>TITAN INDUSTRIES (EDELWEISS)

■ Disappointing performance; net profit down 11.6% Y-o-Y: Titan Industries’ (TIL) Q2FY10 revenues grew only 5.3% Y-o-Y, to INR 11.5 bn, below our expectation of INR 12.5 bn. In spite of festive season, revenues failed to show buoyancy, signaling a substantial decrease. In Q1FY10, the company changed its accounting policy (to FIFO instead of weighted average method) for valuing gold inventory.

■ Skyrocketing gold prices hit jewellery business yet again: As TIL’s jewellery business battled spiraling gold prices, its growth disappointed with a mere 9.4% Y-o-Y growth. Net revenues stood at INR 8.2 bn versus INR 7.5 bn in Q2FY09, driven by ~15% increase in gold prices, signaling a significant decline in volumes (~6%). This lead to 200bps erosion in EBIT margins that stood at 7% against 9% in Q2FY09.

Macro headwinds temper growth

■ Watches business failed to enthuse: Watches and clocks business also exhibited dismal performance with revenue decline of 2.6% Y-o-Y. Sales from the business stood at INR 2.9 bn against INR 3.0 bn in Q2FY09. EBIT margins were down 20bps Y-o-Y, at 19.7%. TIL expects the December quarter to witness a strong comeback for this business, but we stay cautious and would watch the space closely.

■ EBITDA margins down 218bps Y-o-Y: EBITDA margins were down 218bps Y-o-Y due to 245bps decline in gross margins. Employee costs were up 57bps, but other expenses were down 84bps; hence, the net impact on EBITDA was to the tune of 218bps. Most retailers have seen a Y-o- Y decrease in staff expenses, except for TIL.

■ Outlook and valuations: Cautious; maintain ‘REDUCE’: We expect the watch and eye wear divisions to see some uptick due to higher discretionary spending and improving consumer sentiment. However, lower volumes in the jewellery division, due to spiraling gold prices, will continue to be drag on the business. At CMP of INR 1,361, the stock looks expensive at P/E of 29.6x FY10E and 24.6x FY11E. We maintain our ‘REDUCE’ recommendation on the stock, and rate it ‘Sector Underperformer’ on relative return basis (refer rating page for details).

To see the full report: TITAN INDUSTRIES