Titan Company Limited (Titan) is engaged in offering watches, jewellery, eyewear and other related accessories such as bags, sunglasses, etc. The company offers plain and studded gold jewellery brands such as Tanishq, GoldPlus, Zoya, Mia, which are retailed through their respective brand stores. The company’s brands in watches include Titan, Sonata and Fastrack with sub-brands such as Raga, Xylys and Edge, among others, which are retailed through World of Titan, Helios and Fastrack stores. The company offers frames, contact lenses, and sunglasses in brands such as Eye+, which are retailed through Titan Eye Plus stores. It also offers precision engineering components and sub-assemblies (PECSA) and machine building and automation (MBA) solutions. The company's subsidiaries include Titan Time Products Limited, Favre Leuba AG and Titan Engineering and Automation Limited.
Strong Business Model:
Titan has been able to build sustainable retail formats with differentiated products. The company has replicated its success in watches and jewellery to extend across other products including eyewear, sarees andaccessories. Within the jewellery segment, it has successfully expanded to a larger and less discretionary market of wedding jewellery (against only adornment jewellery earlier) where it has created a niche for itself.
The company’s investments in the US$20bn wedding jewellery market (where it has <1% market share currently), extending its presence to occasion wear and high-value diamonds ($6bn market), and growth in Gold instalment Scheme/Gold Exchange from new customers provide visibility of sustained growth. Moreover, as GST (Goods and Services Tax) compliance increases, we expect Titan to consistently gain market share. GST implementation and likely margin of safety from success of other formats will drive future growth.
GHS, gold exchange scheme, wedding jewellery and expansion into multiple distribution channels (Tanishq, Zoya, Miya, Caratlane) will continue to drive strong marketshare gains for Titan in jewellery.
Titan can successfully incubate new formats led by strong retailing experience alongside strong product capabilities. Titan’s efforts in Taneira, Skinn and Eyewear can yield meaningful results over the next decade. This long growth runway implies Titan will continue to command strong valuations.
The Jewellery division had a good festive season and recorded strong revenuegrowth of 37% year-on-year, on the back of strong growth in both the studded and plain jewellerycategories. The plain jewellery category also benefitted from a large institutional order ofRs 200 crore of gold coins with low margin.However, this has resulted in marginally lower sales growth of 17-18%in January. Particularly, growth in the studded jewellery segment has been slower in January.
GHS, studded jewellery, format expansion across Mia/Caratlane/Tanishq/Zoya, and gold exchange is expected to continue driving growth. The management is confident of rolling out 40 stores of Tanishq this year (24 added so far in 9MFY19). The management stated that operating leverage will be the primary reason for margin expansion in jewellery. It also stated that recent market-share gains are driven by focused strategy on 16-17 cities where Titan’s market share is lower than national average. FY20 is more promising from the wedding season point of view, which would support a healthy momentum in jewellery sales.
The management expectsgrowth to recover in March and is targeting 22% growth in 4Q.Jewellery advertisement spends were higher in Q2 and lower in Q3, enablingmargin expansion. Margins were also supported by a reversal in inventory loss ofRs 18 crore.In this quarter, exchange contributed 40% of the total top line and wedding collectioncontributed 30-33%. SSG growth contributed 80% of the total salesgrowth. The number of wedding days in FY19 has been lower but FY20 seems promising inthat aspect.
Deferment of new collections and aggressive promotions led to margin erosionin Q3. The company plans to leverage contract manufacturing to improve profitability. The management maintains margin guidance of about 15% in this segment for the year.
The watch segment’s revenues grew 19% year-on-year led by 16% volume growth. The growth was led by new launches and merchandise improvement to fill gaps. EBIT margin declined from 15.3% to 8.5% year-on-year due to new product launches and higher ad spends carried over from 2QFY19. Margin on a 9-month basis has improved by 70bps on account of improved cost efficiencies in manufacturing. Large Format Store (LFS) grew 15% during the quarter on a Like to Like (LTL) basis while Helios grew 6% on an LTL format. World of Titan and FastTrack witnessed 2% and 1% LTL decline respectively.
Eyewear has two streams: distribution and retail (Titan Eye+). Division sales, which is a newly started business and which comprises 20% of eyewear sales grew faster than retail sales. Same Store Sales Growth and total growth were at healthy levels in the eye business. Investments in the brand and traffic building led to this performance. Satellite lens manufacturinghelped improve customer service and profitability.
Eyewear grew 40% year-on-year driven by a healthy like-to-like sales growth of 13%, network expansion and commencement of frames distribution. Losses reduced from Rs 4.4 crore to Rs 1.5 crore year-on-yearduring the quarter. Focus on eyewear distribution has also caused the growth to be higher this quarter. The management stated that the strategy to lower price points has worked well and the downward trend in store level growth has reversed. Store level SSGs and total sales growth are at healthy levels. Titan Eye+ format grew 15% in the quarter on an LTL basis (10% over 9Mbasis). Distribution and additional satellite lens manufacturing facilities have helped both improve customer service and profitability.
The company’s brand ‘Skinn’ has touched Rs 100 croreturnover mark. Due to its competitive pricing, the company was able to capture7-8% of the overall market. Almost 30% of sales come from World of Titan. The company’s brand ‘Caratlane’ is on the path of breakeven. The management expects its pen brand ‘Mont Blanc’ to breakevenin three years.
The management has issued guidance of 29% tax rate in FY19 and 27% in FY20.It has made a provision for Rs 99 crore out of the total investment of Rs 145 crorein IL&FS. Provision of Rs 29 crore was made in the last quarter and Rs 70 crore inthis quarter.Hedging gains in this quarter are similar to the previous quarters. Inventory loss of Rs18 crore in the last quarter reversed into a gain this quarter.Cash balance increased substantially due to higher gold on lease which led to anincrease in other income.
Indian jewellery market can be separated into two categories plain jewellery which contributes 80% and the rest is studded segment. Indian jewellery & gems market size is Rs 4.5 lakh Cr, of which the domestic jewellery market is estimated at Rs 3.5 lakh Cr and studded jewellery at Rs 1 lakh Cr. In India, total official gold import positions at 900 ton/annum while additional 100-150 ton is imported through the unofficial route. Consumption in India is around 650-700 ton, investment 150-200 ton and gold exchange market is around 150 ton. In the last 8 years gold import has remained even since grammage per piece has come down by 25-30% over the same period due to rise in gold prices. Gold prices are determined daily through the exchanges however there is no regulation on the studded jewellery resulting in higher gross margins (25% +) compared to 5% in gold. In studded segments, jewellers only exchange their own products whereas in plain jewellery segment they exchange other products too, charging a haircut depending on the quality of gold. The custom duty rate of 10% in 2013 encouraged gold smuggling. Most of the jewellers are positive about jewellery demand in India due to its USP as social security. In the recent past the Indian consumers were moving towards the studded jewellery however the local jewelers are facing a trend reversal due to less attractive resale value from their studded jewellery.
|Particulars||Mar-15||Mar-16||Mar-17||Mar-18||Mar-19 E||Mar-20 E||Mar-21 E|
|Cost of Goods Sold||8750.00||8189.57||9524.26||11634.78||13500.00||15800.00||18500.00|
|Power & Fuel Cost||40.18||41.20||43.84||45.32||46.50||48.50||49.50|
|(% of sales)||0.30%||0.40%||0.30%||0.30%||0.20%||0.20%||0.20%|
|(% of sales)||5.30%||6.20%||5.90%||5.50%||5.40%||5.80%||5.80%|
|Other Manufacturing Expenses||188.64||197.18||143.59||176.27||195.50||235.50||275.50|
|(% of sales)||1.60%||1.70%||1.10%||1.10%||1.00%||1.00%||1.00%|
|General and Administration Expenses||329.21||316.93||340.82||312.69||344.50||365.50||385.50|
|(% of sales)||2.80%||2.80%||2.60%||1.90%||1.80%||1.60%||1.50%|
|Selling and Distribution Expenses||497.82||568.82||870.99||969.65||1120.50||1340.00||1580.50|
|(% of sales)||4.20%||5.00%||6.60%||6.00%||5.90%||6.00%||6.00%|
|(% of sales)||2.70%||3.20%||3.00%||2.80%||2.70%||2.60%||2.50%|
|Profit Before Taxation & Exceptional Items||1048.89||868.11||1077.71||1549.20||2157.00||2629.50||3357.50|
|Exceptional Income / Expenses||-102.69||-16.65|
|Profit Before Tax||1048.89||868.11||975.02||1532.55||2157.00||2629.50||3357.50|
|Provision for Tax||232.64||191.59||275.97||427.87||603.96||736.26||940.10|
|Profit After Tax||816.25||676.52||699.05||1104.68||1553.04||1893.24||2417.40|
In the current financial year, Titan reported a splendid performance across all its divisions with overall revenue growth of 24% year-on-year. The jewellery division has continued to gain market share by capitalizing on larger opportunities such as wedding space and high value diamond studded jewellery. Titan has a robust balance sheet having virtually debt-free status and generating 30%+ RoCE (Return on Capital Employed). Factoring in the robust performance of Q3FY19, we recommend‘BUY’ on the stock with a target price of Rs1310 (47x FY21E EPS).