INDIA DAILY February 11, 2021 India 10-Feb 1-day 1-mo 3-mo Sensex 51,309 (0.0) 5.2 18.6 Nifty 15,107 (0.0) 5.3 19.6 Contents Global/Regional indices Dow Jones 31,376 (0.0) 0.9 6.6 Daily Alerts Nasdaq Composite 14,008 0.1 6.1 21.2 Results FTSE 6,541 0.1 (4.8) 3.9 Nikkei 29,563 0.2 5.1 18.7 Titan Company: Growth and profitability trending well Hang Seng 30,039 1.9 7.7 14.2 Tata Steel: Deleveraging swiftly with strong spreads KOSPI 3,101 0.5 (1.6) 26.4 Value traded – India Eicher Motors: Unexciting quarter Cash (NSE+BSE) 868 850 350 16,93 Hindalco Industries: Strong FCF strengthening balance sheet Derivatives (NSE) 34,138 17,730 4 GAIL (India): Recovery across segments Deri. open interest 5,908 4,928 4,285 Indraprastha Gas: Robust rebound Forex/money market Page Industries: Margins surprise Change, basis points Mahanagar Gas: Robust margins, likely to sustain 10-Feb 1-day 1-mo 3-mo Rs/US$ 72.8 (4) (54) (133) Aster DM Healthcare: GCC disappoints 10yr govt bond, % 6.5 3 39 32 Results, Change in Reco Net investment (US$ mn) 9-Feb MTD CYTD Endurance Technologies: In-line quarter; valuations expensive FIIs 454 414 23,258 MFs (153) 1,380 (7,029) Top movers Change, % Best performers 10-Feb 1-day 1-mo 3-mo TTMT/A in Equity 134 0.4 64.0 132.8 TTMT in Equity 329 1.2 66.0 125.3 VEDL in Equity 186 2.4 2.2 86.6 DLFU in Equity 311 1.4 25.4 72.5 SBIN in Equity 392 (0.6) 37.2 69.3 Worst performers RIL in Equity 1,974 0.9 2.1 (5.3) BRIT in Equity 3,425 (1.1) (4.2) (2.4) INDIGO in Equity 1,624 (2.3) (6.3) (0.2) BIOS in Equity 408 0.8 (12.3) 0.5 DABUR in Equity 525 (0.1) (2.9) 1.9 [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD Titan Company (TTAN) https://ultraviewer.et/en/own Retailing FEBRUARY 11, 2021 load.html RESULT Sector view: Attractive Growth and profitability trending well. Titan’s 3Q print was decent- (1) Jewelry CMP (`): 1,563 sales were up 16% yoy and EBIT margin recovered to 12% (still down 100 bps on yoy Fair Value (`): 1,625 basis largely due to product mix), (2) watches and eyewear segments (88%/93% sales BSE-30: 51,309 recovery) reported impressive margin expansion. Overall, Jewelry sales growth, mix and margin recovery are on track and there is potential for acceleration in share gains as Titan emerges stronger relative to the competition in the post-Covid world. We maintain estimates and DCF-based FV of Rs1,625. ADD. Titan Company Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,563/1,625/ADD EPS (Rs) 10.1 23.3 29.2 52-week range (Rs) (high-low) 1,621-720 EPS growth (%) (40.2) 132.1 25.3 Mcap (bn) (Rs/US$) 1,388/19.1 P/E (X) 155.5 67.0 53.5 ADTV-3M (mn) (Rs/US$) 3,845/53 P/B (X) 19.0 15.7 12.9 Shareholding pattern (%) EV/EBITDA (X) 84.4 42.8 34.6 Promoters 52.9 RoE (%) 12.8 25.7 26.5 FPIs/MFs/BFIs 18.0/4.6/5.7 Div. yield (%) 0.2 0.4 0.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 205 273 318 Absolute 0.9 19.7 24.3 EBITDA (Rs bn) 16 32 40 Rel. to BSE-30 (4.0) 1.0 (0.7) Net profits (Rs bn) 9 21 26 3QFY21 – Decent topline/profitability print; strong margin delivery in watches/eyewear Titan’s 3QFY21 topline performance was per quarter-end sales update – (1) jewelry revenue grew 16% yoy (excluding bullion sale of Rs3.4 bn), (2) watches declined 12% yoy, and (3) eyewear declined 7% yoy. Jewelry EBIT margin stood at 12.0% (underlying, adjusted for bullion sales), down 100 bps yoy. Watches and eyewear segment EBIT margin stood at 10.3% and 18.1%, respectively. EBITDA stood at Rs8.6 bn, grew 17% yoy. A&P spends were down 39% yoy and employee cost was down 21% yoy. Other income grew 88% yoy, benefiting from Rs60 mn of rental negotiations. PBT/PAT both grew 18% yoy, in line with our estimates. TTAN has taken Rs1.37 bn provision in Favre Leuba subsidiary. Ineffective cash-flow hedge resulted in Rs510 mn loss in 3Q (included in other expenses; negligible EBIT level impact as the loss is balanced by gains on low-cost gold through P&L). We expect jewelry margins to recovery as mix normalizes Titan management indicated continued improvement in jewelry segment— retail sales were up 28% yoy in Jan 2021 and studded share improved to 39% (versus 43% in Jan 2020). We note that jewelry EBIT margin at 12% was down about 100 bps yoy led by about 200-250 decline in gross margin largely pertaining to higher gold coin sales and lower studded share. The management indicated that it has broadly managed to retain making charges as % of sales over the past 12-15 months even as gold prices have surged 35-40% (essentially implying that Jaykumar Doshi similar inflation in making margin/grammage largely absorbed by customers). Titan is not witnessing any competitive pressure on making charges. As a part of the ‘war on waste’ Sushruta Mishra program, Titan has aggressively worked on (1) improving vendor partner efficiencies to lower production cost, (2) savings in diamond procurement, and (3) product re-engineering to reduce weight of product. Given this, we believe that Titan’s jewelry margin would fully recover as the Aniket Sethi mix normalizes. Titan management also highlighted continued efforts to improve profitability in watches/eyewear. Per Titan about 50% of cost reduction is sustainable. We tweak estimates and maintain DCF-based FV of Rs1,625 We tweak FY2021-23E estimates and maintain DCF-based FV of Rs1,625. We model 15.6% [email protected] revenue CAGR in jewelry segment and 20 bps decline in EBIT margin over FY2020-22E Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Titan Company Retailing Conference call takeaways Jewelry segment revenue grew 16% yoy (adjusted for bullion sale of Rs3.4 bn; reported revenue grew 22% yoy). Retail sales grew 13% yoy largely driven by higher ticket size (store footfalls declined 3% yoy). Management highlighted continued growth momentum in Jan-2021 month with 28% yoy retail sales growth. Revenue growth was aided by significant recovery in studded segment, strong wedding jewelry sales and higher coin/plain gold sales (investment demand). Company highlighted pick-up in footfalls (especially in metros), along with improved demand in sub-Rs0.1 mn ticket size segment. Wedding jewelry grew 10% yoy in 3Q on the back of higher share of wedding-related spend shifting towards jewelry and some pent-up wedding demand from 1H. The company expects wedding jewelry growth momentum to sustain in the coming months. Studded jewelry registered 9% yoy in 3Q. With start of activations, Studded growth has accelerated to 16% yoy in Jan-2021 month (39% studded share). GHS enrolments were impacted by lesser store footfalls (-3% yoy in 3Q), even as sequential improvement continues with 13% yoy growth in store footfalls in Jan-2021 month. TTAN noted good traction on online/remote-selling efforts with 7.5% sales contribution in 3Q (2-3% online contribution). Jewelry segment margin performance. EBIT margin stood at 12.0% (adjusted for bullion sales) – down 100 bps yoy. EBIT margin was impacted by higher coin sales (lower margin), and lower studded share (26% in Dec-2020 compared to 29% in Dec-2019 quarter), partially offset by cost reduction efforts. TTAN noted steady competitive intensity with stable making charge (as % of sale value). TTAN also booked Rs510 mn of loss due to ineffective hedge during the quarter, on account of higher than estimated sales. Losses due to ineffective hedges get balanced out in inventory gains, resulting in negligible net impact on EBIT margins. Management highlighted progress on cost reduction efforts with – (1) vendor partner efficiencies to lower production cost, (2) savings in diamond procurement, and (3) product re-engineering to reduce weight. Watches segment revenue declined 12% yoy aided by strong traction in e-commerce channel (+30% yoy) and gifting even as continued weakness in trade channels and large- format stores dragged on overall performance (Analog watches declined 10% yoy). TTAN noted that these channels continue to see sequential m/m improvement in footfalls and ticket sizes. Franchise stores in small-towns and high-streets performed relatively better compared to Mall stores. Segment EBIT margin stood at 10.3% (+200 bps yoy) aided by cost control efforts despite negative operating leverage. TTAN has launched TRAQ range of high-performance sports watch, which has received encouraging initial consumer reviews. Eyewear segment revenue declined 7% yoy. Segment EBIT margin stood at 18.1% registering sharp improvement aided by better product mix, lower discounts, reduction in material consumption and cost control efforts (higher in-house manufacturing, closure of non-profitable stores). Management expects sustained profitability improvement in eyewear segment with double-digit EBIT margin targeted in FY2023E.