Favre Leuba scaling down is good for Titan but focus remains on jewellery

Titan Co. Ltd’s shares are flirting with their 52-week highs on the National Stock Exchange. On Tuesday, the stock was marginally up, following the firm’s announcement that it plans to scale down operations substantially of its wholly owned subsidiary, Favre Leuba AG, a watch brand. With this move, Titan intends to cease further investments in Favre Leuba as early as possible.

The development is positive, but is unlikely to have a meaningful impact on Titan, said analysts.

Emkay Global Financial Services Ltd’s analysts said: “Despite significant investments made by Titan, Favre Leuba has failed to make a dent and has been reporting losses of about ₹55 crore per annum and revenues of ₹6.5-8.5 crore over FY17-20.” For perspective: in financial year 2020, Titan’s consolidated operating revenue and net profit stood at ₹21,051 crore and ₹1,492 crore, respectively.

As the jewellery company inches towards recovery in a post-pandemic world, these moves are welcome. In October, Titan decided to end its five-year old joint venture partnership with Montblanc in India. “The exit from Montblanc—another loss-making venture— and the scale-down of Favre Leuba are steps in the right direction and should improve overall profitability and enable Titan to invest in its core growth businesses,” said analysts from Emkay in a report on 7 December.

So far, Titan has invested ₹275 crore in Favre Leuba. In FY21, the company will have to make provisions for additional impairment relating to its investments in Favre Leuba. In the earlier years, an impairment of ₹145 crore was made.

Meanwhile, in FY20, Titan derived a little more than 80% of its revenues from its jewellery business, which is a key driver of its fortunes.

In November, the company said the jewellery business witnessed mid-teens year-on-year growth (around 15%) for the 30-day festive season, starting from Dussehra till Diwali. This performance is better than the Street’s expectations. Even so, the Titan stock’s high valuations suggest that investors are factoring in a good share of the optimism. Currently, the shares trade at around 67 times estimated earnings for financial year 2022, according to Bloomberg data.

While Titan has put up a good show during the festive season, it remains to be seen whether the momentum sustains. Even as bunching up of weddings and pent-up demand is expected to help, there are challenges ahead.

Unfavourable movement in gold prices could hurt demand. Further, the hit on income levels owing to the pandemic may curtail consumer spending on discretionary items. As such, moving ahead, how demand shapes up in Titan’s jewellery business would be a key factor to watch out for.

Courtesy: Live Mint