Titan loses shine as rising gold price plays spoilsport

A key disappointment in Q4 was the low profit margin in Titan’s mainstay jewelery business, which contributed 89% to standalone revenues in FY24. In Q4, jewelry sales, excluding bullion sales, rose nearly 19% year-on-year to ₹8,998 crore. However, while the average selling price saw single-digit increase, new customer acquisitions made up just about 54% of jewelry customers.

Increasing promotional spending

Titan had to ramp up promotional spending and discounts to attract buyers amid sluggish demand, rising competition, and fluctuating gold prices, which weighed on its margins. Consequently, jewelry Ebit (earnings before interest and taxes) margin declined 110 basis points to 12.1%, marking the fourth consecutive quarter of year-on-year contraction in jewelry Ebit margins, according to Titan’s earnings presentation.

Its management expects operational headwinds to persist for at least two more quarters. “I am not anticipating it (margins) to go up quickly. We will take our time to respond to elevated gold rates. I am hoping that from Q2 onwards we will start seeing some improvements, given that some of these efforts may take time…,” Ajoy Chawla, the chief executive of the jewelery business, said during the post-earnings call.

Gold prices emerged around 8% in Q4. The upward trend persisted in April, with the yellow metal breaching the ₹70,000 per 10gm mark for the first time.

According to Titan’s management, both organized and unorganized players are on an expansion spree. The highly-fragmented unorganized sector accounts for around two-thirds of the Indian jewelery market.

Impact of lab-grown diamonds

Apart from gold, Titan also faces an emerging threat: lab-grown diamonds. The management acknowledged the rapid growth of lab-grown diamonds in the US market, but said that it is still premature to evaluate the impact on its business. Studded jewelery constitutes 33% of Titan’s jewelery vertical.

Despite the headwinds, Tanishq opened 11 new stores in India, and Mia added 16 during the quarter. While Tanishq’s store count stands at 479, including 15 overseas outlets, Mia boasts 178 stores.

For its watches and wearables business, growth was underdue at 8% year-on-year at ₹ 940 crore, primarily due to price cuts aimed at remaining competitive. The eyecare division’s topline was flat at ₹166 crore. The firm’s emerging businesses (fragrances and fashion accessories) saw 26% revenue growth to ₹97 crore, but with an Ebit loss of ₹22 crore.

Investors have been cautious. So far in 2024, Titan’s shares have fallen by about 4%, while the benchmark Nifty 50 index gained 3%. Still, valuations are steep, offering little comfort. Based on FY24 earnings per share, the stock’s price-to-earnings multiple stands at 90x.

“Several factors, including global central bank purchases, inflation concerns, and geopolitical tensions, are likely to keep gold prices on an upward trend this year. This could act as a headwind for Titan, potentially leading to a near-term underperformance in its stock price,” said Santosh Meena, head of research, Swastika Investmart.

Margin pressure for the near future cannot be ruled out due to high gold prices and rising competition. In view of the ongoing margin challenges, especially in H1FY25, Nuvama Institutional Equities analysts cut profit-after-tax estimates by 6% each for both FY25 and FY26. The brokerage has downgraded the stock to ‘Hold’ rating from ‘Buy’ with a revised target price of ₹3,867.

On Friday, Titan’s shares closed at ₹ 3,533.90 a piece on the NSE.