HOLD Titan Company CMP* (Rs) 1,241 Upside/ (Downside) (%) 5 Bloomberg Ticker TTAN IN Market Cap. (Rs bn) 1,100 Free Float (%) 47 Shares O/S (mn) 888 Retail | India Institutional Equity Research Initiating Coverage | May 28, 2019 1 Target Price: Rs1,304 Share price (%) 1 mth 3 mth 12 mth Absolute performance 8.0 18.7 34.5 Relative to Nifty 7.0 9.8 21.8 Shareholding Pattern (%) Dec'18 Mar’19 Promoter 52.9 52.9 Public 47.1 47.1 1 Year Stock Price Performance Note: * CMP as on May 27, 2019 Priyank Chheda Research Analyst Contact: 022 3303 4625 Email: [email protected]Naveen Kulkarni Head of Research 022 - 3303 4660 [email protected]Evolving Lifestyle Company Key Financials (Rs mn) FY17 FY18 FY19 FY20E FY21E Net Sales 128,965 156,213 190,700 227,946 270,391 EBIDTA 11,954 17,333 22,182 25,926 31,960 Net Profit 8,329 12,307 15,783 18,797 23,152 EPS (Rs) 9.4 13.1 15.5 21.2 26.1 PER (x) 49.2 71.9 73.5 58.6 47.6 EV/EBIDTA (x) 33.3 47.8 45.0 41.7 33.4 P/BV (x) 9.5 16.1 16.3 14.6 12.0 ROE (%) 19% 24% 24% 27% 28% Source: Company, RSec Research We are initiating coverage on Titan Company with a HOLD recommendation and a Target Price of Rs1,304, which implies 5% upside from the current levels. Total revenues are expected to clock 19% CAGR over FY19-21E, while EBITDA is expected to witness 20% CAGR over the same period. Revenue growth momentum is driven by Jewellery division gaining market share from the unorganised players and aggressive store expansion. We model modest EBITDA gains (~20bps for FY19-21E to 11.8% by FY21E), as the Company is undergoing expansion phase, where operating leverage gains are likely to be offset by investments across the brands. At CMP, the stock trades at a premium valuation multiple of 48x of FY21E, which we believe to sustain owing to strong net earnings growth visibility to compound at 22% CAGR for FY19-21E. We value the stock at 50x of FY21E earnings to arrive at our Target Price. Our investment thesis is based on the following premises. Double digit SSSg sustainable: We expect total revenues to clock 19% CAGR over FY19-21E driven by robust earnings prospects of Jewellery division which is expected to clock ~20% CAGR over the same period. Jewellery segment is expected to gain 213bps in market share to 7.8% by FY21E in consumer gold industry. We expect Tanishq to sustain 14% YoY Same-Store-Sales (SSS) growth in FY20-21E after witnessing 20% YoY/16% YoY growth in FY18/FY19. We expect Tanishq to add 65 & 50 stores in FY20-21E with 85-90% growth fueled by asset light franchises (L2 & L3 stores). Its watch division is expected to report 10% CAGR revenue growth (10.6% of total revenue) over FY19-21E on the back of 8% volume growth mainly driven by wearable segment and new product launches. Titan Eye is expected to clock 17.5% CAGR over the next 2 years with 28% CAGR in customers’ base partly offset by 8.2% CAGR contraction in revenue/customer. EBITDA Growth in-line with revenue growth: We expect consolidated EBITDA to clock 20% CAGR through FY19-21E in line with expected revenue growth, leading to EBITDA margin of 11.8% by FY21E. Notably, making charges on studded and high-value designer jewellery (Rs700-1,200/ gram or 35% of value) is ~2x of plain gold jewellery (Rs400-600/gram or 20% of value). We do not expect making charges to rise meaningfully from the current levels considering current gold prices along and subdued contribution of high-value studded jewellery from new stores in initial years of operation. We expect studded jewellery segment to clock 25% CAGR over FY19-21E contributing ~33% to total revenue by FY21E. Consolidated net profit is also expected to clock 22% CAGR over FY19-21E with net profit margin is seen expanding by 35bps to 8.6%. Promising Growth Outlook – Initiate with BUY Once expansion phase is over and new brand investments get mature, we expect Titan’s net earnings to compound at >20% CAGR for multiple years, going ahead. With modest capex requirement (Rs25bn for the next 2 years), the Company is expected to generate ~Rs34.5bn free cash flows over the next 2 years adding to Rs10.9bn of cash equivalents of in FY19. Further, while RoCE is likely to expand to 42% by FY21E from 33% in FY19, RoE is expected to expand by 370bps to 27.8%. However, stock currently trades at PE valuations of 48x PE FY21E discounting the bright business potential and leaves limited potential for valuation re-rating but certainly sustainable given strong earnings visibility. 700 800 900 1000 1100 1200 1300 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
We are initiating coverage on Titan Company with a HOLD recommendation and a Target Price of Rs1,304, which implies 5% upside from the current levels. Total revenues are expected to clock 19% CAGR over FY19-21E, while EBITDA is expected to witness 20% CAGR over the same period. Revenue growth momentum is driven by Jewellery division gaining market share from the unorganised players and aggressive store expansion. We model modest EBITDA gains (~20bps for FY19-21E to 11.8% by FY21E), as the Company is undergoing expansion phase, where operating leverage gains are likely to be offset by investments across the brands. At CMP, the stock trades at a premium valuation multiple of 48x of FY21E, which we believe to sustain owing to strong net earnings growth visibility to compound at 22% CAGR for FY19-21E. We value the stock at 50x of FY21E earnings to arrive at our Target Price.
Our investment thesis is based on the following premises.Double digit SSSg sustainable: We expect total revenues to clock 19% CAGR over FY19-21E driven by robust earnings prospects of Jewellery division which is expected to clock ~20% CAGR over the same period. Jewellery segment is expected to gain 213bps in market share to 7.8% by FY21E in consumer gold industry. We expect Tanishq to sustain 14% YoY Same-Store-Sales (SSS) growth in FY20-21E after witnessing 20% YoY/16% YoY growth in FY18/FY19. We expect Tanishq to add 65 & 50 stores in FY20-21E with 85-90% growth fueled by asset light franchises (L2 & L3 stores). Its watch division is expected to report 10% CAGR revenue growth (10.6% of total revenue) over FY19-21E on the back of 8% volume growth mainly driven by wearable segment and new product launches. Titan Eye is expected to clock 17.5% CAGR over the next 2 years with 28% CAGR in customers’ base partly offset by 8.2% CAGR contraction in revenue/customer.
EBITDA Growth in-line with revenue growth: We expect consolidated EBITDA to clock 20% CAGR through FY19-21E in line with expected revenue growth, leading to EBITDA margin of 11.8% by FY21E. Notably, making charges on studded and high-value designer jewellery (Rs700-1,200/gram or 35% of value) is ~2x of plain gold jewellery (Rs400-600/gram or 20% of value). We do not expect making charges to rise meaningfully from the current levels considering current gold prices along and subdued contribution of high-value studded jewellery from new stores in initial years of operation. We expect studded jewellery segment to clock 25% CAGR over FY19-21E contributing ~33% to total revenue by FY21E. Consolidated net profit is also expected to clock 22% CAGR over FY19-21E with net profit margin is seen expanding by 35bps to 8.6%.
Promising Growth Outlook – Initiate with BUYOnce expansion phase is over and new brand investments get mature, we expect Titan’s net earnings to compound at >20% CAGR for multiple years, going ahead. With modest capex requirement (Rs25bn for the next 2 years), the Company is expected to generate ~Rs34.5bn free cash flows over the next 2 years adding to Rs10.9bn of cash equivalents of in FY19. Further, while RoCE is likely to expand to 42% by FY21E from 33% in FY19, RoE is expected to expand by 370bps to 27.8%. However, stock currently trades at PE valuations of 48x PE FY21E discounting the bright business potential and leaves limited potential for valuation re-rating but certainly sustainable given strong earnings visibility.
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Titan CompanyInitiating Coverage | India
Institutional Equity Research
2
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Exhibit 1: Organised Players Gain Larger Pie of Market Share Exhibit 2: Tanishq to Gain 7.8% Share by FY21E in Domestic Consumer Gold Market
Source: CRISIL Research, RSec Research Source: WGC, RSec Research
Key Investment Rationale A. Jewellery BizI. India’s Most Trusted Jeweler – Significant Gain in Market Share
Brand, Trust and Transparency – Advantage for Organised Players: We estimate Titan to gain ~213bps market share annually over the next 2 years taking its current market share to 7.8% from current level of 5.7% (FY19) in consumer gold industry. We factor in 3% CAGR in industry size to 850tonne by FY21E. The Management aims to achieve 8% market share by FY21E and 10% by FY23, which seems to be achievable, in our view. Brand, Trust and Transparency are the key factors driving this shift. Tanishq has been witnessing market share gain across large, medium and small towns.
New Brands Likely to Boost SSS Growth: Changing consumer preferences, increasing demand for diamond-studded jewellery, preference for light weight jewellery, and more variety of designs, augur well for Tanishq, in our view. Increasing number of working women, exposure to global designs, rising number of young consumers and shift in preference to light weight fashion jewellery from traditional bulky jewellery are the key positives for Tanishq. We expect Tanishq to sustain 14% YoY Same-Store-Sales (SSS) growth in FY20-21E after witnessing 20% YoY/16% YoY growth in FY18/FY19.
f Mia: Titan launched first sub-brand ‘Mia’ for working women in 2011 and known for modern, trendy and light jewellery. Mia sells daily-wear gold and semi-precious stone jewelleries, which are priced between Rs4,000-30,000. Mia has been launching 2-3 products annually and growing in the excess of 20-25%. The Company targets to achieve Rs2.5bn turnover in FY20 with 54% YoY growth and 21 new stores (added 10-12 standalone stores in FY19). It aims to achieve Rs7.5bn turnover under this brand by FY23. Mia has entered an exclusive online partnership with Amazon for an omnichannel growth.
f Zoya: It is a luxury brand of fine jewellery with flagship boutique showroom in New Delhi. The Company plans to add 5 new boutiques and targets Rs1.15bn revenue in FY20E.
f Caratlane: This omnichannel brand is targeted to grow by 45% in FY20 crossing sales (MRP) of Rs6bn and addition of 35new stores in FY20E. With reported revenue of Rs4.2bn (+44% YoY), its EBIT loss halved to Rs380mn in FY19. The Company targets to achieve breakeven in FY20E. It has undertaken various brand building investments with focus on digital marketing, catalogue expansion and ‘Ready-To-Ship’ inventory initiatives. It has set target of achieving Rs20bn turnover with 5% EBIT and 20% RoCE by FY23. It
invested further Rs1bn in Caratlane increasing its stake to 69.47% in Apr’19. Aaranya (An Ode to the Beauty of Trees), Pero (A medley of Flying Colours) and Butterfly (The Spirit of You) are the few recent successful launches under this brand.
f Action Plan for FY20: The Company is planning to regionalise the wedding collection across the key states i.e. Uttar Pradesh (UP), Bihar, Jharkhand, Odisha, West Bengal (WB) and Andhra Pradesh (AP), going ahead. It is expected to come up with affordable diamond collection to fill the key gap in the studded jewellery segment. The Company is planning to leverage the occasion of ‘Engagement’ collection with the target of 4x growth in FY20.
Exhibit 3: Regular Launches of New Collections – Key Demand Driver
Collection Brand Product Feature Launch
New Rivaah Tanishq Regional Wedding collection Ongoing
Swayahm Tanishq High Value Studded collection Apr-19
Utsav Tanishq Heritage and Antique gold jewellery Oct-18
Peacock Preen Party diamonds category Oct-18
Gulnaaz Tanishq Inspired by representation of nature’s bounty Jul-18
Silver Mia Stylish, fashionable and Affordable Jul-18
Padmavati Tanishq Associated with film collection Sep-17
Glitterati Tanishq High value diamond jewellery Nov-17
Aveer Tanishq Men’s Jewellery Dec-17
Jewels of Royalty Tanishq High value diamond jewellery Jul-17
Mirayah Tanishq Collection of Diamond and colour stone Apr-17
Rivaah Tanishq Refreshed plain and studded collections Mar-17
Source: Company; RSec Research
II. Expansion Opportunity – Galore f Aggressive Store Expansion on the Cards: On the back of regulatory tailwinds, the
Company has accelerated its average annual store addition rate. Average annual net store addition has significantly ramped up to 21 (FY17-19) from 13 (FY11-17), and the momentum is expected to increase further to 65/50 stores addition over FY20E/FY21E. The Management has guided for 70 stores addition in FY20E.
f Foray into Newer Markets & Franchise Expansion to Aid Market Share Gain: Since most of the store addition are planned in towns where market share is below national average, average area of new store is expected to scale down to 2,000sq ft in FY20-21E from ~4,000sq ft in FY16-19. We model 0.23mn sq ft addition of area under operations in the next 2 years taking the total area under operation to 12.8mn FY21E with 405 stores. Management ambitious target to have 500 stores by FY23E, seems to be reasonable, in our view. 90-95% store expansion is planned on franchisee based (L2 & L3 formats) going ahead. The Company has identified Tier-II & Tier-III towns as strategic markets, which are under-served by the branded jewelers. It has doubled its towns reach to 175 in last 4 years and plans to add more 75 towns in next 4 years. We expect area under operations to witness 10% CAGR with sales per sq ft expected to clock 9% CAGR over FY19-21E.
Titan CompanyInitiating Coverage | India
Institutional Equity Research
4
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Exhibit 4: Current Expansion is Led by L2 & L3 Format Stores
Stores L1 L2 L3
Store Format "Large formats Company Owned"
"Medium formats, Company managed"
"Small formats, Franchise Owned & managed"
Presence Metros Mini Metros & Tier II Tier II & III
High Value Gold & Daimond Contribution Higher Equal Lower
Plain Gold Contribution* Lower Equal Higher
High Value Gold & Diamond Contribution* Higher Equal Lower
Source: Company and RSec Research | *Indicative levels may not be exact.
Exhibit 5: Significant Ramp-up in Store Addition; 65 & 50 Stores Planned to be Added in FY20E & FY21E
III. Value Addition, Strong Pricing Power & Improved Product-mix – Key Margin DriversStrong Pricing Power: Based on our on-ground interactions, traditional jewelers’ margin varies between 15-20% (net of karigar cost). Hence, they make up the lost profits in diluting the purity of gold. Tanishq has been earning 25-26% gross margin for past decade. Tanishq earns 3-4% pricing premium compared to peers in the same area of operation. Additionally, Tanshiq charges 15-25% making charges on plain jewellery and 30-45% making charges on studded and wedding jewellery. Margin in stone-studded jewelleries can go up to 50-60% Our channel check suggests that the traditional jewelers lack pricing power vis-à-vis organised jewelers in terms of quoting market rate and making charges. Cost of skilled labourer for manufacturing (Karigar cost) can be as low as 50% for Tanishq compared to the traditional jewelers. (Refer to margin composition analysis in exhibit 9.)
Improvement in Product-mix key to Drive Margin: Jewellery segment has been the focus for Tanishq since 2016, which has seen 300bps improvement in EBIT margin over last 4 years mainly on incrementally higher share in studded jewelleries and premiumisation/up-selling. Studded segment – which has been witnessing 25% CAGR since 2016 – is expected to contribute 33% to total revenue by FY21E. Stone-studded/diamond jewelleries are more profitable compared to plain gold jewelleries. Margin in studded designer jewellery can be as high as 35-40%. Product mix is one of the important factors for margins upside.
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Tanishq Expansion History
Tanishq Sq Ft ('000) Showrooms
Titan CompanyInitiating Coverage | India
Institutional Equity Research
5
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Near term margin upside looks limited: Higher number of wedding days in FY20 also bodes well for the Company. The Management targets increase in contribution of high-value diamond jewellery from 30% in FY17-18 to 50% by FY22-23. Looking ahead, we believe higher share of studded jewellery is the key for improvement in margin. However, the near-term margin upside looks limited as newer stores would contribute higher low margin plain jewellery.
Exhibit 6: Significantly Higher Wedding Days in FY20 Exhibit 7: Trend in Studded Jewellery Contribution
Plain Jewellery (70% of Revenues) 15-25 Rs 500-600/Gram (The making charges starts from as low as Rs275/gram and can be as high as Rs800/Gram).
Studded / Wedding Jewellery (30% of Revenues)
30-45 Rs700-1,200/Gram (The making charges starts from as low as Rs600/gram and as high as Rs1,500/Gram). Margins are also boosted from higher value stones and diamonds.
Add: Pricing premium in gold 4-5 Explained above in the table
Blended Gross Margins 25-28 Margin trend observed for FY08-FY18
Traditional Jeweller Margin 10-15 Rs400-800/Gram. Sourcing of gold from bullion, higher karigar cost due to low scale, less bargaining power due to like-to-like competition. Usually – Purity of gold is compromised to compensate for the loss of margin (difficult to judge)
Source: RSec Research, Prices as on 14th May 2019 (Afternoon) / Note: The above data points are assumptions based on our channel check. The Management does not provide any
indicative margin for the type of jewellery sold. Data may vary visavis the assumptions
IV. Unique Initiative to Differentiate Men from Boys35% YoY Growth in Exchange & Up-selling – Key Opportunity: Titan de-risked its business model by focusing on volume growth through various gold exchange schemes after the government’s restriction on gold imports. Today, gold sourcing through customer exchange (recycled gold) contributes ~40% to total revenues (compared to 15% in 2013) and has been the key driver to sales volume since 30% exchange of old gold jewellery is from non-Tanishq jewelers. Tanishq discounts the exchange gold value by 3% if ‘22k & above’ and 8-10% if ‘22k & below’ for gold from non-Tanishq jewellery. It expects 35% YoY growth in gold exchange in FY20E. Though the exchange/re-cycled gold has higher cost attached, it helps in acquiring new customers with more upselling leading to higher ticket sales, a win-win situation for consumer and Tanishq. The Management targets to scale-up gold exchange contribution to 50% by FY23E.
Gold Lease – Advantage over traditional jeweller: Gold on lease contributes 40%-50% and spot purchases account for only 10-20% of overall gold purchases as against traditional jeweler who is 80-100% dependent on spot purchases. Titan has been able to scale up business operations using low-cost gold on lease (at 3.5-4% annual interest). Additionally, gold lease acts as natural hedge against volatility in gold prices. Gold lease leads to low-cost working capital and adds to RoCE as well. Titan confirms that 60% of its total gold sourced from leasing is LBMA (London Bullion Market Association) certified, which ensures the highest standards of raw material sourcing from the refiners.
Titan CompanyInitiating Coverage | India
Institutional Equity Research
7
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Exhibit 10: Titan Sourcing Avenues vs. Traditional Jewelers Exhibit 11: TGHS Scheme as a % of Sales
Source:Company, RSec Research
GHS Scheme: Tanishq runs Golden Harvest Scheme (GHS) for the customers to deposit a minimum of Rs2,000/month for a minimum period of 10 months. Being one of the registered schemes under the Companies Act, GHS contributed 20% to its total sales in FY19. Tanishq expects higher activations in FY20E led by higher GHS limit following increase in net-worth. Swarnanidhi is another flexible scheme by Tanishq, which helps in protecting the customers against the rising gold prices.
1st Jan'2019 421st Day 13 2,000 75 1.500 26,000 5.8
Source: Company, RSec Research
Setting Standard of Gold: Traditional jewelers derive value by traditional rub-off method and discounts 10-15% of value even if it is returned to the same jeweler. However, by introducing Karat meter (proprietor gold instrument of Tanshiq, available at all Tanishq stores) guarantees the most accurate way of measuring purity of gold, to provide 100% exchange value for diamonds/precious stones purchased from Tanishq. All the Tanshiq jewelleries are hallmarked and has unique identification mark, while most traditional jewelers do not have BIS license, which is a pre-requisite to sell hallmarked jewellery.
Exhibit 13: Segmental Revenue Over the Years Exhibit 14: Segmental Margin Over the Years
Source:Company, RSec Research
Gold Exchange,
40%
Gold Lease, 40%
Spot Purchases
, 20%
Titan Sourcing avenues %
Gold Exchange,
20%
Gold Lease, 0%
Spot Purchases,
80%
Traditional Jeweller sourcing avenues %
14%
17%
20%
0%
5%
10%
15%
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25%
FY17 FY18 FY19
% of Total Sales
8%
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14%
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FY16 FY17 FY18 FY19 FY20E FY21E
Jewellery EBIT and Margins
EBIT (Rs mn) EBIT Margins %
4% 4%
15%
10% 11%
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FY17 FY18 FY19 FY20E FY21E
Watches Revenues
Revenue % Change
Titan CompanyInitiating Coverage | India
Institutional Equity Research
8
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Exhibit 15: Gold Prices Remaining at above 4-Year Average – Suggests Stable Demand Scenario
Source: Bloomberg
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Titan CompanyInitiating Coverage | India
Institutional Equity Research
9
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
B. Watch Biz: Unique in the styleRe-crafting Strategy, double digit revenue growth expected for FY19-21E: The re-crafting strategy, to improve revenue and profitability started in 2016-17, has led to double-digit volume growth in FY19 after 6 years with selling of 16.8mn watches. Product design & new launches remains at the core of the watch business strategy, which resulted in excellent results for new launches in FY19. We expect segmental revenue to clock 10% CAGR over FY20-21 led by 8% CAGR in volume. Premiumisation trend by World of Titan stores, Xylys and Nebula brands is likely to keep pricing growth in the range of 2-3% in the coming years.
Wearable Portfolio – Adding Fuel to Growth: Global wrist wear market has been witnessing 5% CAGR for last 6 years, while smart watch segment reported 84% CAGR in the same period. Smart watches contributed 23% to global wrist wear market. Titan’s wearable portfolio comprises of smart bands, hybrids and smart watches. Smart products including wearable grew at a high rate of >80% YoY in FY19, crossing the milestone of Rs1bn sales, which aided the company to become the second largest wearable company in India. The Company has adopted GPS (Growth, Profitability & Seeding) strategy to innovate and lead the change, thereby keeping the strong revenue growth momentum intact.
Focus on Brands – Powers the Complete Watch Portfolio f Titan: The watch division is driven by 'World of Titan' (contributing ~50% to segmental
revenue) with its 486 exclusive showrooms (as of FY19-end) across 223 towns. The Management focuses on new launches in >10k price bracket in Titan Edge and Raga portfolio along with new products introductions in hybrid, Full Touch and Analog LED. Titan brand is considering its entry into mechanical watches as well.
f Sonata: This value-focused brand reported highest ever >6.3mn volume in FY19 with 1mn sold via e-commerce channel. Titan has also entered a strategic partnership with about 10 e-commerce majors. It has also entered the US market through an exclusive partnership with Amazon.
f Fastrack: Youth brand has revamped its portfolio with higher focus on wearables, new sub-brands for girls and new launches. Fastrack has 172 exclusive outlets (90,000 sqft.).
f Favre Leuba AG (FLAG): Titan acquired FLAG (WOS) in 2012 with commercial launch in 2016, is one of the oldest Swiss watch brands. With this, Titan forayed into premium/luxury watch segment.
f Helios: It is the fastest growing brand in brick and mortar channel for watch portfolio. Helio’s offers international brands apart from in-house brands.
f New Brands: The Company plans to launch new brands in new consumer segment – ‘Adventure Gear Brand’, recording key activity metrices. It also plans to revamp wall clock collection.
Customer Acquisition to Keep Revenue Momentum Intact: Titan Eyewear division’s revenue is expected to grow by 20% YoY in FY20E, driven by 26% YoY growth in customer base to 4.4mn and 5% reduction in revenue/customer (in-line with the company’s strategy to improve price-value equation). The Company targets 10mn customer base by FY23, which will ensure 30% CAGR volume growth over FY20-23E. Price value equation is likely to bottom in the next 2 years with sales/customer to report 8% CAGR decline in the next 2 years to Rs1,225/customer. After disproportional investments for last two years, we have modelled 6% and 10% EBIT margin for FY19E and FY20E, respectively. Though the Management has refrained to provide any guidance on segmental margin, it has been vocal on ensuring improvement in value growth, going ahead.
Action Plan for FY20E: (1) The Company has identified 50 catchments for domination and plans to open 1-2 large stores; (2) driving SSS growth by enhancing price value equation for standard stores and bringing focus back on premium stores (50 stores planned in FY20E); (3) ramp-up in frame manufacturing plant for frames and lens from 0.16mn to 0.48mn units; (4) building awareness for 3 brands i.e. Titan Eyeplus (retail chain), Titan Eyewear and Fastrack Eyewear (Frames & Sunglasses); (5) following aggregator model in MBO outlets; and (6) licensing international brands.
Huge Untapped Opportunity: Out of a total population of >1.2bn, people who need vision correction is estimated at 530mn, which is roughly 44% of total population and actual spectacle users out of the people who need vision correction are just 170mn (32% of population), and annual spectacles buyers are pegged at 60mn, which is just 35% of total spectacle users. The sunglasses (1/3rd revenues to Eyewear segment) as well as the contact lens market is highly under-penetrated and continues to be the key focus area of the management.
Initiatives Undertaken to Improve SSS Growth f Delivery of spectacles within 30 minutes has been extremely successful, which is the
key differentiator.
f Old format stores underwent major renovations to reflect the new identity along with 300 new frames and 350 new sunglasses introduced in FY18.
f Simplified incentive structure, which motivated staff to sell more.
f The satellite lens labs to work closely with the stores to reduce turnaround times and enable to deliver spectacles on the same day.
f Most stores now have 2 qualified trained optometrists. Stores focus on to deliver zero error eye testing and error-free spectacle dispensing.
f The Omni channel model has been successful with online presence and has been effective in driving large customers to stores.
Frame Manufacturing & Cost Control to Aid Margin: The Company started its plant to manufacture 1mn/annum and satellite labs in Mumbai, Kolkata, Delhi and Bengaluru. As most frames are imported from China, Titan constituted a dedicated team to design frames with an eye on international eye-wear trends and thereby reduce imports. Only 0.16mn frames were manufactured from the plant as on FY19, ramping-up of this facility is likely to help improve margins. The Company has invested Rs700-800mn for setting up its manufacturing plant and satellite labs. Continued brand investments and restructuring plans have led to subdued segmental EBIT margin. Considering these factors, we have modelled improvement in margin up to 10% by FY21E.
D. New Business Opportunities I. Skinn – Tapping the next big Opportunity About the Business: Titan launched fragrances under its ‘Skinn’ brand in 2013 reported ~Rs1.2bn revenue in FY19. Skinn aims at giving the consumers finely distilled perfumes made in France by celebrated perfumers. Branded perfumes at an attractive price point is the USP of the offering. Skinn enjoys 9% market share with ~1mn units sold in 3,000 points of sales including 32 exclusive kiosks as on FY19-end. Brand desire grew dramatically post launch of Amalfi Bleu. World of Titan stores contribute 30% to Skinn’s revenue.
f Huge Fragrance Opportunity: Fragrances –largely an underpenetrated market (~30% penetration as per Kantar consulting, 2018) – is expected to grow to >Rs25bn by FY23 from Rs1.35bn. As per the Management’s estimate, less than 1 in 6 urban consumers use perfumes and are typically ‘reserved’ only for special occasions. Currently, the fragrance industry in India is dominated by 60-70 international brands. The Management targets >4mn consumers with revenue target of Rs5bn by FY23E, translating market share of ~20%. The Company focuses to build a portfolio of products, gift packs and brands to appeal to different segments. Strengthening the supply chain in India for scale, agility and higher gross margin are the key focus areas for Skinn. The Management expects segmental EBITDA margin to hit 10% by FY23E.
Titan CompanyInitiating Coverage | India
Institutional Equity Research
14
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
II. Taneira: ‘Hand Crafting the Brand’ f Large Unorganised Opportunity: Indian special occasion wear market is large,
fragmented and still growing rapidly (~20% CAGR) mainly driven by higher wedding spends. According to management, addressable market size, which is largely dominated by the unorganised market, is expected to grow to Rs700bn by FY23E from ~Rs350-400bn in FY19. Taneira looks for potential business to the tune of Rs8-10bn in the next 7-8 years with a strong retail network of 15 stores in top 20 towns over the next 5 years from current 5 stores in 3 metros. Store collections starts from Rs2,500-250,000/unit with median collection at Rs8,000/unit and average ticket value of ~Rs10,000-14,000/unit. Bridal wear constitutes 60% of the business and 70% of bridal wear is sarees. Taneira has built strong business inroad during FY19 on the back of category expertise, design studio, strong vendor base, sourcing hubs in key clusters, tie-ups with the Ministry of Textiles/KVIC. Key proposition lies in providing authenticity in materials, handwork, craftsmanship and design as a big differentiator. The Management guides that the profitability of this business would be between jewellery and watch segment.
Titan CompanyInitiating Coverage | India
Institutional Equity Research
15
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Valuations – Surprise factors to watch for valuations to justifyTitan has been successful in achieving moat in jewellery designs and capturing market share from unorganized players. Investments in brands over the years, professional management and agile business models has helped Titan achieving higher than industry growth across the business segments of its presence. Post demonetization, GST and regulatory hurdles in the industry, Jewellery segment of Tanshiq stores has witnessed double digit Same Store Sales growth for last 9quarters (from Q3 FY17, except for Q1 FY19 albeit on higher base). Sales value growth has been in double digit for Tanshiq stores for 8 out of 9 quarters. Since than the market value has seen significant valuation re-rating from 10 years long term average shifting from 12m Frwd PE of 25x to 30x. At CMP, the stock trades at 48x PE FY21E, which discounts the ambitious plans of double-digit revenue growth. Along with double digit SSS growth visibility, company plans to add 50-70 stores annually for the coming couple of quarters which is likely to keep the total revenue momentum intact.
Surprise Factors to Watch out For f The Management aspires to tap the big domestic opportunity of 47% young population
(under 25 years) aspiring for premiumisation trends. Young growing brands with aggressive growth plans are likely to cater to the management’s vision to reach 50mn customers and achieving revenue target of Rs500bn by FY23E. This is likely to keep the Company to focus on top-line growth of over 25% CAGR for the forward years, making next big Tata brand in value terms.
f We believe margin expansion in jewellery segment has not been discounted in Titan’s current consensus valuation. The stores –added in last two years (total 51 stores added) – are likely to add to SSS growth and improve the product-mix. This is likely to add to the operating leverage once the stores get matured.
f We expect Titan to report stable and high RoE of 28% by FY21E. Higher RoE is expected to sustain on the back of incremental store expansion including contribution of franchise network (asset light model). The Management has indicated the return on capital from across the format stores to be same, but when macro turns unfavorable – asset light model (L2 & L3) is least impacted.
f Higher revenue contribution is expected from non-flagship brand-sub-brands of Jewellery divisions (Caratlane to be profitable brand), Watches (wearables and premiumisation trend), Eyewear segment (major investments in branding and distribution is behind). Brands i.e. Skinn and Taneria are also likely to get matured by FY23.
We initiate our coverage with a HOLD rating on Titan Co at PE multiple of 50x for FY21E with target price of Rs 1,304.
Return on Equity % 28 27.5 (50)bps 28.4 27.81 (60)bps
EPS, Adj+ 21.3 21.3 0 25.9 26.3 1
Source: Bloomberg as on 27th May 2019, RSec Research
Titan CompanyInitiating Coverage | India
Institutional Equity Research
16
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Exhibit 27: Revenue Growth Outlook Remains Robust Exhibit 28: EBITDA Likely to Grow With Revenues
Source:Company, RSec Research
Exhibit 29: EBIT Margin For Eyewear Division Likely to Rebound Exhibit 30: RoE & RoCE
Source:Company, RSec Research
Exhibit 25: Saga of Strong Earnings Growth Exhibit 26: Significant Re-rating from the Beginning of CY18
Source:Bloomberg, RSEC Research
9%
-5%
16%
21% 22%20% 19%
-7%
-2%
3%
8%
13%
18%
23%
28%
50,000
100,000
150,000
200,000
250,000
300,000
FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Total Revenue Growth
Total Revenues % Growth
10%
9%
9%
11%
12%11%
12%
8%
9%
9%
10%
10%
11%
11%
12%
12%
13%
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY15 FY16 FY17 FY18 FY19 FY20E FY21E
EBITDA & Margins
Total EBITDA % EBIDTA Margins
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY16 FY17 FY18 FY19 FY20E FY21E
EBIT Margins
Watches Jewellery Eye Wear
22%
26%
33% 33%
37%
42%
20% 19%
24% 24%
27% 28%
15%
20%
25%
30%
35%
40%
45%
FY16 FY17 FY18 FY19 FY20E FY21E
ROCE v/s ROE
ROCE ROE
Key Risks f Volatility in gold prices in spot as well as futures market.
f Adverse regulatory changes.
f Overall decline in consumer sentiment.
5
7
9
11
13
15
17
19
21
23
200
400
600
800
1000
1200
1400
Jan/16 Jul/16 Jan/17 Jul/17 Jan/18 Jul/18 Jan/19
Price Consensus EPS Movement
10
15
20
25
30
35
40
45
50
55
60
May
-09
Oct
-09
Feb-
10Ju
n-10
Oct
-10
Feb-
11Ju
n-11
Oct
-11
Feb-
12Ju
n-12
Nov
-12
Mar
-13
Jul-1
3N
ov-1
3M
ar-1
4Ju
l-14
Nov
-14
Mar
-15
Jul-1
5D
ec-1
5A
pr-1
6A
ug-1
6D
ec-1
6A
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7A
ug-1
7D
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7A
pr-1
8A
ug-1
8D
ec-1
8M
ay-1
9
1YFW PE (x) Avg (x) +1SD (x) -1SD (x)
Titan CompanyInitiating Coverage | India
Institutional Equity Research
17
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Global Peer Comparison New York-based, Tiffany & Co. (Tiffany) – a luxury jewellery and specialty retailer – was founded by Charles Lewis Tiffany in 1837. Tiffany has become known worldwide for luxury goods and most notably diamond jewelry. Today, Tiffany is valued at US$12.9bn ~3x of annual sales and at PE of ~21.5x FY20E despite single-digit revenue growth since last 5-6 years. Engagement and designer jewellery contribute 40% to its total revenue.
Notably, Tiffany earns 63.3% gross margin (expansion of 630bps in last 7 years) and ~13% of EBITDA margin (~250bps higher than Titan’s current margin). Titan makes less than half the margin that of Tiffany. Tiffany’s market value has clocked ~17% CAGR over the last decade. The Company has spent 8.9% of its revenue on advertising, marketing and public/media relations in 2018, which explains that the brand value in jewellery business is of utmost importance.
Exhibit 31: Tiffany – Brief financials over the Years
World of Titan 6.0 5.0 7.0 (4.0) 2.0 9.0 (2.0) 7.0
Tanishq 51.0 18.0 12.0 17.0 2.0 32.0 27.0 14.0
Goldplus
Helios 24.0 (9.0) 4.0 5.0 (2.0) 16.0 6.0 6.0
Fastrack (3.0) 2.0 6.0 (6.0) 0.0 6.0 (1.0) 2.0
Zoya
LFS -watches 8.0 1.0 6.0 11.0 12.0 26.0 15.0 16.0
Titan eye+ 3.0 3.0 14.0 1.0 8.0 8.0 13.0 14.0
Outlets
World of Titan 482 485 481 486 496 489 491 486
Fastrack 161 166 164 166 173 173 175 172
Helios 54 62 67 70 72 72 73 76
Tanishq 219 229 240 256 262 267 277 287
Zoya 2 2 3 1 3 3 3 3
Mia 20 30 32 36 39 43 48 50
Carat lane 32 24 30 36 39 45 50 55
Eye+ 457 462 478 500 509 513 525 537
Taneria 4 4
Source: Company; RSec Research
Titan CompanyInitiating Coverage | India
Institutional Equity Research
19
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Company Background Titan started jewellery business in 1995 with the launch of the brand Tanishq. Subsequently, it launched Zoya brand in luxury segment, while Mia – a sub-brand under Tanishq – was started specifically for work-wear jewellery. It acquired CaratLane in 2016 to bring seamless omni-channel experience to customers.
Titan is the world’s fifth largest integrated watch manufacturer with one of the largest retail networks. With three business units i.e. Titan, Sonata, and Fastrack, it owns >50% of domestic market share in Rs50-55bn organised watch market. It has 6 major in-house brands and 6 licensed brands present across 11,000+ dealers/MBOs.
Titan eyewear business consists of two streams of revenues i.e. (1) distribution business including sunglasses and frames; (2) retail business (Titan EyePlus stores). Apart from selling gears/sunglasses in-house brands (Titan & Fastrack), Titan Eyeplus store also offers along with a wide range of over 10 global brands.
Exhibit 33: Key Senior Management
Name Designation Brief Profile
Mr. Bhaskar Bhat MD Mr. Bhat – expected to retire by Sept’19 – has been associated with the Watch Project since 1983. At Titan, he dealt with sales and marketing, HR, international business and various general managerial assignments.
Mr. C.K. Venkataraman CEO – Jewellery Biz Mr. Venkataraman – expected to succeed Mr. Bhat as MD – has been heading Jewellery division since Jan’05. He joined Titan in 1990 and worked in advertising and marketing functions before becoming the Head of Sales & Marketing in 2003.
Mr. S Ravi Kant CEO – Watches & Accessories & EVP Corporate Communications
Mr. Kant joined Titan in 1988 and headed Direct Marketing, followed by Retailing and Exports. He took over the International Business Division – for watches as well as jewellery in over 25 countries. He took over the watches business in 2015.
Mr. Ronnie Talati CEO – Eyewear Biz Mr. Talati – who joined Titan in 1984 as GM Finance –headed the new business unit to target the youth. Thus, 'Fastrack' came into existence.
Mr. S. Subramaniam CFO & Head of IT Function Mr. Subramaniam has over 25 years of experience. Subramaniam has been driving strategic finance and has been a part of the top management teams for the past 10 years.
Source: Company and RSec Research |
Other Subsidiaries f Titan Engineering & Automation (WOS): It is present in automation and aerospace and
defence business. Automation segment provides turnkey assembly/testing solutions for several industry segments like transportation, energy, life-sciences, engineering and consumer packaged goods. Aerospace and defence segment provide high precision manufacturing solutions for components and sub-assemblies. Its revenue grew by ~44% to Rs3.5bn and contributed Rs580mn to its net profit in FY19. The Company is witnessing a strong growth across the customer segments and a very healthy order wins with 30 projects exported to 17 countries.
f Mont Blanc (49% JV): This luxury writing instruments/accessories maker operates 12 boutiques and 95 cities.
Titan CompanyInitiating Coverage | India
Institutional Equity Research
20
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
Profit & Loss Statement
Y/E Mar, Rs mn FY17 FY18 FY19 FY20E FY21E
Net sales 128,965 156,213 190,700 227,946 270,391
Growth, % 16 21 22 20 19
Raw material expenses (92,888) (113,857) (139,502) (167,084) (197,386)
Liquidity ratiosCurrent ratio (x) 1.7 1.8 1.8 1.8 1.9
Quick ratio (x) 1.0 0.7 0.9 1.2 1.4
Interest cover (x) 31.4 35.9 50.8 38.9 36.0
Net debt/Equity (%) (26.9) (12.2) (17.7) (27.4) (36.5)
ValuationPER (x) 49.2 71.9 73.5 58.6 47.6
Price/Book (x) 9.5 16.1 16.3 14.6 12.0
EV/Net sales (x) 3.1 5.3 5.2 4.7 4.0
EV/EBITDA (x) 33.3 47.8 45.0 41.7 33.4
EV/EBIT (x) 34.1 48.5 44.2 40.9 32.7
Titan CompanyInitiating Coverage | India
Institutional Equity Research
22
CMP* (Rs) 1,241
Upside/ (Downside) (%) 5
Bloomberg Ticker TTAN IN Target Price: Rs1,304
HOLD
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