Titan Company Limited (500114) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Titan Company Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C. K. Venkataraman, Managing Director, Titan Company Limited. Thank you, and over to you, sir.

Thank you very much. Hello, everyone, on the call. Happy Dussehra and Diwali season to all of you. The quarter that went by was quite satisfactory. At the first level, we were focused significantly on the safety of all our stakeholders, starting from the workers in our vendor premises, karigars, to our employees, all the way to our customers, and did not relent on the intensity of that through this period, continuing to be the gold standard, particularly in our stores, for customers in all our formats to spread the word about how safe it is to shop in any Titan Company store, and therefore, in a way, persuade their friends and others to come and shop with us. The second was a much higher level of innovation exhibited by all teams across the company, whether it was the manner of delivering the product through try at home, video calling, live chats, or pre-dispatch inspection being done remotely or designing for above the keyboard new life that we have, our management of cash in a smart way using inventories that we already had and so on. The third was a very high level of teamwork and collaboration in these challenging times when most people are sitting by themselves in their homes, unable to meet their colleagues. Despite offices having opened up, overall restrictions on social distancing and the density at the workplace meant that a lot of people continue to work from home, thereby constraining the normal way of working. But we saw a greater teamwork and collaboration despite these challenging circumstances. The fourth is a fabulous effort by all leaders, all managers on operational excellence, on containing costs, managing assets and coming out on top, exceeding budgets. Fifth is an explosion in terms of what we call figital, which is the combination of the knowledge that we have about our customers digitally at the center and the hundreds of thousands of deep relationships that we have through our sales staff in the front with our customers. So combining this knowledge and that relationship to build the business even when people were perhaps not really needing the kind of discretionary products that we make and sell. And last and perhaps most importantly, a resolve across the company from vendors to franchisee partners, to employees, to make sure that we come out of this crisis at a brisk clip and at a rate which exceeds what we have set -- targets that we have set for ourselves. So all these were either strategies or ways of behavior, ratcheting up some of the things that we were already doing. The combination of all this made sure that our quarter 2 was very, very satisfying to all of us. And I wouldn't go into the actual performance. That presentation has been shared with us. All my senior colleagues are here in the room, and they will speak to you as you raise questions about the individual business in the next part of the session. We're all very, very satisfied in the manner in which all parts of Titan Company have risen to this challenge and, in a way, made sure that this crisis has not been a waste in a sense, even though it has been a tragedy of huge proportions, but considering that there is only so much that any organization can actually do to deal with the crisis. We have dealt with it in the best manner, in the most humane and fair manner. And we believe that we have sharpened all our faculties, all our weapons to be much better prepared for the improvement in the overall sentiment and demand that will surely come soon. Thank you very much. I am there for questions as well. And I hand over to Subbu.

I just wanted just to clarify a few things before we get onto the call. This is more to do with some of the accounting aspects of the results. You might have noticed that there were a few exceptional things, which have been called out separately, particularly on the ineffective hedging portion. So we did put out a presentation sometime back in August to all of you on what -- how we go about hedging and what impact it has on our bottom line and for that matter even on the disclosure purposes sometime back. The situation is no different in quarter 2. We've had significant ineffective hedges. But let me explain to you the impact of these, so that some of these terms may look very disturbing in a way, but frankly, they don't have much of an impact on the bottom line. So going back to the hedging principles. Hedging -- we do cash flow hedging, and we designate contracts based on expected sale periods. And if there is a mismatch between the sale period and the contracts taken, we end up with what is known as an ineffective hedge. Ineffective hedge by itself is not a problem. The impact of the ineffective hedge -- the value of the ineffective hedge depends not just on the mismatch in the quantity, but importantly also in the gold rate increase or decrease as the case may be. In our case, we've had significant variations over the last 2 quarters. In the first quarter, of course, we had the pandemic, which impacted sales very, very substantially. So our sales was far lower than what was originally planned. And therefore, you had an ineffective hedge because quantities were low. But it also got compounded by the fact that gold rates also went up substantially during the period. Therefore, the value of the ineffective hedge, which is basically a product of the 2, was substantially high. We've had a similar situation in this quarter, except that the situation was slightly different. In this quarter, actually, we had expected to sell less than what we actually ended up selling. So the quantity that we sold was higher. That was one. Secondly, if you remember, we also got a moratorium from the Reserve Bank of India to delay our payments on gold on loan. That also contributed to the ineffective hedge in a way because we had assumed that we would be utilizing the gold on loan in this quarter and, therefore, hedges were taken for a quarter later. But because there was a second deferment of this gold on loan, we ended up advancing the usage of the hedges, which were designated for quarter 3, which is impact -- which has affected -- which has resulted in the ineffective hedge that you've seen. INR 484 crores is what we are saying is the entire amount. Now the point I want to clarify here is that if the hedges have been effective, essentially they would have reduced revenue. And the impact on bottom line would not have been in any case -- in this case, I don't think there was any impact on our bottom line. So the bottom line that you are seeing, the INR 238 crores of profit that we are showing, is a true fair view of what the performance for the quarter also was. It is just that these have to be called out separately because of accounting standards and, therefore, ineffective hedge is shown separately. The revenues, to that extent, possibly higher. But as I said, there is no impact on the bottom line. We had said something similar in the previous quarter as well. So now going forward, we expect this variation come down dramatically. The reason being most of the contracts that we had taken before March, which is before the pandemic hit us, are expiring by October/November latest. And we are now also changing our hedging policy in a way -- not policy actually, more of a practice in a way, which should hopefully reduce this difference going forward. Therefore, all I want to say is that the numbers that you're seeing in the profits there are a true and fair representation of the actual performance during the quarter. So this is something I wanted to start with. Now we are open to questions.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

My first question is on the mix of Jewelry business. So Studded has seen a good recovery quarter-on-quarter from 18% to 26%, but it is still much lower than last year. So will it be fair to say that now worst is behind on Studded also? Because last quarter, you had said the big cities are not recovering. So now big cities also lockdown is not there, and plus overall sentiment we are seeing across consumption is much better than initial expectations. So will the gap keep narrowing versus the previous year? And the margins in Studded -- when I look at just the Studded segment, how is the margins versus last year? Because if something is not selling well, the normal strategy will be to give some more discount, some more promotion. So if you could comment just on the margins in Studded. How are they versus last year?

Abneesh, Ajoy here. You're right. The buyer recovery in Studded is improving month-on-month. And we have seen it improve right through the quarter, July, August, September. But it is still lower than last year, and we are unsure whether it will completely narrow down. It is certainly narrowing down even in quarter 3. But as you know, this quarter 3, we are still not able to make a comparable figure because the season was timed differently. But yes, it is -- we are seeing that. I'm hopeful that by quarter 3, it should narrow down considerably, and then quarter 4 onwards we start looking up closer to what it was. In terms of margins, we are seeing no major impact on margin actually. The discounting is, in fact, for the quarter, slightly lower than what we saw last year and it is as per budget. There is some squeeze on gold -- on the gross contribution because the gold component in the Studded material cost is a little more because of the value of gold and the gold prices having gone up significantly. But it is not very material. It's a small marginal -- very marginal drop, which can be easily made up. So not really. We are not seeing any margin pressure on Studded.

So just 1 follow-up there. So gold coins also as a mix if you see, 14% is too high. I understand gold prices play a big role here. So could we need to wait for 2 more quarters for gold coins and overall mix to revert back to its mean? So gold coins used to be more like mid-single in the last many years. So if any comment you can give on that?

Yes. Gold coin -- see, I think sentiment-wise gold coins continue to be popular. And in this quarter also, we are expecting it to remain higher than last year and in double digits. Perhaps, once the uncertainty around the overall economic scenario comes down and/or gold prices start correcting downwards, only then we can say. As of now, it is going more on sentiment on the street. People think gold prices are going to go up, and there is a safety in buying bullion.

Right. My second and last question is on the INR 34 crore provision. So if you could elaborate why your own subsidiary -- how that will eliminate this kind of a risk in the future? And second, will it not recur in the coming quarters? So is it just onetime?

This is a onetime thing. This is the entire exposure that we have to this broking house. We have provided prudently and maybe rightly so because it's been some time we've been following up. We do hope that we do -- we get this money back, but we're not sure when exactly this can happen. And that's the reason we made this provision. Once we set up our own -- we have set up our own commodity company -- broking company. And once it's operational, we could possibly move all our business into that. Therefore, this risk of margin money being stuck with somebody else will not happen.

Will not happen, no?

Yes, will not.

Will not.

Yes.

The next question is from the line of Latika Chopra from JPMorgan.

My first question was on the festive sentiment. You mentioned in the press release it seems good. And I understand the timing of the festivals is different this year versus last year. But any color on the Dussehra, 10 days of Navratra? How sales were versus last year same period? And also, how is this -- how -- what is the feedback you are getting from franchisees in terms of them taking up inventories ahead of Diwali?

So Ajoy here. I'll respond from the Jewelry side since it has a material impact. The way we looked at this quarter and especially the festive period of 30 days, we've tried to spread it out because of social distancing and safety considerations and the fact that not 100% of the staff will be working in the store all the time. We've tried to spread out in such a way that we reduce the peaks of Dhanteras and Dussehra and some of the weekends. And we've also put our promotions and schemes accordingly, so that there is minimal impact on the stores. As a consequence, even looking at the 10 days of Navratri and Dussehra this year versus last year may be inaccurate. We are happy it is positive. We are seeing a marginal growth. But unable to comment whether you can kind of project it for the entire festive season of about 31 days, which is Navratri to Dhanteras and Diwali, yes, because we are consciously trying to advance sales from Dhanteras and other peak days across the 30-day period. But so far, positive, happy franchisees and on the ground feel is good. And so far, we are able to manage it with a good amount of social distancing, which is the biggest concern in our mind to ensure that we are able to navigate the season well.

The second question was on your store addition plans across Jewelry, Watches and Eyewear. How are you thinking about these considering the recent trends and the expectations on consumer sentiment towards discretionary purchases? And also, if you could comment on the franchisee front. Is L2 the most preferred manner for Jewelry in particular?

Yes. So on Jewelry, we've opened 14 stores so far. A large number of them were lower from the previous year. And we -- after the pause that we had in the first few months of this fiscal, we are now recommencing our growth in terms of expansion. We think we may end the year somewhere between 30 to 34 additions for the year. We are at 14. We have stuff in the pipeline. So we are not holding back. In fact, we are seeing a benefit in going into catchments and towns where presence is not there because people are more comfortable shopping locally. And we don't have too much dependence on malls for Jewelry. So to that extent, that's not bothering. Yes, L2 is the preferred mode. L3 is in very small towns where we think there may be potential law and order issues, are very remote towns. But otherwise, by and large, L2 is our preference.

Suparna from Watches. We don't have -- we've never had any substantial expansion plan for our retail stores and that continues even now.

This is Saumen from Eyewear. We have opened about 14 stores exactly like -- as of now. We also had to shutdown 38 stores. But going forward, we don't have any major drive. But my sense is around 25, 30 stores might get added up in the year overall.

The next question is from the line of Aditya Soman from Goldman Sachs.

So firstly, in terms of this hedge accounting, so would it be fair to say that the retail sales for the quarter were 14% lower than on a Y-o-Y basis?

Yes. If we were to adjusted this, you are right. That would have been the case, yes..

Yes. And then if that is the case, sir, is this largely a function of lower footfalls? Because I'm assuming there will be some benefit coming through with higher gold prices as well, right? So would footfall then be down close to 40% to 50% or that would not be right?

So retail sales actually, without considering this hedge related thing, it's around 96% on an MRP basis for Jewelry. I'm not able to answer your question on account of hedging whether it has...

Yes, because it will reduce. Our hedges are based on whole rates, so it would be lower, correct.

Yes. So to just to give you a sense, 96% of value business is about 74% on buyer level, if you want to look at number of customers and bills.

So that 74% went up to 96% because of the price of gold, but may have come down to 90% or 89% because of this marching the price of gold of...

Hedge rate.

Yes, sales and purchases.

Yes.

No, understand. That's very clear. And secondly, we are seeing this disparity in the performance, say, for Watches and Eyewear compared with Jewelry. Now again, part of it is explained by gold prices and maybe partly by malls and exposure to malls. Would these be the 2 main factors? Or are there any other reasons why Watches or Eyewear have done somewhat significantly worse?

Actually, it's not a very easy thing to put your hands around. But some of the additional points to consider is that Eyewear, despite being a product of necessity, is also a product where relatively older people form a high share. It is also a product, which involves proximity in terms of the testing and therefore worries about infection and stuff like that because we have heard these in the conversations. Jewelry, despite being a high ticket size, is a store of value product, does very well, and the sentiments are poor and people are feeling worried. Watches are a discretionary product, very much a part of dressing up. And therefore, you don't really need a new watch when you are most of the time sitting at home and not going out somewhere, anywhere, going to office and stuff like that. So actually, it's a combination of these 3 things. And the share of the brand in that categories and other, both Eyewear and Jewelry operate with single-digit shares. And, therefore, in a secular wave of formalizing that's happening in the industry both tend to benefit, whereas Watches is a Goliath in that market with maybe 40% to 50% customer share, and therefore, the upside on that is low. So it is a condition of multiple things. But if you go back to July and start looking at it month after month, in every category, the recovery rates are improving, even though the absolute levels are sort of trailing in Jewelry.

Fair enough. That's very clear. And just 1 sort of accounting question. So the impact on gross margins this quarter, that's again a function of the hedge accounting, right? I mean where your sales have gone off...

So 2 things here to adjust the hedge accounting. There is also the other operating revenue, INR 390 crores of gold sales. So it will complicate issues a little. Yes. It's not going to be very comparative, unfortunately.

The next question is from the line of Arnab Mitra from Crédit Suisse.

My first question is on the margins. So if in the Jewelry business, we were to add back the INR 34 crore loss and subtract the rent waivers, would that be an accurate representation of the EBIT of the Jewelry business? And if you look at that as a number, it looks like a significant drop Y-o-Y. Is that entirely explained by the mix effect of higher gold coins and lower Studded?

Why would you want to reduce the rent waivers? These are real savings.

No. I'm -- is it a permanent saving, which you maintain? Or would it be a...

They may not be permanent.

Permanent, they may not recur.

No, no. It should recur.

No, no, just to clarify.

Correct. correct.

It will not reverse.

Yes. It will not reverse.

It's not recur.

But you're right. They do not recur.

Sure. Sure. And the gap -- would it be entirely explained by mix in terms of the drop Y-o-Y that -- therefore we see in the margins in the Jewelry business?

Operating leverage. There are 2 aspects to it. One is the mix itself. The client sales being much higher, studded being much lower. Combination of the 2 is going to produce gross margins and the operating leverage. If we had grown that much whole, it's now kind of better EBIT margin.

Okay. Sure, sure. Understood. And my second question was in terms of GHS, so there would be a period from maybe March to June, July where new enrollments would have been very low in GHS. So do you see this as a kind of a headwind for the second half when your natural redemption cycle gets broken for 3, 4, 5 months? Or do you feel that the consumer would anyways kind of come back and it's not a net effect, which -- where you may lose some sales because enrollments were not happening for those 3, 4 months?

So on -- the impact of the first -- lack of enrollments will impact us in quarter 1 next year. So far, the recovery on Golden Harvest is also good. If I look at quarter 2, it's at an 85% recovery of fresh enrollments. We are trying to see through other means if we are able to generate some load for quarter 1 over the next few quarters by -- we have launched a shorter duration scheme on -- for wedding. And we are seeing if we can build that up sufficiently for quarter 1 next year. But you're right, there will be an impact to some extent in quarter 1 next year. Not for the current year.

The next question is from the line of Prasad Deshmukh from Bank of America.

So a couple of questions. Firstly, after the lockdown now, incrementally, so the stores are opening up. How do you see the competitive intensity panning out, especially with the local jewelers sitting on the inventory gains? And interest rates also having come down, which probably would have eased the working capital situation for them.

So from a competitive track that we have seen, quarter 2, while we have seen the recoveries I mentioned to you, our sense is that local jewelers are under greater pressure. And stand-alone jewelers are having much lower recovery rates, ranging from 55% to 70% or thereabouts. And some of the larger chains have also got a better off, but not as ours is what we understand. So overall, there is a share shift. There is not so much impact of -- in fact, in quarter 2, we saw an improvement in the gold prices. But in the month of October, we are seeing some gold rate related, let's say, competitive intensity in select markets. But it's not too much. It's not anything out of the ordinary and not as high as we might have anticipated earlier.

Got it. And the 2 other questions. Firstly is new stores of Tanishq, which have been opened, seems like these are larger stores in size. So is that the correct interpretation? And if so, then, I mean, in such -- in current situation, what is the logic of opening larger stores?

No, we have not really opened larger stores. Some of the stores are in bigger cities and catchments where we were not there. So there may be 3,500 to 4,500 square feet. But otherwise, when we go to smaller towns, it is in the 2,500-odd square feet. So we have not changed the strategy in terms of square footage. And we think we've got the right optimal size. It's a function of cities and catchments.

Got it. And then last question on the balance sheet. There is a decline -- marginal decline, but there is a decline in fixed assets from March to September. So is this like a gross or it's a net number?

Yes, net number.

The next question is from the line of Vivek M from Jefferies India.

Subbu, one, again, a follow-up or a small clarification, just to get it right. Hedging has no impact at EBIT level that I understood. But from a revenue perspective, there is no impact. Is that correct?

No. What I said was that had the hedges been effective, the revenue would have been lower, okay? The costs would have also been lower. That INR 484 crores would have moved from other expenses to reduce revenue. That's what would have happened.

Okay. So when I'm looking at margins, if I'm trying to calculate like-for-like margins, since EBIT number is -- any which way is not accounting for that, I should not change the revenue number as well, right?

Yes. Actually, see, what we could possibly do is reduce INR 484 crores from the revenue, okay, add back that INR 426 crores, which is the other operating, INR 391 crores, which is the gold sale that we made, knock off the cost of materials purchased, stock in trade and change in inventory, you'll get an idea of the GC.

Sure. But -- see my question is what one of the earlier participants asked. If I look at on a Y-o-Y basis, the Jewelry margins are down, which you clarified is because of, let's say, mix change as well as operating leverage, working the other way. But shouldn't there be a big pricing leverage also the fact that gold price has moved up and the costs are -- outside of gold the costs are generally fixed rather than being variable? So in an environment when gold prices are moving up, ideally margins should have been -- should have moved up. So is that understanding not correct?

See, on a making charge, making charge as a percentage of gold, yes, there would be an increase, right? But at the cost of gold, there will be no margin really on gold itself because if the hedges is as effective as can be, then your purchase price and your sales price are whole to be similar, okay? And it is almost that. So you will not make margin on that. The making charges percent, yes, absolute amount it will be more. As a percentage when it's sent -- yes.

But the commission that we give to our channel partners is a percentage of making charges. So as the price rises, they also -- their commission also increases. The labor charges that we pay to vendors, if I recollect, about 2/3 of that total is designated in percentages and 1/3 in rupee terms. So that also rises. Therefore, per gram the rupee rises, but percentage margin on gold rate remains by and large the same.

Got it. Got it. And if I look at the last, let's say, 8 quarters, 4 quarters, you have roughly done around 12% kind of EBIT margin in case of Jewelry. As and when the formalization sets in, in case of Studded, do you think that's the number that we should be looking at again?

Yes. That should be what we should be looking at as we normalize.

Got it. And lastly, on the Watches business. Could you just give your thoughts on, this is a marginal loss in this quarter. So how do you think about the second half of the year?

So the Watches business recovery, as Venkat mentioned, has been more muted. But the festive season has been good, and we are hoping to, as we had stated earlier, to exit the year -- Q4 at roughly what was our last year level. We are seeing channel differences. So some channels are performing better, some others are not. But overall, the business should recover to 100% of last year level by Q4 end.

Okay. And in the context of cost savings that are underway, would you believe that the margin profile on a full year basis, let's say, exit should be better than what it was, let's say, the last year?

Better may be difficult, but definitely it should go back to what it was earlier, before COVID.

The next question is from the line of Amit Sachdeva from HSBC.

Congratulations for good recovery of Jewelry business. And I just wanted to sort of take Ajoy's base on how we should think about the festive quarters, especially considering how month-on-month things have recovered? So if I may say we made some observations from your release and other channels, et cetera, is that August was very good recovery in Tier 2, Tier 3 towns, and maybe September as well. But July may have picked up that momentum. While coins were also promoted, but how -- when you're exiting this and looking at Q4, how one should think about wedding season being now buzzed up in Q3 and some of the other tailwinds are there? Which segment actually are doing well? Is the coin sales are sort of fueled by preemptive wedding purchases? What really consumer is saying and doing? How do we make sense of the recovery that you've seen in Q2 and exit that you've seen in September? And how the October has been going? What expectations, not hoping for a guidance, but what should we think about Q3 as a quarter? Would you think that will be like a strong quarter for you, like this recovery -- the way September has exited?

Okay. Many questions. Let me first give you a sense on what has worked, okay. You're right. Smaller towns -- Tier 3 towns have done better than Tier 2. Tier 2 have done better than the top 12 towns. Out of the top 12 towns, 8 towns which are excluding Mumbai, Pune, Bhubaneswar and Kolkata, all the 8 out of the 12 have seen 80% plus recovery. So there is an improvement. And even in the Bombays and Punes, we are seeing -- as we go forward and exit, it's showing an improving trend. So that's one. Second piece, for the quarter, wedding contribution has been good. In fact, on wedding segment related sales, we have seen a growth as opposed to a recovery, a marginal growth, but -- so therefore, people have been buying up for the expected bunched up weddings in Q3 and Q4. We are betting big on weddings in the second half. And therefore, we are not holding back on any of inventory or promotion, et cetera, for wedding. We will go out -- all out. On Studded, high-value Studded is still a little sluggish. But past few days, maybe we are beginning to see some improvement. It's too early to say anything. But I must say, on Studded, quarter 3 is hopefully good. We are chasing it aggressively. And if we get to the goals of quarter 3, the gap should have narrowed down, as I mentioned earlier. And therefore, from there on, we can hope that quarter 4 then becomes pretty much back to normal, maybe not 100%, but at least Studded should be pretty up. At an overall level, if you see, we -- see quarter 2, last year was a depressed quarter because of the spike in gold prices that happened, okay? And therefore, our recovery in quarter 2 of 96% on retail or 98% on the NSV to some extent is overstated. I would still adjust it downwards to maybe around 90%, say, around that. It is just an approximate figure. We are gunning for anything between 90% to 100% kind of recovery we want to try and get into this quarter. Where we will end, it's very difficult to say. So far it's good. I'm hoping that it's better than the like-to-like 90% that I told you about quarter 2. Quarter 4, our target remains to get back to growth, which means it should be 100% plus, which is what we've said even in our previous investor calls. I don't know if that answers your question, but this is the broad sense that I can give you.

No. I think it's very helpful, Ajoy. Why I'm asking this question is because see, metro cities have not done well. Tier 2, Tier 3, which is a smaller percentage of revenue, has done exceedingly well, so much so that your actually revenue is almost flattish. So -- which I would -- if I were to simply extrapolate, maybe August, September would be like 15%, 20% up for those towns, right, on like-to-like basis. I may be wrong. I'm just guessing, right? So in that sense, when metros have not participated, and Tier 2, Tier 3 showing actually double-digit growth momentum to make it national picture look like this, then probably if metros come back to some extent, aren't you being slightly conservative for shaping expectations for Q3? Or is it something that you're really worried about? That's what I really -- where I'm coming from, because I saw your initial comment on the Q3, and I thought that probably you feel very uncertain. Or is it something that you want to be very conservative at this stage?

See, the reality is that metros have started kicking in. Having said that, I would still be worried about Mumbai and Pune, okay? Ahmedabad, for example, has picked up very well. Hyderabad has been lower, but Bangalore and Chennai have picked up well. So it's a little bit of mixed bag. Delhi NCR, which is an important -- has seen an 86% recovery in quarter 2. So I think we are actually midway through the season. We are only about 11 days into the season technically out of the 31 days. Unlike last year, when we met in November, by then the season had got over. So we could give you a better feel. And also because of the way we structured things, it's becoming slightly difficult to gauge where we will be by the end of Diwali.

See the point that, Amit, Ajoy was making about the conscious effort by the division to advance the sale to manage the crowd better within the protocol. It -- and they believe they have been reasonably successful in advancing, which means that whatever has happened in the 10 days is higher than last year to that extent. And what that extent is very difficult to figure out at the moment. And therefore, only by Diwali we'll be sure that despite whatever we are seeing is going to continue for 30 days or compensates for a drop in the next 20 days or whatever. So that's the reason for what you may perceive to be a conservative picture.

Sure. No, that's very, very helpful. If I may just squeeze in a bit of -- what is the implication for margins here? Because I see that you would like to maximize revenue in festive, like the revenue has been focused in the last quarter as well. Because if I would perhaps pick up correctly, the coins were also promoted where the making charges were reduced significantly for coins. And I -- if I hear you correctly, probably you are -- will have the same objective in Q3 as well, while Studded is not picking up to the last year's level. I think is it safer to say that promotional intensity will be higher over last year in the quest for maximizing revenue, and hence, we should not expect margins to really hold up? And probably the underlying like-to-like margin decline should be expected in Q3 as well? Should the margin expectations be like-to-like, same, lower? My sense is that you are trying to suggest it should be lower?

So we are not -- so in terms of promotions, we are pretty much more or less along similar lines as last year. So our gross margin level should be good. We are also pushing Studded more aggressively in this quarter because we are beginning to see that recovery. So the Studded ratio should be better than quarter 2. Quarter 3 ratio should be better than quarter 2. Maybe, I don't know. We hope it is as good as quarter 3 last year, but I can't say for sure right now. So far, it's looking decent. And because of that, I think, overall we should start getting pretty close to our EBIT margin if things go well in this quarter. We are not trying to. And I don't see gold coins further being pushed because I think whatever natural demand is there is there.

Also, Amit, it is not in a way substituting jewelry. It is an additional fit, which may come at a lower percentage gross margin, but in -- we get some more crores extra because of that. So nothing wrong in that.

I'll give you another response, which may be useful. We are also trying to chase absolute profits and absolute gross contribution as well, besides looking at the percentages we are looking at. So we are maximizing the opportunity from a total profit and total gross margin.

The next question is from the line of Rakesh Jhunjhunwala from Rare Enterprises.

Ajoy, it's fair enough that you anticipate that the sale for the festive period cannot be predicted because we will be following a different strategy. But why don't you tell us in absolute numbers that what is the growth in the first 11 days of the festive period? We understand that we cannot extrapolate it for the whole festival season. Fair enough. There could be differences, which are unknown. They could be or they could not be. So then what is the actual growth in the festive period you had you know, no. So what is the actual growth?

Rakesh, so I would say it's a single-digit growth right now. I cannot say beyond that because there has been -- I'll tell you why I'm saying this. First 16 days of October, we actually started off the offer in order to spread this out. So we've also cropped in some figure in the first 16 days. This first 16 days of October is not comparable to any period last year because it didn't exist. It was an [indiscernible]. So it becomes a little complex to try and figure out.

I accept all that you said, Ajoy, that factors may change and you may not extrapolate. But what -- you know what is the growth in the festive seasons for the first 11 days. And what will happen in the future is a matter of speculation. So we like to know what you actually had.

So I would say it is in the high single digits as of now.

Like-to-like.

Yes, those 10 days to 10 days.

Right. And my second question is that the sales -- that means in the previous quarter, if we reduce the sales because of the -- we're recognizing the sale at the full price, then the -- and we add the provision of 34%, so INR 320 crores becomes your gross EBIT and your sales comes to about INR 2,985 crores. Hello?

No, no, he is reducing NSV and...

You're adding the INR 34 crores back...

That's one-time. And I'm reducing recognition of the gold at the regular price because if you got the effective hedge, your sales would have been higher -- would have been lower.

Would have been lower.

So the profitability would have been the same, no?

Yes, profitability would be the same. Yes.

So your last year's effectively around [ 2,900 -- INR 83,000 crores ].

Sorry?

And your EBIT is INR 320 crores, so your effective margin is around 11% -- 9%, 10.8%, 10.9%.

Yes. Yes. Yes. If I add back the INR 34 crores, yes, yes.

Fair enough. And my another question is, that in the Watch division, we did about 55% in the second quarter, and the Eyewear division also -- so what is percentage in terms -- is our aim or our estimate, it could go wrong, what percentage of sales we could do in this quarter? Like we did 55% last year -- last quarter in Watches. Am I right?

Yes. For Watches, our estimate is about 75%.

75% last quarter -- of the corresponding quarter. And Eyewear?

75% of Q3 last year.

Corresponding quarter.

Correct. Correct.

And Watches?

So that was Watches.

And for Eyewear?

For Eyewear, we expect around 75% to 80%. Quarter 2 is 51%. And of course, quarter 1 was 12%, so 75% to 80%.

Now there has been a marked improvement in the breakeven sales amounts in the Watches and Eyewear both?

Yes.

But your sales are lower and your margins -- your profits are higher. Am I right?

Yes.

Yes.

So now what is -- I mean what do you think? This is a permanent reduction? Or this is onetime? Or how much of margin profile would improve because of this percent? How much is a permanent improvement?

Rakesh, actually, this is a complex question. In the Eyewear business, we were anyway wanting to dramatically transform the financial performance of the division, and we had chartered out a course for FY '22 and '23. And multiple initiatives have been identified by Saumen and team in the first 6 months of calendar '20. And the results in Q2 are actually evidence that those are starting to work. And we are, in fact, a little ahead of our target for FY '22 itself. So there will be a big turnaround in Eyewear. As far as Watches are concerned, Watches division was, in any case, a very profitable division, and it would be our endeavor to actually grow the business in FY '22 in terms of sales, not just in the wearable side, but in the main analog quartz and mechanical watches side. We may end up investing in it for a while as opposed to going to the 16% and 17% that you've been talking to us for the last many quarters. I certainly know that. But we'll come back to you on this because we were never dissatisfied with the profitability of the Watches division. In fact we are now thinking of the growth side more than the profitabilities.

Right. And my last question is, first, we advance money to IL&FS. Now we lose INR 34 crores by broker. Don't we have some system or process in the company that we classify whom we are dealing with? How can we lose money to giving money to -- what kind of a broker is this? And what kind of process and system are we having in the company?

Rakesh, these are brokers who are very reputed, who we worked with. We have a risk profiling for all of these people. These are commodity -- we have to do through MCX, right? And there are therefore only a few people that we have to deal with. The exposure to this particular broker was less than 10% of our total exposure, okay? Now unfortunately, if something goes wrong -- we still believe we should get this money. Let me put it this way. We still -- we are going after them. And we know that they are doing some restructuring and they are getting some cash and so on and so forth. This is not equivalent to an IL&FS. So these -- let me restate. It is not an IL&FS here. But...

This provision is made out of abundant caution and could get reversed in future?

Which is why we also now have setup that other company that we are talking about, right, in commodity trading, which is to take over even that risk, even this element of risk.

Right. Fair enough. Congrats on a good position, good performance in adverse circumstances. And one thing also I wanted to ask,you. Doesn't this dramatic reduction in the outstanding cases and the number of cases coming up every day improve our prospects?

We should encourage everybody who's sitting at home to step out of the house and go to their offices, go to shops and buy. So the...

No, Venkat, today if -- number of active cases have dropped from 10.25 lakhs to 6 lakhs.

No. What I'm saying is that despite that, the tendency is still to change. People need to actually get that confidence to start moving out is what I'm saying. In fact, the Watch division had done a beautiful campaign called Let's Get India Ticking.

Yes, yes, I know.

Yes. So that is the kind of thing that needs to happen for us to realize what you're describing.

So what we are saying is that it has not had much of an effect now. But if things keep improving, people will then move out more.

It is no. Because what is happening is also a result of the improving sentiments and people stepping out of their houses and moving.

Right. And if the improvement in cases takes -- continuously takes dip, sentiment will further improve?

Correct.

One question I had that you were going to make public your targets for cost savings? Hello?

Rakesh, there were 2 things that we spoke on the call last. One was on hedging, and the other was on the war on waste program, okay? We didn't have a proper opportunity to speak about it at this time -- at that time. But the thing is that Titan Company is not in a situation where it is startled with huge fixed costs. And the only way to improve its performance is by a dramatic reduction in the fixed cost of the company. So therefore, the imperative to work on the cost as well as disclose it to everybody is not on Titan Company as much as it may be with many other companies who are in that situation. That's why we have chosen...

You don't want to disclose it, for whatever reason. Fair enough. We accept it.

Yes. Yes. Yes.

The next question is from the line of Manoj Menon from ICICI Securities.

Good performance in the context. Just a couple of questions over there. One, on the...

Sorry to interrupt. Mr. Menon, your voice is not coming in clear. May we request you to use your handset, please?

Is it better? Is it better?

Sounding a little muffled, though.

No, that's okay. We can hear you. Carry on.

Okay. Okay. Okay. One question to Ajoy was on the industry update on the trend of fixed making charges, which we have started seeing a few quarters back or a few months back. And what is the industry update? And what's our response or no need for any response?

No. Actually, as I'd mentioned in the last call, we did put out a few KVI products at the entry point on fixed making charge. I think it helps in just providing something to the store staff to talk to the customers with. It has not had any material impact, and we are not worried about that at all. I know you've been worried about that, but it's not really had an impact on our plain gold product. And in fact, we've done reasonably well on our plain gold margins in quarter 2, and we continue to do so.

Sure, sir. Sure. Understood. And my only objective was to understand, is there any material changes in the way industry operates. So that's the only objective, actually. Secondly, on the expansion, if we heard you correctly previously in the call, you mentioned the 34 stores. And if I take an average of 2,500 to 3,000 square feet, maybe 3,000 square feet, you're talking about 100,000 square feet approximately. So is it fair to then say -- assume that FY '21 will have largely the normal 100,000 type expansion, square feet?

Yes. I'm not able to react to your square footage. But as I mentioned, the range of stores that we expect to open, I don't have a single figure because we decided to pause in between. So between 30 to 34 stores for the year. So if you apply the metric you're saying...

Actually, from a number of stores point of view, it would be a very good achievement for a COVID year.

Yes. Last year, we opened around 41 or 42...

Average 3,000 square feet. 100,000 [Foreign Language].

Yes, yes, number is pretty much there.

Understood. One follow-up on this, if I may. Given the context of real estate, et cetera, in a normalized scenario in 2, 3, 4 years' time, would these stores will have better IRR given you might have better rentals? And is there an angle there to consider?

I wouldn't give it so much because the material impact of their marginally better IRR on the overall base would not be so much.

And eventually all of them would be branches.

And all of them are -- most of them will be L2s.

So the IRRs will be for them.

Yes.

The next question is from the line of Chirag Shah from CLSA.

Subbu, you mentioned in your opening remark that because of the -- there will be a change in hedging accounting. And some -- a bit of volatility that you have seen because of gold prices moving and ineffective hedges, that would anyways be taken care of going ahead. Now is this to do with you moving towards your in-house subsidiary for Titan Commodity Trading?

No, there's nothing to do with that. This is just about designation of hedges. Nothing to do with our in-house...

So can you just explain what are you trying to do going forward on the ineffective hedges going forward?

Let me very quickly explain this. Whenever we've hedged in the past, we would expect to sell in a certain month, okay? So if I buy 1 kilo gold today, we expect to sell in a certain margin. Therefore, the designation on the hedge for this 1 kilo would be a specific month. Now instead of a specific month, we may take it over a broader period of, say, 3 months, so that any variations therefore within the 3 months can still be effective. Do you understand? So the idea is to reduce the variance as much.

So essentially, what you're saying is you take a broader bucket while looking at allocating the gold acquired?

That's it. That's it.

Perfect. And that should considerably reduce the volatility, even if there is an ineffective hedge, right?

Yes, yes. That is the whole idea. It would bring down, hopefully, the ineffective hedge substantially. Yes.

Got it. And as regards hallmarking, now mandatory hallmarking of gold has been deferred. So given that a large part of the competition that Titan competes with is compliant, how do you pursue the impact of the same on Titan?

This is -- as we see it, it's got deferred to June next year, '21. It was supposed to be earlier by Jan '21. We were getting ready for ensuring -- in fact, we've got the hallmarking licenses, et cetera. I think it will still be some time before all the industry manages to become totally compliant and that purity is matching because even the quality of hallmarking centers, et cetera, has to really pick up. We don't know. But we think we will still -- if the question is, will we be able to command the premium on gold vis-à-vis gold rates vis-à-vis other jewelers, et cetera? I think we should be able to command until, of course, we see that their purity levels have also come to higher levels, et cetera. But right now, we are not seeing much of a issue on that. And I don't know whether this June '21 will also remain or it will get further pushed because there is, again, enough and more lobbying with the government by the jewelers to try and push this further.

Understood. Just 1 last question on the franchisee support. So what kind of support have we extended to franchisees? We spoke about extending some additional working capital loans to the franchisees last quarter also. Can you just quantify what is the number this quarter?

No, this is not something that we would like to quantify. It is an important aspect about a stakeholder that we wanted to share that through grants as well as through working capital support we are enabling the Titan ecosystem to flourish in these challenging times. And we will continue doing it as long as we deem it necessary to do that because we are all part of a very large family.

Sure. But that number is not very material, is what you would say?

No, it is not material.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. C. K. Venkataraman for closing comments.

Thank you very much, everyone, in the call, as usual, for probing deep into the business, giving us perspectives, which are always fresh and take us forward and also keeping us on our toes all the time by asking piercing questions at the right time. Thank you very much. Till February first week, bye-bye.

Thank you very much, sir. Ladies and gentlemen, on behalf of Titan Company Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.