TITAN COMPANY LTD: WILL SHINE AGAIN !!!

Scrip Code: 500114 / TITAN

CMP:  Rs. 361.35; Market Cap: Rs. 32,080.15 Cr; 52 Week High/Low: Rs. 448.40 / Rs. 302.75.

Total Shares: 88,77,86,160 shares; Promoters : 47,10,07,920 shares – 53.05 %; Total Public holding : 41,67,78,240 shares – 46.94 %; Book Value: Rs. 34.83; Face Value: Rs. 1.00; EPS: Rs. 7.91; Dividend: 230.00 % ; P/E: 45.68 times; Ind. P/E: 39.63; EV/EBITDA: 31.21; Total Debt: Rs. 99.79 Cr; Enterprise Value: Rs. 32,012.34 Cr.

TITAN COMPANY LTD:  The Company was founded on 26th July 1984 and is based in Bengaluru, India. Titan was promoted jointly by Questar Investments Ltd a Tata Company with its associates Tata Sons Ltd and Tata Press Ltd and the Tamil Nadu Industrial Development Corporation (TIDCO) with main obective to manufacture analog electonic watches with over 150 designs. The company was earlier known as Titan Watches Ltd and changed its name to Titan Industries Ltd in 1993 and again in 2013 the company changed its name to Titan Company Ltd. The Company had declared split in face value of its shares from Rs. 10 to Rs. 1 on 29 April 2011 and on same date it also declared bonus in ratio of 1:1. Titan Industries Limited manufactures and retail sale of watches, jewelry, clocks, and eye wear primarily in India and internationally. The company provides its watches under Titan Edge, Titan Raga, Nebula, Sonata, Xylys, Fastrack brands. It also markets international brands, such as Versace, Seiko, Tommy Hilfiger, Hugo Boss, Esprit, Raymond Weil, DKNY, Baume & Mercier and Victorinox under a licensed agreement. It also offers jewelry under the Tanishq and Goldplus brand names, as well as operates a chain of luxury jewelry boutiques under the Zoya brand. In addition, the company provides sunglasses under its Fastrack brand; and prescription eyewear, such as lenses and contact lenses. It sells frames, sunglasses, and accessories of proprietary brands and other premium brands, as well as provides optometry services. Further, the company provides precision engineering components and sub-assemblies, machine building and automation solutions, tooling solutions, and electronic sub-assemblies for use various industries, in aerospace, automotive, oil and gas, engineering, hydraulics, solar, and medical instruments. It operates approximately 1100 retail stores across a carpet area of over 1.3 million sq. ft. spanning over 204 towns. The company has over 364 World of Titan showrooms; over 140 Fastrack stores; 928 after-sales-service centers; It also has approximately 145 Tanishq boutiques and 2 Zoya stores; over 31 Gold Plus stores; and approximately 220 Titan Eye+ stores. The company has around 7,000 employees, two exclusive design studios for watches and Jewellery, 10 manufacturing units. The company also sells its product through departmental stores such as Shoppers stop, Central, Westside, Pantaloons & Reliance retail. Titan Industries Ltd is locally compared with Renaissance Jewelery, Goldiam International, Atlas Jewellery India Ltd, Winsome Diamonds, Parekh Platinum, Gitanjali Gems Ltd, Surana Corporation Limited, Shrenuj & company, Rajesh Exports, Shree Ganesh Jewellary House I Ltd, SBT & International and globally compared with Citizen Holdings Co Ltd of Japan, Casio Computer Co Ltd of Japan, F&A Aqua Holdings INC of Japan, Guess? INC of USA, Rolex of Switzerland, Omega of Switzerland, Oakley of USA, Timex of USA, Seiko of Japan, TAG Heuer of Switzerland, Patek Philippe of Switzerland, Swatch Group of Europe .  

Investment Rationale:

Titan Industries Ltd is the world’s fifth largest integrated watch manufacturer with a market share of around 65 % in the domestic organised watch market and also enjoys market share of around 40 % in the organised jewellery retailing market where the company offers gold and diamond jewellery through its popular brands - Tanishq, Gold Plus and Zoya. Titan Industries Ltd is the organization that brought about a paradigm shift in the Indian watch market when it introduced its futuristic quartz technology, complemented by international styling. India is the fifth largest retail destination globally and the Indian retail industry has experienced tremendous growth over the last decade with a significant shift towards organised retailing format and development taking place not just in major cities and metros, but also in Tier II and Tier III cities. The overall retail market in India is likely to reach Rs. 47 trillion by FY 17. As India’s retail industry aggressively expands itself, online medium of retail is gaining more and more acceptance there is a tremendous growth opportunity for retail companies, both domestic and international. Favourable demographics, increasing urbanisation, nuclear families, rising affluence amid consumers, growing preference for branded products and higher aspirations are other factors which drives retail consumption in India. Both organised and unorganised retail are bound not only to coexist but also achieve rapid and sustained growth in the coming years. The Indian retail market, currently estimated at around US$ 490 billion, is project to grow at a compound annual growth rate of 6 % to reach US$ 865 billion by 2023. Organised retail, which constituted 7 % of total retail in 2011–12, is estimated to grow at a CAGR of 24 % and attain 10.25 % share of total retail by 2016–17. India has about 10 lakhs online retailers – small and large – which sell their products through various ecommerce portals. India remains a largely untapped and unorganised retail market, with several international retail companies yet to commence operations in the country. India holds a substantial advantage over other emerging retail destinations owing to its strong domestic consumption and low rate of market penetration by overseas retailers. India's new middle class is increasingly becoming brand conscious and willing to spend on quality goods, a trend which is creating numerous business opportunities for mid-range international brands. With political and economic sentiments already showing signs of improvement, this could be the right time for international retailers to look at India for expansion into the region. With this growth in the ecommerce Industry, online retail is estimated to reach US$ 70 billion by 2020 from US$ 0.6 billion in 2011. According to the World Gold Council, gold demand rose 15 % in Q3 2015; the council maintains that demand grew in both the urban and rural segments. The overall long‐term environment remains exciting considering the Indian consumption story. The 3 aspects of consumption i.e. the demographic dividend, rising incomes of Indian consumers and growing aspirations of Indians excites the company. Titan Company participates in categories that are unorganised, under‐served and under‐penetrated. Titan always tries to make pro consumer choices for example in the watch business, the company moved from mechanical watches to quartz watches. Being in the unorganized sector also has its pros like large opportunity in branded space, improved quality of competition and category transformation and cons like non level playing field for organized players and regulations. Titan derives 80 % of its revenues from Jewellery business. Titan has 4 % market share in gold Jewellery & 7 % market share in diamond segment. The jewellery industry faced setback in last couple of years on the back of government regulations to limit the import & consumption of gold, and changes in Gold deposit scheme. Customer purchases have largely been distorted on the back of volatility in gold prices and discontinuation of Golden Harvest Scheme from which Titan derives 30 % of its jewellery business. However, it is expected that the demand for jewellery to be stable as it is more of essential & cultural aspect in respect to Indian society, though the timing of purchase may vary. It is evident that Titan’s management has taken initiatives in the last 12-18 months to bring back its mojo which gives confidence and is expected to be a continuous process to spur up its revenues. Titan is slashing its making charges from 12 % to 8 % in order to overcome the stiff competition especially in southern markets; also they re-launched Golden Harvest schemes, launched designer collections and roped in Deepika Padukone as brand ambassador for Tanishq. The management did not state the specific numbers for store expansion but plans are on. The festive season has started on a decent note as per the management and it expects sales to recover in the coming quarters too. With recovery in sales, margins are expected to move back to the normalised range of 9 % to 10 % with activations, the management expects the share of studded jewellery to improve as against 24 % reported in the current quarter, which is also expected to assist in margin expansion. The volume growth in watch business remained flat. Higher realisations and exports led the growth in this category with impressive margins. Also, the company witnessed lower walk-ins in the World of Titan stores, Helios but the large format stores performed well. The management expects hedging benefits to come in the next couple of quarters. It also stated that the company has been able to negotiate favourable gold lease rates. Titan will enter categories that cater to personal lifestyles, involve branding and design and which have national play. 

Titan has achieved leadership in the watches segment in 5 years from its entry. Of the total 52 million watches sold in India, only 16 million watches can be accounted for; balance are in the grey market. Titan still continues to explore unorganized segments in the market. Titan is promoting a culture of innovation across products, business models, brands, customer touch points and customer experience. The company promotes innovation in the organization through initiatives like Titan Innovation Bazaar, Innovation School of Management etc. Eg of innovations are Edge watches, diamond sorting machines (first time in the world). In its business model also Titan has chosen the end‐to‐end business model (vertically integrated), but is open to change. Eg getting jewellery manufactures outside but it keeps a close watch on the process. Titan has the largest network of after sale service for watches in India. This is proving to be an advantage as foreign brands entering India are using the network built by Titan. Titan has assiduously positioned itself in the premium designer jewellery space. Titan has the ability to create significant value with its large distribution presence, strong brand, designing skills and proven execution track record. Titan has proved its metal time and again by emerging strong and successful against various regulatory hurdles that have emerged over the past one year. With robust balance sheet, strong brand equity and professional management team in place gives the bullish sentiments on Titan 

Outlook and Valuation:

Titan’s success story began in 1984 with a joint venture between the Tata Group and the Tamil Nadu Industrial Development Corporation. Titan is the fifth largest integrated own brand watch manufacturer in the world. In addition to ‘Titan’ the watch brand, Titan has also built ‘Tanishq’ the leading jewellery brand over the past few years. Both these brands are among the most recognised and loved brands in India. The company has sold 150 million watches world over and manufactures over 15 million watches every year. Titan is basically a play on evolving Indian consumerism who aspires for branded products and recognition. Titan’s business segment majorly focuses on women and youth who would form the majority of Indian population by 2020. Among its business segments, majority of revenues are contributed by Tanishq which caters to women by launching new designs, collection of diamonds and studded jewelery to attract traditional & working women. Watch business sells products of international brands and in-house made products designed specifically to youth and women under brand names of Fast track & raga respectively. Major growth drivers from the company’s perspective would be the rise in launch of new innovative products & designer collections, expansion of stores & building brands. From macro perspective, positive factors would be rise in discretionary spending, weddings & rise of female economy. Indian annual consumer spending is expected to grow at CAGR of 14% and reach $3.5 Tn in 2020. Gems & jewellery industry is one of the fastest growing industries in India with significant contribution of 7 % to Indian GDP. Domestic gems & jewellery market is estimated at Rs. 2510 billion and contributes to around 45 % of industry. Jewellery export market is worth Rs. 730 billion with share of 13 %. Apart from these, there is important export market for cut diamonds & gemstones worth Rs. 1260 billion, along with demand for Gold bar & coins which is worth Rs. 1030 billion. Investment demand for Gold has shot up from 135 tons in 2005 to 362 tons in 2013, implying a CAGR growth of 13 %. Share of Gold & diamond forms 96 % of the total domestic gems & jewellery market. Jewellery & gold demand in India is mostly dominated by cultural & religious practices, rather than price fluctuations & government regulations which are likely to have minimal impact. As a result jewellery demand is expected to increase going forward supported by Indian weddings and festivals along with rise in household income. This Industry is dominated largely by unorganized players with market share of 78 %. However, the organized players are expanding and witnessing higher growth compared to the unorganized players. Organized players have significantly increased its market share from 10 % in 2009 to 23 % in 2015 on the back of expansion of their operations and better quality and designs offered by branded players. Recently, small & weak players who were staying afloat have been affected because of government restriction on imports and increase in duty which affected their business. Branded players are expanding fast despite sluggish environment in the industry on anticipation of demand revival. Among the organized players, Tanishq has highest number of showrooms with pan Indian presence and other players such as Kalyan & Joy Alukkas are eyeing faster expansion which increases the competition for the national player such as Titan. The Average age of India’s population by 2020 is expected to be 29 years, making India the world’s largest country having young population. India witnesses approximately 10 million of weddings annually and with gold being integral part of it, approximately 400 to 500 tons of gold is exchanged during the marriages. Gold & jewellery approximately accounts for around 40 % of marriage expenses as the tradition of gifting & wearing gold jewels during marriages is inculcated strongly in the minds of Indian people. 

Indian Wedding industry is worth $38 billion and is expected to grow at a rate of 25 %. Increased spend on weddings is expected to come from Tier II and III cities which are likely to see higher disposable incomes and is expected to drive the growth of wedding industry. In the last 20 years, Indian jewellery demand stood to 575 tons of Gold annually. India is the largest market for Gold, contributing 27 % of world’s jewellery demand and 20 % of total gold demand in 2015; and has high impact on the international Gold market & prices. Gold jewellery industry has been recovering from the regulatory changes. However certain regulations are still hurting the industry and the same is being reflected in sluggish same sales growth. However, schemes such as gold monetization scheme are going to benefit jewelers if they are successful. With efficient & experienced management at the top in Titan, it can be expected that Titan to fare well compared to other players and the company’s other businesses such as watches & eye wear divisions are also expected to do well with revival in consumer spending. Titan’s large retail network present across India is another strong competitive advantage over its competitors and is likely to be one of the biggest beneficiaries on the back of rise in consumer spending over the years. Titan is the leading player in the segments it operates. Efficient top management, good balance sheet and strong brand image justify the current valuation despite sluggish environment and are expected to be the biggest beneficiary of revival in consumer sentiment. Titan is proxy play on Indian evolving consumerism and long term story despite headwinds in short term. Consistent topline growth with revenues which grew at a CAGR of 26.6 % during FY07-14, it is expected that the company will continue to grow at 8 % CAGR during FY15-17E. As compared to other jewellers, Titan is relatively lower leveraged and has maintained a strong cash balance, which enables it to meet working capital requirements. Despite the continued growth, Titan has managed to remain debt-free considering the nature of its business. Even after the change in gold regulations, the company has very low debt on a net basis. The company has been consistently reporting return ratios in excess of 30 % in the last 10 years. Titan has always strived hard to achieve the topline growth. To achieve this, it has launched various brands across categories and is working hard towards nurturing these brands. It is also exploring new product categories, which are relatively lower penetrated and striving further to grow. With most regulatory concerns reduced and gold supply improving coupled with reduction in gold prices and making charges, it is expect that revenue growth will revive during the forthcoming festive season. At the current market price of Rs. 361.35, the stock is trading at a PE of 18.7 x FY15E which compares with the sector average of around 27.5 x and mid cap sector at 24-25 x. While the regulation and demand environment will some what impact the stock and will tend it to trade at lower multiples. But still Titan can post Earnings per share (EPS) of Rs. 10.96 for FY15E. It still remains a solid long term play on the growth of the Indian Jewellery sector with proven management track record. It is expected that soon the demand environment will improve and expect the company to keep its growth story in the coming quarters also. 

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	10,915.80	11,903.20	12,330.50	14,017.60
NET PROFIT (₹ Cr)	757.10	832.70	831.70	993.80
EPS (₹)	8.53	9.38	8.37	11.19
PE (x)	42.70	38.80	38.90	32.50
P/BV (x)	12.90	10.50	9.20	8.20
EV/EBITDA (x)	30.70	27.70	28.00	23.30
ROE (%)	33.90	29.80	25.30	26.70
ROCE (%)	19.80	19.80	17.70	19.20

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