CMP:
Rs. 360.70; Market Cap: Rs. 32,022.44 Cr; 52 Week High/Low: Rs. 444.50 /
Rs. 296.15.
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. 39.59; Face Value: Rs. 1.00; EPS: Rs. 8.14;
Dividend: 220.00 % ; P/E: 44.31 times; Ind. P/E: 45.24; EV/EBITDA: 30.28;
Total Debt: Rs. 113.05 Cr; Enterprise Value: Rs. 32,056.55 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 objective 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. Titan Company
has more than around 7,000 employees, two exclusive design studios for watches
and Jewellery, 10 manufacturing units all around
India. 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. 48 trillion by FY 18. 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 month
of October witnessed a robust overall growth with Tanishq reporting a growth of
39 % during the festive period. However, following the announcement of demonetization on November 8,2017 there was a sharp
decline in sales due to cash crunch and muted sentiments of customers. Since,
large part of estimated around 60 % of Tanishq customers pays through the
digital mode and the profile of the consumer is different from that of
unorganised players, the jewellery division has revived daily sales traction to
pre-demonetisation days i.e. post the festive period. Management indicated that
decline in sales is not as high as 30 % to 40 % post demonetization and sales
are mainly driven by gold exchange schemes. Government policies in the recent
past coupled with the demonetization of Rs. 500 & 1000 notes will bring
structural changes in the industry which augurs well for organised players like
Tanishq. Post demonetization, the cost of doing business for an unorganised
player is likely to get expensive which will result in them passing on the
higher cost to their customer and improve the competitive positioning of
Tanishq. Titan has already reduced its making charges over the past 1-2 years
especially at the lower end which has changed the price perception of Tanishq.
Further, its replacement offer is better when compared to unorganised players.
The management in concall highlighted that the Watches
segment has also been impacted adversely due to the demonetization announcement,
however retail channel sales have revived. Trade channel for watches is still
under pressure with a demand shortfall of 20 % to 30 %. The company expects the
impact of demonetization to stabilise in FY18. Further, it expects to get
benefit from the demand shift from unorganised to organised retail. Tanishq
continues to endeavour to bring in new and exciting designs, thereby enticing
customers to furnish the PAN cards and purchase jewellery. Management believes
that the company could benefit from demonetization with respect to increasing
its franchise network as few unorganised players would shift to Tanishq. Many
jewellers are forced to shut shop due to supply side cash crunch as there’s no
liquidity with vendors. Titan offers its cash strapped vendors’ funding
facilities and hence can carry on with business as usual. Helios has been
largely immune from the impact of demonetisation due to its lower ticket size
and high share of credit/debit card customer’s vs cash paying customers. The Golden
Harvest Scheme (GHS) enrolments have been steady and there has been no impact
on the monthly instalments. Due to a reduction in premium on USD, the gold on
lease option has become as attractive as buying gold on spot. The Industry
sources suggest that the overall jewellery industry in India has declined by 15
% to 20 % in CY16, while Titan’s jewellery revenues have reported a growth of 2
%, indicating an increase in market share during CY16. It is expected that the
government regulations such as compulsory hallmarking, demonetisation/drive
towards cashless transaction and GST to bode well for the organised sector,
accelerating the shift from unorganised to organised retail. 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 recognized 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.
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. Titan is proxy play on Indian evolving consumerism and long term story
despite headwinds in short term. For Titan, FY16 was
a challenging year for the company. The company’s sales income declined 5.4 %
while net profit declined 14.2 %. The company launched its first smart watch,
‘Titan JUXT’. The initial response was encouraging. The company expects a good
growth opportunity in years to come. The company believes there is an
opportunity for all its brands to introduce technology watches to garner a significant
share in one of the fast growing segments today. Favre Leuba, the heritage
Swiss brand that the company acquired, is being actively worked on for a launch
towards the end of FY17. The product, marketing and distribution strategy is
being worked upon by a newly constituted team largely from Swiss watch industry.
The performance of the jewellery division was dampened on account of various regulations
imposed by the government in FY16. The fourth quarter was tough owing to
regulatory changes like implementation of PAN card rule for purchases above Rs.
2 lakh and industry strike in March 2016 on account of introduction of 1 %
excise duty that was opposed by the jewellery industry. The management believes
the worst has played out on the regulatory and competitive fronts and growth trajectory
for Tanishq will come back in FY17, aided also substantially by the Golden
Harvest Jewellery purchase scheme that is now fully back in place. Despite a
slowdown in retail, the eyewear segment grew 12 % in FY16 over previous year. Over
70 new stores were opened during the year taking the total store count to 402.
Over 300 new products were introduced during the year. In sunglasses, Fastrack
and Titan Glares continued to do well with Fastrack sunglasses selling over
1.10 million pieces during the year. During FY07-15,
revenues grew at a CAGR of 26.6 % led by a healthy 31.2 % CAGR in the jewellery
segment. It is expected that the jewellery and watches segment to grow at a
CAGR of 13% and 8%, respectively, in FY16-19E. Jewellery revenues in FY17 are
expected to be buoyed by Gold Harvest Scheme redemption, which was absent in
FY16 due to regulatory changes. In the jewellery segment, Titan plans to add
new products at different price points to capture higher volume growth. The company
is also looking at the online channel as another growth engine to engage with customers
who prefer the convenience of online buying and spend higher time and money on
online purchases. Also, the management is introducing new collections (Zuhur,
Shubham) with exquisite designs to attract customers into buying jewellery. The
domestic performance of the watches segment in Q2FY17 saw an increase of 5 %
YoY growth. However, overall revenue of the watch segment declined 5 % on
account of a decline in exports. Regulatory tightening by the government with
the intention of curbing black money could lead to higher compliance from small
and unorganised players leading to a level playing field for organised players like
Titan resulting in a shift from the unorganised to the organised segment. The company
would be a beneficiary of the shift of demand towards the organised segment.
Considering its strong brand image and pan-India presence, Titan would be able
to double its market share in the Indian jewellery market from the current 5 %.
Titan’s operating margin has fluctuated in the past owing to a changing product
mix and also impact of rupee movement in the watch segment. On a segmental basis,
the gold business has relatively stable margins. The share of studded jewellery
does tend to bring some variation as studded jewellery has 3.0x gross margins
of plain gold jewellery. Also, in Q1FY17, it introduced a lotus themed
collection ‘Niloufer’, which was well received by the market. Strategically,
Titan is focusing on introducing high margin products and enhancing its studded
share, which would enable it to improve its EBITDA margin, going ahead. Titan is relatively lower leveraged and has a 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 25-30 % in the last 10 years. Titan has always strived
hard to achieve 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 grows Slower growth in H1FY17 is expected to be compensated by higher growth
in H2FY17 due to strong festive season sales in Q3FY17 and a weak base Q4FY16
(Due to jewellers strike in March 2016). Titan’s management indicated that the
jewellery industry de-grew 30 % in H1FY17 suggesting tough times for the
sector. However, Titan’s performance is commendable considering the tough
regulatory environment curbing revenue growth for the sector with the
management indicting that the company may have gained market share. Also, the government’s
decision to enhance the limit for golden harvest scheme to 35 % of company’s
networth from the earlier mandated 25 % would assist the company’s revenue
growth. The management is continuing with its strategy of aggressive retail expansion
and introduction of newer brands at different price points. The company is also
looking at having higher share of studded jewellery, which would aid in margin
growth in FY18E and FY19E. Titan would be a beneficiary of the shift from unorganised
to organised players owing to its strong brand and pan India retail presence. At the current market price of Rs. 360.70, the stock is trading at a PE of 39.63 x FY17E and 32.79 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 9.10 in FY17E and Rs. 11.00 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
| KEY FINANCIALS | FY16A | FY17E | FY18E | FY19E |
|---|
| SALES (₹ Crs) | 11,264.50 | 11,889.80 | 13,520.90 | 15,360.30 |
| NET PROFIT (₹ Cr) | 705.80 | 804.00 | 978.00 | 1,172.40 |
| EPS (₹) | 8.00 | 9.10 | 11.00 | 13.20 |
| PE (x) | 41.10 | 36.10 | 29.60 | 24.70 |
| P/BV (x) | 8.20 | 7.40 | 6.40 | 5.50 |
| EV/EBITDA (x) | 30.70 | 24.30 | 20.00 | 16.60 |
| ROE (%) | 21.40 | 21.60 | 23.20 | 24.10 |
| ROCE (%) | 26.90 | 29.60 | 31.70 | 32.80 |
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*As the author of this blog I disclose that I do not hold TITAN COMPANY LTD in my any of the portfolios.
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