the FMCG/ retail space is offering growth visibility as high as Titan.
While the performance has remained subdued in the recent months, historically, the second half of the financial year has remained strong. For instance in the previous fiscal, after a tepid second quarter with sales growth at 8 per cent, the growth rebounded in the second half with sales up 27 per cent year-on-year.
According to the company’s filings, jewellery sales growth in the second quarter of FY20 was 7 per cent, lower than expectations of 12-13 per cent. The jewellery segment contributes over 85 per cent of the company’s profits and any subdued performance on this front is detrimental for the stock price movement. In addition to slower growth, hedging expenses amid volatility in gold prices, too, impacted revenue which declined 2 per cent year-on-year. This resulted in the stock losing 5 per cent on Wednesday morning.
However, there are chances that these costs could be reversed. Analysts ET spoke to said the probability of hedging costs getting reversed was higher in the coming quarters, leading to higher revenue growth. This could not be verified from the management owing to the silent period before announcement of the quarterly results.
The muted demand of June and July is a distant memory as sales growth for August and September bounced back to 15 per cent, according to data shared by the company. It is expected to be higher in the second half of FY20 due to festive season demand and higher number of weddings taking place during this period.
In fact, any correction in the stock price should be viewed as an opportunity to enter as demand for the stock is expected to remain high. No large-cap company including Nestle, HUL, Britannia in the FMCG/ retail space is offering growth visibility as high as Titan.
Based on management guidance, analysts expect a 20 per cent CAGR for the next two years and higher operating profit margins resulting from same-store-sales growth. A profit growth of over 20 per cent is highest in the large-cap consumer space. Despite this, Titan’s 12-month forward P/E multiple is same as average of the top five consumer players.
“The valuation is fully justified. In fact, increasing concerns over revenue and earnings for consumer peers will ensure higher multiples for Titan,” said Krishnan Sambamoorthy, consumer analyst with Motilal Oswal.