Titan Industries - result update-Aug-13-EDELbreport.myiris.com/ES1/TITINDUS_20130801.pdfLTL surged...

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Edelweiss Securities Limited

Our Contra BUY call on Titan has worked well with Stock up 31% since our

Note - When the going gets tough, the tough get going. Q1FY14 was a

blockbuster quarter well ahead of our expectations. Key positives were:

(i) 47.2% YoY growth in jewellery business led by 67% YoY grammage

surge; (ii) adjusting for INR340mn notional loss, EBIT margin in jewellery

was flattish YoY (despite lower studded share); and (iii) added 37,000 sq

ft in jewellery (already met 37% of FY14 guidance). Key negatives include:

(i) 367bps YoY dip in watches margin (due to one-time impact of wage

settlement and INR depreciation); and (ii) drop in studded share to 16%

(as expected). The withdrawal of restrictions on gold on lease model by

RBI will definitely be advantageous to Titan. We expect Titan to be

prioritised in the sourcing of gold under the curtailed supply scenario due

to its large size, years of strong operating performance, healthy balance

sheet and the Tata brand. In our view, it is the best play on discretionary

consumer space. Maintain ‘BUY’ with revised TP of INR324.

Robust revenue growth, jewellery customer growth at 49% YoY

Tanishq reported robust 29% YoY like-to-like (LTL) growth (42% overall), while Goldplus

LTL surged 37% YoY. Watches sales growth surged from 1.5% YoY in Q4FY13 to 11.4%

YoY in Q1FY14. Eyewear revenue grew strongly at with 34% YoY jump.

Margins disappoint on account of one-offs

Jewellery EBIT margin dipped 135bps YoY (notional cost of INR340mn booked in

Grammage Scheme; can potentially reverse in coming quarters) with fall in share of

studded to 16%. Titan booked. Watches EBIT margin tanked 367bps YoY to 10.3%.

EBITDA margin for the consolidated business slipped 173bps YoY.

Outlook and valuations: Go contra; maintain ‘BUY’

At CMP, the stock is trading at P/E of 27.0x and 22.4x FY14E and FY15E EPS,

respectively. As RBI reversed ban on gold on lease and requirement of upfront

payment we reverse the earlier cut in numbers and increase EPS for FY14E and FY15E

by 6.7% and 13.1% respectively. Also, we increase target multiple to 28x (26x earlier, as

the concerns on inventory risk go away) to arrive at a revised TP of INR324 (INR267

earlier). We maintain ‘BUY’ on the stock with ‘Sector Outperformer’ rating.

RESULT UPDATE

TITAN INDUSTRIES Jewellery shines; one-offs singe margin

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Low

Sector Relative to Market Overweight

MARKET DATA (R: TITN.BO, B: TTAN IN)

CMP : INR 259

Target Price : INR 324

52-week range (INR) : 314 / 200

Share in issue (mn) : 887.8

M cap (INR bn/USD mn) : 230 / 3,811

Avg. Daily Vol.BSE/NSE(‘000) : 2,756.0

SHARE HOLDING PATTERN (%)

Current Q4FY13 Q3FY13

Promoters *

53.1 53.1 53.1

MF's, FI's & BK’s 2.8 2.8 3.1

FII's 20.1 19.1 18.3

Others 24.0 25.0 25.5

* Promoters pledged shares

(% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty

EW Retail

Index

1 month 14.3 (2.9) 2.7

3 months (4.2) (3.4) 3.9

12 months 17.0 9.3 18.6

Abneesh Roy

+91 22 6620 3141

[email protected]

Pooja Lath

+91 22 6620 3075

[email protected]

India Equity Research| Retail

August 1, 2013

Financials (INR mn)

Year to March Q1FY14 Q1FY13 % change Q4FY13 % change FY13 FY14E FY15E

Net rev. 31,077 22,057 40.9 26,132 18.9 101,233 120,342 141,465

EBITDA 2,449 2,120 15.6 2,665 (8.1) 10,125 11,914 14,288

Net profit 1,825 1,561 16.9 1,850 (1.3) 7,249 8,535 10,286

EPS (INR) 2.1 1.8 2.1 8.2 9.6 11.6

P/E (x) 31.8 27.0 22.4

EV/EBITDA 21.6 17.9 14.8

ROAE (%) 42.3 37.6 35.2

http://www.edelresearch.com/rpt/showPdf.aspx?id=23300&reportname=/Titan_Industries_-_event_update-Jun-13-EDEL.pdf

Retail

2 Edelweiss Securities Limited

Q1FY14 conference call | Key Takeaways

Jewellery: In Q1FY14, jewellery sales rose 47% YoY to INR2,614mn with a high grammage

growth of 67% YoY. However, PBIT margin declined 135bps YoY primarily due to the

notional loss in inventory of INR340mn (which could potentially reverse) as a result of the

Gold Grammage scheme; the decline can also be attributed to the fall in the share of high

margin diamond jewellery business.

Grammage growth: Predominant reasons for the substantial increase in grammage growth

were: (1) sharp decline in gold prices; (2) good number of marriage days; and (3) Titan’s

campaign highlighting affordability.

Gold prices: Gold prices in Q1FY14 fell 7% YoY.

Coins and gold bars: Titan has stopped selling gold coins and bars since mid July. Total

share of gold coins and bars was 10% in Q1FY14.

Studded share: There has been a sharp dip in studded jewellery share to 16% YoY which

was due to fall in prices of gold which shifted consumer sentiments towards buying gold

jewellery. Value growth in studded jewellery was flattish YoY. Titan is taking measures to

revive the sale of diamond jewellery with new initiatives and programmes, e.g., the

company has started a discount offer of flat 15% off on all its diamond jewellery.

Gold Grammage scheme: The scheme allows the customer to fix the quantity of gold that is

based on the gold rate prevailing on the date the customer takes the scheme i.e., from the

date of payment of installment. The value of this quantity at the rate prevailing on the date

of sale is allowed as credit against the sale price of jewellery. Titan is naturally hedged in

this exposure as it buys the requisite quantity of gold at the price decided. But since there

has been a substantial decline in prices of gold, this resulted in a notional loss of inventory

(valued on FIFO basis) amounting to INR340mn (expected to recover with increase in gold

prices).

Titan has a total exposure of ~INR12bn through the two schemes of Gold Harvest and

Grammage scheme. Grammage scheme contributes about one third to the total.

RBI’s new regulation: The new regulation that mandates keeping 20% of the imported gold

earmarked for exporters is for importers of gold—banks/trading houses—and not for gold

consumers. Titan has no obligation to export for procuring supply of gold. The overall

scheme is for restricting the supply of gold in India. As per available data, ~70-100 tonnes of

gold was exported in FY13. As per the new regulation, supply of ~350-500 tonnes of gold

would have been available. But this is as per past data. Titan stands at a good position

compared to peers with respect to the procurement of gold available for import because of

its huge market share, reputation, brand name and robust balance sheet.

Gold sourcing: Titan is sourcing gold from the gold deposit scheme of banks like SBI as an

alternative for the past two months. It is getting this gold on a lease for 180 days credit (on

gold on lease model) as domestic banks which get supply of gold from domestic sources are

allowed to lend gold on 180 days credit. Another source of gold is the ETFs which SEBI has

permitted to lend 20% of deposited gold. On both these sources, obligation of exporting

20% is not applicable as these are not imported gold.

Titan Industries


Custom duty hike: Due to increase in custom duty from 6% to 8%, Titan gained around

INR150mn in Q1FY14 and also expects some gains in Q2FY14.

Demand: Titan believes that the proportion of customers who have pushed ahead gold

purchase is not much and expects demand to be good in the coming quarter.

Eyewear: Titan plans to open 40 new stores in FY14 and has many new products in the

pipeline. The company will be launching a new product in Q2FY14 for age group of 40 and

above and is also eyeing new launches in the lens segment.

Watches: The overall demand in watches has been sluggish because of the decline in

discretionary spends with volume growth of only 3% YoY. LTL growth in the watch business

has declined 2% YoY, though the sales value growth stood at 12% YoY. LTL growth in

Fastrack and Helios was also less at 8% YoY and 5% YoY, respectively. Margins of the watch

business plunged 366bps YoY due to the wage settlement contract.

Precision engineering: This segment’s top line grew 60% YoY. PED is expected to turn into

an INR2,000mn business for the company in FY14 and has strong order book in place for

nine months from now. This business is not margin dilutive for Titan.

Outlook: Titan remains aggressive on top line growth and believes that turnover of INR120-

125bn is achievable in FY14. However, there is a possibility of margin dilution. The company

is also confident of resolving the supply of imported gold issue in the coming few weeks.

Expansion: In the jewellery segment, Titan added 37,000 sq ft in Q1FY14 and expects to add

another 75,000 sq ft by Q3FY14 end.

Cash: The company has a cash reserve of over INR20bn as on June 30, 2013.

Our recent meeting with Titan’s top management | Key takeaways

Take on gold coin and bar sale: Post RBI’s restriction on gold import many banks have

gradually stopped selling gold coins. Gold coin and gold bar sales are primarily investment

related. Titan also stopped selling coins and bars since mid July. Though this may impact top

line, profits may not be impacted significantly (margin in diamond jewellery is 2.5x that in

gold jewellery, which is 2.5x of gold coins and bars).

Watches: As demand continues to remain weak in the watches division, Titan is relying on

innovation to boost it. With the INR playing a spoil sport for the company’s watches

division, it is looking at price hikes in the near term. It has added Police and Timberland

brands amongst other exclusive licence tie ups it has with global brands like Tommy Hilfiger,

French Connection, etc. To improve margins over the long term, the company is setting up a

stainless steel components factory (to reduce dependence on imports and provide some

insulation from INR depreciation), which will come on stream by FY15. Stainless steel is

heavily used in premium watches and is high in terms of value. Plastics and movement will

continue to be imported. The plant will need a capex of INR700-800mn.

Eyewear: Titan Eye+ is looking at aggressive growth, with plans to add 40 stores in FY14,

mostly through the franchise route. Titan is relying heavily on innovation to drive growth in

this category. In Q2FY13, it launched on-line eye tests. Now, it is planning to expand its

C K Venkataraman

COO - Jewellery, Titan

Retail


range of sunglasses offerings. We expect the company to benefit from innovation focus in a

highly unorganised segment.

New product categories: As Titan moves from being a watches and jewellery focused brand

to a lifestyle focused brand, the company’s board of directors has decided (received

shareholder approval) to change the company’s name to Titan Company. It is looking at a

slew of products ranging from sarees to writing instruments, mobile phones, musical

instruments, educational accessories and kitchen equipment (may not necessarily enter all

these segments). Titan is focusing on categories where the market is large and unorganised

where it can differentiate and use innovations and strong brand image to establish category

dominance. The company has created a 'New Business Division' under a dedicated CEO to

look at various segments, exhibiting increased focus on new growth drivers. It plans to

exploit its current distribution points for its new products and thus will look to enter

categories wherein brand extension is possible. For instance, Titan may soon launch

helmets and perfumes through its Fastrack distribution network in departmental stores like

Shoppers Stop, Lifestyle and World of Titan.

Loyalty card: Titan ran three separate loyalty programmes till recently (Vista for its Titan

Eye Plus, Anuttara for Tanishq and Signet for World of Titan). Now, the company has

merged its loyalty programmes across three brands into one Encircle Loyalty card. In our

view, loyalty programme is a key revenue contributor and unifying into one card for the

Group as a whole will help promote sales across divisions.

FY13 Annual report highlights

Overall business

• Titan added 126 stores (2.35 lakh sq ft) across watches, jewellery and eyewear

businesses. As at March 31, 2013, the company had 953 stores (over 1.27mn sq ft).

Capital investments were also made during the year in manufacturing facilities of

watches division and precision engineering division.

• The company’s exports stood at INR2bn (up 23% YoY) in FY13 comprising watches and

precision engineered components.

• FY13 was a challenging year for the watches segment, which grew 9.6% YoY to

INR17bn. The consumer / retail sentiment remained subdued during most parts of the

year. The number of wedding dates were much lower compared to FY12.

• Malls and department stores also registered lower walk ins. Retail growth in the multi

brand outlet channel was lower than in World of Titan and Fastrack stores.

• Titan’s jewellery division sales grew 14.8% YoY to INR81bn. Customer sentiments were

affected by inflation, uncertain economic conditions and movements in gold rate,

leading to poor walk-ins.

• The government and the Reserve Bank of India initiated few measures to contain the

current account deficit and money laundering, to cite a few, by increasing customs duty

on gold, restricting the credit period on gold imports, extending provisions of

Prevention of Money Laundering Act, 2002 as amended, to the gem & jewellery sector

etc. Final notifications on some of these are still awaited.

Jewellery

H G Raghunath

CEO – Watches, Titan

Subramaniam S

CFO, Titan

Titan Industries


• While sales growth in FY13 was perhaps the lowest (in percent terms) in the past

decade, profit growth was among the highest, taking the division’s EBIT margin beyond

the 10% mark for the first time.

• A new jewellery manufacturing facility is being set with state-of-the-art technology at

Pantnagar. This facility, aimed at catering to northern markets as well as to reduce

manufacturing and logistics costs, is being developed at a capital expenditure of

INR450mn, of which INR240mn was incurred in FY13.

• For FY14, Titan is planning significant network expansion, region-specific product

introduction and new launches across the price spectrum.

• Titan has always held that “lower” price of gold is actually a good thing in two

significant ways: (1) at lower prices, more customers come into the jewellery category

and each one of them is psychologically tuned to buy more. The jewellery industry will

benefit from lower prices. Overall tonnage is expected to be better; and (2) at lower

prices, making charges of Titan brands will come closer to other big jewelers.

• In order to counter the potential competitive effect of major regional players, the

jewellery division has started the following initiatives: (1) KYC (Know Your Customer)

programme through which Titan detects any significant shift to a neighbouring

competitor and puts together a response basis; and (2) pre-emptive competitive action

plan that is rolled out in every neighbourhood where a new competitor is about to

open, a couple of months before the opening, to blunt the impact.

Watches and accessories

• The Indian watch market is estimated at ~55mn units and valued at around INR47bn.

Over 50% of this market is unorganised. The organised market is dominated by Titan,

with its collection of brands having 65% plus market share.

• The company’s market share in multi-brand outlets grew to ~49% during FY13 (up 2%

YoY). Titan entered the stylish leather belts and wallets space which have so far been

well accepted and is in the process of being rolled out nationally.

• Titan is setting up a new manufacturing plant at Coimbatore (Tamil Nadu) to produce

high end stainless steel (SS) cases with an investment of INR1bn. In addition to

technical services support, SEC will also procure SS Cases from the company to meet its

market demand.

• The Pant Nagar assembly unit could quickly ramp up volumes from 3.0mn to 4.5mn in

FY13. Further increase of capacity up to 1mn is planned in FY14.

• Favre Leuba, the heritage Swiss brand that the company acquired in FY12, is being

actively worked on for a launch during FY15.

Retail


Chart 1: Jewellery margin decline YoY Chart 2: Jewellery revenue growth robust

Chart 3: Watches margin dips YoY Chart 4: Watches revenue growth slows down

Chart 5: Others EBIT margin in positive territory Chart 6: Eyewear sales boost others’ revenue growth

Source: Company, Edelweiss research

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Titan Industries


Table 1: Segmental performance


Table 2: Growth across formats


Table 3: Aggressive expansion plan (number of stores)


% growth % growth

Titan (Year to March) Q1FY14 Q1FY13 Y-o-Y Q4FY13 Q-o-Q

Revenue

Watches & clocks 4,017 3,607 11.4 4,199 (4.3)

Jewellery 26,142 17,755 47.2 20,933 24.9

Others 1,232 896 37.5 1,288 (4.3)

Corporate unallocated 69 50 38.0 8 741.5

Total 31,460 22,308 41.0 26,428 19.0

PBIT

Watches & clocks 414 504 (17.9) 456 (9.3)

Jewellery 2,306 1,806 27.7 2,487 (7.3)

Others 28 (16) NM 11 145.6

Total 2,748 2,294 19.8 2,955 (7.0)

PBIT margins

Watches & clocks 10.3 14.0 (367) 10.9 (56)

Jewellery 8.8 10.2 (135) 11.9 (306)

Others 2.3 (1.8) NM 0.9 139

Total 8.7 10.3 (155) 11.2 (245)

Sales value growth (% YoY) Like to Like growth (% YoY)

World of Titan 4 (1)

Tanishq 42 29

Goldplus 36 37

Helios 52 5

Fastrack 46 8

LFS - Watches 12 (2)

Titan Eye+ 26 21

FY11 FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

Jewellery 151 163 166 168 176 179 184

Tanishq 120 129 132 134 143 146 151

Goldplus 29 32 32 32 31 31 31

Zoya 2 2 2 2 2 2 2

Watches 364 459 472 502 527 550 555

World of Titan 311 332 337 348 354 364 368

Fastrack 47 102 110 122 132 140 139

Helios 6 25 25 32 41 46 48

EyePlus 150 205 209 209 215 224 229

Total 665 827 847 879 918 953 968

Retail


Outlook and valuations: Positive; maintain ‘BUY’

RBI, in July, reversed a few regulations on gold imports and has done away with stringent

curbs imposed that had placed restrictions on the gold lease model and required upfront

cash payments that had hiked costs to jewelers by way of interest and hedging. We had

highlighted in our report, When the going gets tough, the tough get going, dated June 13,

2013, that gold on lease constitutes only 8% of total imports in India and the ban seemed

unnecessary. We had cut our EPS numbers for Titan by 10.4% for FY14E and 15.0% for

FY15E post those announcements. However, post withdrawal of the restrictions, we reverse

these assumptions as the company will no longer need debt. We thus increase our FY14E

and FY15E EPS by 6.7% and 13.1%, respectively (though remain a little conservative on the

margin front due to reduced studded share).

We expect volume growth to be robust in FY14 aided by a large number of marriage days.

Also, sustained retail expansion (added 148,274sq.ft in jewellery in FY13; added 37,000sq.ft

in Q1FY14 – 37% of FY14E target), we believe, will boost growth. In light of these factors,

coupled with eyewear turning profitable in H2FY14, we continue to recommend Titan as

our top pick in our retail universe.

As concerns of inventory risks go away, we increase our target P/E to 28x (26x earlier),

arriving at a target price of INR324 (INR267 earlier). We maintain ‘BUY’ recommendation

and ‘Sector Outperformer’ rating on the stock.

Chart 7: 1 year forward PE chart

Source: Edelweiss research

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Titan Industries


Financial snapshot (INR mn)

Year to March Q1FY14 Q1FY13 % change Q4FY13 % change FY13 FY14E FY15E

Net revenues 31,077 22,057 40.9 26,132 18.9 101,233 120,342 141,465

Raw material costs 24,212 16,250 49.0 19,351 25.1 75,134 89,053 104,401

Ad spend 1,047 1,034 1.2 666 57.1 3,771 4,814 5,659

Employee expenses 1,306 1,039 25.6 1,476 (11.6) 4,898 5,776 6,790

Other expenses 2,063 1,613 27.9 1,973 4.5 7,305 8,785 10,327

EBITDA 2,449 2,120 15.6 2,665 (8.1) 10,125 11,914 14,288

Depreciation 146 123 18.6 150 (2.3) 562 647 743

EBIT 2,303 1,996 15.4 2,516 (8.4) 9,563 11,267 13,545

Other income 382 252 51.9 295 29.6 1,009 1,142 1,307

EBIT including other income 2,686 2,248 19.5 2,811 (4.5) 10,572 12,409 14,851

Interest 170 126 35.2 142 19.8 506 554 565

Profit before tax 2,515 2,122 18.5 2,669 (5.7) 10,065 11,855 14,286

Tax 691 561 23.0 819 (15.7) 2,816 3,319 4,000

Core profit 1,825 1,561 16.9 1,850 (1.3) 7,249 8,535 10,286

Diluted EPS (INR) 2.1 1.8 16.9 2.1 (1.3) 8.2 9.6 11.6

As % of net revenues

Raw material 77.9 73.7 74.1 74.2 74.0 73.8

Ad spend 3.4 4.7 2.5 3.7 4.0 4.0

Employee cost 4.2 4.7 5.6 4.8 4.8 4.8

Other expenses 6.6 7.3 7.6 7.2 7.3 7.3

Total expenses 92.1 90.4 89.8 90.0 90.1 89.9

EBITDA 7.9 9.6 10.2 10.0 9.9 10.1

PBT 8.1 9.6 10.2 9.9 9.9 10.1

Adjusted net profit 5.9 7.1 7.1 7.2 7.1 7.3

Tax rate 27.5 26.4 30.7 28.0 28.0 28.0

Change in Estimates FY14E FY15E

New Old % change New Old % change Comments

Net revenue 120,342 120,051 0.2 141,465 141,092 0.3

EBITDA 11,914 12,245 (2.7) 14,288 14,391 (0.7) Dip in FY14 due to lower studded

share

EBITDA margin 9.9 10.2 10.1 10.2

Core profit 8,535 8,002 6.7 10,286 9,096 13.1 As gold on lease returns, debt no

longer needed so interest burden

reduces sharply

PAT margin 7.1 6.7 7.3 6.4

Capex 1,232 1,500 (17.8) 1,510 1,510 0.0

Retail


Company Description

Titan was incorporated in 1984 as a joint venture between the TATA Group and Tamil Nadu

Industrial Development Corporation (TIDCO), a Government of Tamil Nadu undertaking. The

company manufactures and markets quartz watches since 1987 and is now India’s leading

watch manufacturer and retailer. Gradually, jewellery, precision engineering, eyewear,

accessories, and licensed products were added to the watches portfolio to leverage on the

premium positioning that was assiduously achieved and the success of the Titan brand was

extended to Tanishq and other retail businesses. Its watch brands include Titan, Edge,

Fastrack, Nebula, Raga, Steel, Regalia, Bandhan, Zoop, and Sonata. The company has also

acquired a license for marketing global brands Tommy Hilfiger and Hugo Boss in India.

Investment Theme

The Indian retail landscape is evolving with interplay of several demographic and economic

factors. The long-term prospects backed by changing consumer behaviour in favour of larger

discretionary spending, has set the stage for a healthy growth in the retail space over the

next five years. The big opportunity lies in the growing share of organised retail with

growing trend among consumers to allocate a larger share of income to consumption and

gradual improvement in lifestyle.

Titan has assiduously positioned itself in the premium watch and designer jewellery space.

With constant product innovation it has become the largest organised player in both these

segments. Given its well established brand and sound management we expect Titan to

replicate this success in its new eyewear venture as well. We believe Titan has the ability to

create significant value with its large distribution presence, strong brand, designing skills

and proven execution track record.

Key Risks

Regulatory hurdles: As gold is one of the key import articles, Government may take action

to curb its demand thereby impacting the jewellery business by reducing demand and/or

increasing costs like customs duty, lease rate, etc.

Deterioration of macro conditions: Poor macro outlook could lead to prolonged slowdown

in the company’s growth as the company’s revenues depend on discretionary spend.

Volatility in gold prices: Gold prices have a significant bearing on gold demand. Any steep

rise in prices results in lower demand, and investment buying that comes in is low margin.

Margin pressure due to deterioration in product mix and investment buying:

Down trading in watches and jewellery divisions on account of fall in discretionary spending

and higher growth in tier II and IV towns could impact margins.

Sustained losses in new initiatives: New initiatives like Eye+ and the precision engineering

division are currently a drain on profitability. Prolonged losses in these divisions will impact

overall profitability.

Business seasonal, restricted to marriage season and festivals: The jewellery segment is

seasonal with respect to marriage season and festivals. Additionally, the number of

wedding dates varies in a year. This could impact the company’s revenue


Titan Industries

Financial Statements

Income statement (INR mn)

Year to March FY12 FY13 FY14E FY15E

Net revenue 88,484 101,233 120,342 141,465

Materials costs 65,402 75,134 89,053 104,401

Gross profit 23,082 26,099 31,289 37,064

Employee costs 3,977 4,898 5,776 6,790

Other Expenses 6,937 7,305 8,785 10,327

Advertisement & sales costs 3,814 3,771 4,814 5,659

EBITDA 8,354 10,125 11,914 14,288

Depreciation & Amortization 456 562 647 743

EBIT 7,897 9,563 11,267 13,545

Other income 945 1,009 1,142 1,307

EBIT incl. other income 8,842 10,572 12,409 14,851

Interest expenses 437 506 554 565

Profit before tax 8,405 10,065 11,855 14,286

Provision for tax 2,390 2,816 3,319 4,000

Net profit 6,015 7,249 8,535 10,286

Share in profit of associates (1) 4 4 4

Profit after minority interest 6,014 7,254 8,539 10,290

Shares outstanding (mn) 888 888 888 888

Diluted EPS (INR) 6.8 8.2 9.6 11.6

Dividend per share (INR) 1.8 2.1 2.5 3.0

Dividend payout (%) 25.8 25.7 26.0 26.0

Common size metrics


Materials costs 73.9 74.2 74.0 73.8

Employee expenses 4.5 4.8 4.8 4.8

EBITDA margins 9.4 10.0 9.9 10.1

Net profit margins 6.8 7.2 7.1 7.3

Growth ratios (%)


Revenues 35.4 14.4 18.9 17.6

EBITDA 35.4 21.2 17.7 19.9

Net profit 38.9 20.5 17.7 20.5

EPS 38.9 20.5 17.7 20.5

Key Assumptions


Macro assumptions

GDP(Y-o-Y %) 6.2 5.0 5.6 6.5

Inflation (Avg) 8.9 7.4 5.2 6.0

Repo rate (exit rate) 8.5 7.5 6.8 6.0

USD/INR (Avg) 48.0 54.5 58.0 56.0

Company assumptions

Revenue growth (Y-o-Y %)

Watch - growth (%) 20.9 9.7 12.0 14.0

Jewellery - growth (%) 40.9 14.8 20.0 18.0

Eyewear - growth (%) 26.0 18.0 25.0 22.0

Other - growth (%) (47.2) 96.2 30.0 26.0

EBITDA margin (%)

COGS as % of sales 73.9 74.2 74.0 73.8

Gold as % of COGS 79.8 80.1 80.5 80.5

Components as % of COGS 9.4 9.5 9.6 9.6

Purchase goods as % of COGS 17.6 17.3 17.2 17.2

Staff costs as % of sales 4.5 4.8 4.8 4.8

A&P as % of sales 4.3 3.7 4.0 4.0

Financial assumptions

Tax rate (%) 28.4 28.0 28.0 28.0

Capex (INR mn) 1,283 1,225 1,232 1,510

Debtor days 9 11 11 11

Inventory days 101 118 119 119

Payable days 95 97 97 97

Cash conversion cycle (days) 15 33 33 33

Depreciation as % of gross block 6.1 6.4 6.4 6.4

Interest rate on cash 9.7 8.8 10.0 7.8

Dividend as % of net profit 25.8 25.7 26.0 26.0


Retail

Peer comparison valuation

Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)

Name (USD mn) FY14E FY15E FY14E FY15E FY14E FY15E

Titan Industries 3,811 27.0 22.4 17.9 14.8 37.6 35.2

Future Retail 273 8.6 19.5 5.4 5.4 5.2 (13.4)

Jubilant Foodworks 1,192 42.1 32.0 22.3 16.8 33.3 31.7

Shoppers Stop 495 68.0 46.8 23.4 17.1 8.6 11.7

Median - 34.6 27.4 20.1 15.8 21.0 21.7

AVERAGE - 36.5 30.2 17.2 13.5 21.1 16.2

Source: Edelweiss research

Cash flow metrics


Operating cash flow 1,594 1,158 9,700 7,791

Investing cash flow (699) 3,338 (1,232) (1,510)

Financing cash flow (2,349) (2,740) (3,135) (3,674)

Net cash flow (1,453) 1,756 5,333 2,607

Capex (1,283) (1,225) (1,232) (1,510)

Dividends paid (1,806) (2,181) (2,576) (3,104)

Profitability & efficiency ratios


ROAE (%) 48.2 42.3 37.6 35.2

ROACE (%) 61.5 55.7 49.8 46.4

Inventory day 101 118 119 119

Debtors days 9 11 11 11

Payable days 95 97 97 97

Cash conversion cycle (days) 15 33 33 33

Current ratio 1.0 1.1 1.1 1.2

Debt/Equity - - - -

Interest coverage 18.1 18.9 20.3 24.0

Operating ratios


Total asset turnover 6.9 5.9 5.3 4.8

Fixed asset turnover 24.8 22.1 22.5 23.5

Equity turnover 7.1 5.9 5.3 4.8

Valuation parameters


Diluted EPS (INR) 6.8 8.2 9.6 11.6

Y-o-Y growth (%) 38.9 20.5 17.7 20.5

CEPS (INR) 7.3 8.8 10.3 12.4

Diluted PE (x) 38.3 31.8 27.0 22.4

Price/BV (x) 15.8 11.7 9.0 7.0

EV/Sales (x) 2.5 2.2 1.8 1.5

EV/EBITDA (x) 26.4 21.6 17.9 14.8

Dividend yield (%) 0.7 0.8 1.0 1.2

Balance sheet (INR mn)

As on 31st March FY12 FY13 FY14E FY15E

Equity capital 888 888 888 888

Reserves & surplus 13,721 18,811 24,775 31,961

Shareholders funds 14,609 19,699 25,662 32,849

Long term debt 59 - 27 21

Current maturity of long term 54 60 24 19

Borrowings 113 60 50 40

Deferred tax liability (35) (78) (78) (78)

Sources of funds 14,687 19,681 25,635 32,811

Tangible assets 3,630 4,466 5,319 6,076

Intangible assets 209 173 173 173

CWIP (incl. intangible) 249 418 150 160

Total net fixed assets 4,088 5,057 5,642 6,409

Non current investments 24 29 29 29

Cash and equivalents 9,671 11,390 16,723 19,330

Inventories 28,820 36,803 39,235 46,121

Sundry debtors 1,652 1,658 1,978 2,325

Loans and advances 2,481 3,722 3,693 4,341

Other current assets 328 95 95 95

Total current assets (ex cash) 33,281 42,278 45,001 52,883

Trade payable 18,910 20,980 23,666 27,745

Others current liabilities 13,467 18,094 18,094 18,094

Total current liabilities & 32,377 39,074 41,760 45,839

Net current assets (ex cash) 904 3,205 3,241 7,044

Uses of funds 14,687 19,681 25,635 32,811

Book value per share (INR) 16.5 22.2 28.9 37.0

Free cash flow (INR mn)


Net profit 6,014 7,254 8,539 10,290

Add : Non cash charge 895 1,064 1,197 1,304

Depreciation 456 562 647 743

Others 439 502 550 561

Gross cash flow 6,908 8,318 9,737 11,594

Less: Changes in WC 6,053 7,160 36 3,803

Operating cash flow 855 1,158 9,700 7,791

Less: Capex 1,283 1,225 1,232 1,510

Free cash flow (428) (67) 8,468 6,281


Titan Industries

Top 10 holdings

Perc. Holding Perc. Holding

Jhunjhunwal Rakesh Radheys 7.36 Jhunjhunwala Rekha Rakesh 2.00

Matthews International Capital 1.94 T Rowe Price Associates 1.16

Merrill Lynch Capital Market ES 1.06 Vanguard Group Inc 0.67

UTI Asset Management Co Ltd 0.59 Ewart Investments 0.56

SBI Funds Management 0.5 Fidelity Management & Research 0.46

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Additional Data

Directors Data

Hans Raj Verma Chairman Mr. T.K. Arun Non-Executive, Non-Independent Director

Mr.Ishaat Hussain Director Mr.N.N.Tata Non-Executive, Non-Independent Director

Mr. Bhaskar Bhat Managing Director Mr. T.K.Balaji Non-Executive, Independent Director

Dr. C.G.Krishnadas Nair Non-Executive, Independent Director Ms. Vinita Bali Non-Executive, Independent Director

Ms. Hema Ravichandar Non-Executive, Independent Director Mrs. Ireena Vittal Non-Executive, Independent Director

Prof. Das Narayandas Non-Executive, Independent Director Mr. N.S. Palaniappan Non-Executive, Non-Independent

Auditors - Deloitte Haskins & Sells

*as per last annual report


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Future Retail HOLD SU H Jubilant Foodworks HOLD SP M

Shoppers Stop BUY SP L Titan Industries BUY SO L

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Titan Industries

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Retail

Future Retail, Jubilant Foodworks, Shoppers Stop, Titan Industries

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 127 44 8 180

* 1 stocks under review

Market Cap (INR) 112 54 14

Date Company Title Price (INR) Recos

Recent Research

01-Aug-13 Shoppers

Stop

Like-to-like sales resurgence

boosts show;

Result Update

360 Buy

23-Jul-13 Retail Gold on lease is back;

EdelFlash

27-Jun-13 Titan

Industries

Well equipped to ride the

rough weather; Visit Note

226 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


Retail

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Titan Industries

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