Is Titan's Valuation Glow Beginning to Fade?

When a company's stock drops 6% in a single trading session after reporting 20% growth, investors are clearly looking past the headlines. Titan Company's June quarter update revealed exactly why: despite overall consumer business growth of 20% year-over-year, the core jewellery segment managed just 18% growth—well below Street expectations of 22-23%.

More troubling, excluding bullion sales, jewellery growth was only 17%, significantly below expectations of 27%-28%, a sharp deceleration from the 25% pace that had justified the stock's nose-bleed valuation of 65 times forward earnings.

That’s because buyer growth remained flat for both flagship brands Tanishq and CaratLane, with customers shifting to lightweight and lower carat jewellery. When your customer base stops growing despite adding 19 jewellery stores in a quarter, you have a demand problem.

Gold's Grip
The fundamental challenge comes from affordability collapsing due to soaring gold prices. Premium jewellery sales are largely simple designs, leaving Titan with virtually no scope to raise making charges to offset higher raw material costs. Unlike complex studded pieces where craftsmanship commands premiums, plain gold jewellery offers limited pricing flexibility.

This constraint becomes particularly painful when gold leasing rates have increased significantly, limiting the company's ability to hold prices steady. Gold leasing allows jewellers to borrow gold from banks rather than purchasing it outright, providing working capital flexibility. But when leasing costs spike, they face a squeeze with higher financing costs for inventory while being unable to pass these increases to customers already struggling with affordability.

The company faces additional pressure from its commitment to keep opening showrooms despite weakening demand fundamentals. Titan added 19 jewellery stores in June quarter alone, bringing fixed costs and rental commitments that must be serviced regardless of sales performance. With buyer growth flatlining, each new store potentially cannibalises existing outlets rather than expanding the customer base.

Customer behaviour shifted dramatically as demand for gold coins surged whilst buyers gravitated towards lighter, lower-karat pieces. That's the jewellery equivalent of trading down from steaks to hamburger, not quite the premiumisation story Titan built its valuation on.

Valuation Reality
At 69 times forward earnings, Titan trades at a significant premium to competitors, though the valuation gap has narrowed. Senco commands around 23 times earnings while expanding into Titan's North Indian strongholds. Kalyan's asset-light franchise model delivers superior growth with same-store sales growth of approximately 18% and overall revenue growth of 31%. Brokerage firm Morgan Stanley called Titan’s update a "big miss" on jewellery growth.

While Titan plays wait-and-see with lab-grown diamonds, retail prices for synthetic stones have collapsed 65% over the past year from nearly ₹60,000 per carat to ₹20,000. New entrants like Indriya and fashion retailer Trent are capitalising on this trend, offering aggressive pricing without Titan's overhead structure or margin expectations.

Other segments performed well. Watches grew 23%, fragrances surged 56%, and international operations jumped 49%. Sub-brands within Titan's portfolio could outperform flagship operations by targeting different market segments and price points. However, jewellery contributes roughly 85% of revenue, making peripheral strength inadequate compensation.

The long-term India story remains compelling. Rising incomes and jewellery premiumisation are secular trends that should benefit organised players. But the stock has priced in perfection precisely when the business model faces its biggest stress test.

Unless gold prices ease significantly, affordability will remain constrained and pricing power limited. The company's dependence on simple design jewellery leaves it particularly vulnerable to sustained precious metal inflation. Sub-brands targeting different price segments may offer some relief, but the core Tanishq franchise faces structural headwinds that expansion can't overcome.

Senco offers similar India jewellery exposure, whilst Kalyan's franchise model provides operating leverage without the capital intensity weighing on Titan's returns. Both competitors have shown stronger recent growth momentum.

The king of Indian jewellery isn't losing its crown overnight. But when gold prices make products unaffordable and customers start trading down, even the most polished brand begins to lose its lustre. Until gold retreats from current levels, Titan's premium valuation will remain under pressure.