titan company -...

Gautam Duggad ([email protected]); +91 22 3982 5404 Manish Poddar ([email protected]); +91 22 3027 8029 / Vishal Punmiya ([email protected])

13 August 2015

Update | Sector: Retail

Titan Company CMP: INR330 TP: INR305 Neutral

Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Navigating the choppy waters Neat term challenges persist amidst attractive long term opportunity

We attended the analyst meet of Titan Company. Following are the key takeaways: Uncertain near term demand outlook in Jewellery and Watches. Long term opportunity robust backed by favorable demographics and

Titan’s leadership position in core segments. Stepping up the digital investments across the platform. Maintain Neutral. Near term earnings clouded by weak demand,

deflationary gold price backdrop and tight regulations. Near term demand outlook uncertain: Weak consumer sentiments

continue to cloud the near term demand outlook in Titan’s core categories – Jewellery and Watches. Company however highlighted the attractive long term consumption story predicated on demographic dividend, rising incomes and growing aspiration.

How does the company plan to negotiate current weak demand environment? Titan intends to negotiate weak consumer sentiments by A) significant investments in ASP (“advertising and marketing like never before”). B) Store renovations and expansions in all businesses. C) Expanding the network in middle India (200+ towns). D) Richer product mix with focus on differentiation. E) Enhancement of customer store experience/delight – offers cross category loyalty programmes. F) Customer retention and increase in ticket size. It also targets to capture better share of wallet even as consumers are getting lured by convenience shopping on internet.

Driving Digital enablement and Technology products: Management emphasized its strategy to drive investments in digital infrastructure across the three segments in order to capture the growing e-commerce pie. It also highlighted the focus on driving product technology especially in Watches e.g. infusing smart technology in personal wear products. Management indicated a near term launch of innovative product in Watches segment.

Long term Jewellery strategy: From a longer term perspective it has set itself a vision of becoming an “icon” in 2020 from current status as “leader”. It aims to dominate in the “Adornment” segment, play in the “Status” segment and participate in the “Savings” bucket. Strong brand equity of Tanishq and several favorable demand drivers – best-in-class consumer understanding, rising small town aspirations, young population’s preference for adornment jewellery – should aid its long term segment performance, per management.

BSE Sensex S&P CNX 27,512 8,349

Stock Info Bloomberg TTAN IN

Equity Shares (m) 887.8

52-Week Range (INR) 448/315

1, 6, 12 Rel. Per (%) -7/-17/-12

M.Cap. (INR b) 293

M.Cap. (USD b) 4.6 Avg Val (INR m)/Vol ‘000

400/1045

Free float (%) 47.0

Financial Snapshot (INR b) Y/E Mar 2015 2016E 2017E

Sales 119.0 120.7 139.2

EBITDA 11.5 10.9 13.2

Adj. PAT 8.2 8.0 9.7

Adj. EPS (INR) 9.3 9.0 10.9

EPS Gr. (%) 11.1 -3.4 21.7

BV/Sh.(INR) 34.8 40.7 48.4

RoE (%) 26.6 22.0 22.6

RoCE (%) 38.0 30.0 31.0

P/E (x) 35.6 36.8 30.3

P/BV (x) 9.5 8.1 6.8

Shareholding pattern (%) Jun-15 Mar-15 Jun-14

Promoter 53.1 53.1 53.1

DII 4.7 3.2 2.8

FII 20.1 21.6 21.5

Others 22.2 22.2 22.6 Notes: FII includes depository receipts

Stock Performance (1-year)

300

340

380

420

460

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr-

15

Jun-

15

Aug-

15

Titan CompanySensex - Rebased

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Titan Company

13 August 2015 2

Jewellery business facing some near term headwinds: Apart from weak demand, Jewellery division is also negotiating deflationary gold price dynamics and absence of Golden Harvest Scheme (GHS) related demand. As a consequence of gold price deflation, Titan is finding it incrementally difficult to get new franchisees for store expansion (L3 stores). Franchisee typically does not hedge the price risk and are thus wary about committing investments for Tanishq in this environment. Management however believes this is a short term hiccup and Titan’s inherent brand equity will ensure this is a transient issue. In the interim, it can however delay the expansion plans a bit – e.g. typically it achieves a hit rate of 85-90% on target expansion plans of 100k sqft; it may now achieve 70% hit rate only.

Jewellery volume pick up does not compensate the fall in Gold price: Fall in gold price may also impact the segment revenues as pick up in volume does not compensate for the gold price decline. As per management, after the first decline in gold price in July, the jewellery volumes spurted but it flattened out in a week. It is concentrating on driving advertising and promotion spends in addition to the making charge correction already taken in May’15.

No action on PAN card regulation: Only silver lining in the near term appears to be lack of any definitive government action on the INR 1lac PAN card regulation. New uncertainty on GST however pertains. Currently Jewellery attracts no excise duty and 1% VAT rate. Industry has represented to the government to keep the structure unchanged in the GST regime. However, if Jewellery is included in GST at higher rate it might create hassles for customers who want to exchange old gold jewellery

New GHS will make contribution only 4QFY16 onwards: The new GHS scheme is slowly gaining scale. However its impact will be visible only in 4QFY16. Titan is experimenting by tying up with banks in order to increase the cap for its GHS (existing regulations cap the GHS limit at 25% of previous year’s networth). Currently the experiment is limited to Mumbai and Nagpur. However this arrangement has not shown any meaningful traction as yet due to additional paperwork required for consumer.

Watches – hurt by lesser consumer involvement thanks to emergence of new categories: The rising share of voice of categories like mobile phone, real estate, apparel, consumer electronics are making the watch category seem relatively quiet, per management. Plus Watches is no longer as relevant for gifting as it used to be a decade back. In this challenging environment, Titan is focusing on driving excitement in the category. Towards this end it intends to drive Sports and Fashion Watches, Technology enabled Watches, enhancing consumer experience by renovating existing stores (75 World of Titan stores to be renovated) and also driving expansion (opening 70 new stores).

Eyewear – Rapid scale up planned: The category is characterized by under penetration of branded players. Currently the expansion is driven by regional players while national players are still being conservative. Titan’s strategic objective in this space is to drive rapid scale up and double the consumers in the next 3 years by enhancing the desirability quotient of its

Titan Company

13 August 2015 3

brand. Here it will focus on aggressive expansion of stores, design differentiation, building manufacturing capability in Frames, new product introductions (300+ Frames and 200 Sunglasses). Management believes competition is not a concern as the influence of branded players is limited currently and has a long way to go before saturation sets in.

Valuation and view: Long term outlook for Branded Jewellery space looks compelling to us given the favorable demographics and Titan’s pan-India presence with unparalleled brand equity. Titan’s near term performance will be impacted by the trinity of weak demand, deflationary gold price and tight regulations, in our view. This does impair the near term earnings visibility of Titan, we believe. We maintain Neutral with target price of INR305 (28x June FY17 EPS—a 15% discount to three-year average due to weak earnings visibility).

Titan Company

13 August 2015 4

Other takeaways Strategy Consumption story: Demographic dividend + Rising income + Growing

aspiration. Titan’s categories: Unorganized, underpenetrated and underserved Pros of Titan’s categories: Opportunity for branded play, quality of competition,

transform category. Cons of Titan’s categories: Non level playing field, regulatory challenges Competition uses Tanishq as a benchmark and tries to follow it. Driving innovation: Titan famous for innovation. Products – brands – business

model – consumer touch points – customer experience. Chose to excel in each stage of the business model – end to end – design,

manufacturing, distribution, retailing, after-sales service. Culture of the company is key differentiator: Open, informal, entrepreneurial

and non-hierarchical.

Jewellery Vision: From being a leader in 2015 to Icon in 2020. 2014 jewellery market – INR 2500b – Diamond INR 400b, Gold –INR 2100b. Titan share: 7% of Diamond and 3% of Gold. Occasion share of market: Wedding – INR 1500b, Daily wear – INR 700b,

Occasion wear – INR 300b Titan’s Share of occasions

1. Overall division share – 4% 2. Lowest share in Wedding – 1% 3. Occasion share – 3% 4. Daily wear – 8% share.

Customer profile and average ticket spend Adornment customer (Progressor): Upper middle, upper. Service class

profession. Avg bill value - INR 75k Savings customer (Traditionalist): Middle, lower middle. Service class, traders.

Avg bill value – INR 100k. Status customer (Projector): Upper middle, upper – business class professional.

Avg. bill value – INR 150k Competition may not necessarily be targeting the same segment even if the size

of competition is high e.g. Kalyan. Drivers of sales growth and margins Weddings High value diamond jewellery and solitaries Working women’s jewellery Network expansion – discomfort in prospective franchises – getting franchisee

has become slightly more difficult.

Titan Company

13 August 2015 5

Watches Technology products are bringing excitement to the category (smart

watches/wearables) Impacted by: Mobile phones, Watches become less relevant in economic

downturn. Share of voice: The noise level in categories like mobile, real estate, apparel,

consumer electronics are making the watch category seem relatively quiet. Many categories compete with Watches for gifting – e.g. for wedding earlier

bride groom used to receive multiple watches as gift. Technology wave is bringing Watches back in consumer mind-space. Opportunities: a) Participation in the Technology space. b)The booming sports

and fashion segments. C) Booming sports and fashion segments.

Titan Company

13 August 2015 6

Key charts

Exhibit 1: Titan’s Segmental performance snapshot INR m 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 Total Sales 22,258 22,931 30,370 26,419 31,085 23,545 26,785 28,073 28,931 35,947 29,237 25,038 27,102 Watches 3,607 4,718 4,235 4,199 3,987 4,424 4,513 5,018 4,442 5,275 4,426 5,110 4,845 YoY Growth 14.4% 13.0% 10.6% 1.5% 10.5% -6.2% 6.6% 19.5% 11.4% 19.2% -1.9% 1.8% 9.1% Jewelry 17,755 17,239 25,152 20,933 25,866 17,981 21,107 21,573 23,253 29,294 23,474 18,279 20,720 YoY Growth 7.8% 5.7% 26.7% 16.3% 45.7% 4.3% -16.1% 3.1% -10.1% 62.9% 11.2% -15.3% -10.9% Others 896 974 983 1,288 1,232 1,141 1,165 1,462 1,236 1,379 1,337 1,649 1,536 YoY Growth 15.7% 49.4% 4.3% 40.0% 37.4% 17.2% 18.6% 15.0% 0.3% 20.9% 14.7% 12.8% 24.3% Total EBIT 2,293 2,653 2,994 2,955 2,443 2,871 2,463 2,927 2,665 3,356 2,691 2,795 2,197 Watches 504 547 512 456 385 464 471 602 449 666 428 489 481 YoY Growth 4.9% -18.7% 6.5% -14.6% -23.7% -15.1% -7.9% 32.0% 16.7% 43.4% -9.2% -18.8% 7.3% EBIT Margin 14.0% 11.6% 12.1% 10.9% 9.6% 10.5% 10.4% 12.0% 10.1% 12.6% 9.7% 9.6% 9.9% Jewelry 1,806 2,150 2,466 2,487 2,030 2,409 2,009 2,294 2,178 2,682 2,261 2,321 1,803 YoY Growth 8.7% 35.5% 29.5% 36.5% 12.5% 12.0% -18.5% -7.8% 7.2% 11.3% 12.5% 1.2% -17.2% EBIT Margin 10.2% 12.5% 9.8% 11.9% 7.8% 13.4% 9.5% 10.6% 9.4% 9.2% 9.6% 12.7% 8.7% Others (16) (43) 17 11 28 (3) (18) 31 38 8 2 (15) (87)

Source: Company, MOSL

Exhibit 2: Space addition over the years Space (in ‘000 sqft) 1QFY16 FY15 FY14 FY13 FY12 Format No of Stores Space No of Stores Space No of Stores Space No of Stores Space No of Stores Space World of Titan 427 412 430 416 401 401 364 375 332 339 Fastrack 157 92 154 90 150 86 140 76 102 49 Helios 43 53 42 53 49 66 46 64 25 42 Tanishq 177 738 174 718 163 632 146 521 129 387 Goldplus 33 81 33 81 33 81 31 74 32 67 Zoya 2 7 2 7 2 7 2 7 2 7 Eye+ 384 237 366 225 280 221 224 154 205 146 Total 1223 1620 1201 1590 1078 1494 953 1,272 827 1,036


Exhibit 3: Jewelry grammage growth has been sub-par


Exhibit 4: ..leading to weak sales growht


Titan Company

13 August 2015 7

Exhibit 5: Jewelry - Key operating parameters Jewelry 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Volume Gr (%) (22) (16) 12 7 67 (4) (21) (2) (24) 75 25 (11) (10) Customer Gr (%) (2) 7 12 12 49 (3) (10) 3 (16) 97 8 (7) NA Studded Share (%) 25 32 22 32 16 39 26 37 25 35 26 37 29 Sales Gr (%) 8 6 27 16 47 4 (15) 4 (10) 63 11 (15) (11)


Exhibit 6: Tanishq and GoldPlus posted LTL sales decline of 12% and 24% respectively in 1Q16 Jewelery 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16

Tanishq GoldPlus Tanishq GoldPlus Tanishq GoldPlus Tanishq GoldPlus Tanishq GoldPlus Tanishq GoldPlus

Sales Gr % 13 (14) (8) (21) 75 81 (4) 30 (21) (4) (10) (24)

LTL Growth % 6 (18) (13) (24) 68 84 (8) 30 (25) (4) (12) (24)

Stores 165 33 168 33 170 33 172 33 176 33 179 33


Exhibit 7: Watches segment posted another quarter of volume decline (4%) in 1Q16 Watches 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16

Gr % Sales

Growth LTL

Growth Stores

(x) Sales

Growth LTL

Growth Stores

(x) Sales

Growth LTL

Growth Stores

(x) Sales

Growth LTL

Growth Stores

(x) Sales

Growth LTL

Growth Stores

(x)

World of Titan 8 2 406 15 10 417 0 (3) 426 11 5 430 1 0 427

Helios 23 20 45 4 9 43 (3) 4 43 (3) 3 42 0 4 43

Fastrack 16 9 148 8 1 150 3 (6) 157 1 (4) 154 2 (4) 157

LFS - Watches 2 5 NA 3 1 NA 2 (5) NA 10 8 NA 1 0 NA

Sales Growth (%)

10.4 19.0 (1.9) 1.8 9.1

Volume Growth (%)

9 9 (4) (6) (4)

Net sales (INR b)

4.4 5.3 4.4 5.1 4.9


Exhibit 8: Titan Eye+: LTL growth stood at 13% in 1Q16 Titan Eye+ 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16

Stores 224 229 228 270 280 300 323 341 366 384

Sales Growth (%) 46 26 35 14 35 28 34 22 14 20 LTL Growth (%) 40 21 25 2 21 13 19 9 0 13


Titan Company

13 August 2015 8

Story in Charts

Exhibit 9: Jewelry sales increased 8.3% in FY14


Exhibit 10: Watches sales expanded 11.1% in FY14


Exhibit 11: Jewelry EBIT margins were up 50bps YoY in FY14…


Exhibit 12: …while watches EBIT margins declined 50bps YoY


Exhibit 13: PAT growth of 8.5% over FY15-17E


Exhibit 14: Return Ratios (x):


20,2

63

27,6

02

34,9

75

50,1

20

69,8

98

80,3

24

86,9

62

57.1%

36.2%

26.7%

43.3%39.5%

14.9%8.3%

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Jewellery Sales (INR in mn) Jewellery Sales gr (%)

8,75

9

9,07

0

10,2

53

12,6

52

15,2

01

16,6

68

18,0

13

15.4% 15.0% 14.0% 14.6% 13.6%11.6% 11.1%


Watches Sales (INR in mn) Watches Sales gr (%)

5.4% 5.8%6.9%

8.3%8.9%

10.1% 10.6%


Jewellery15.4%

15.0%

14.0%14.6%

13.6%

11.6%11.1%


Watches

6,04

8

7,26

2

7,41

1

8,23

1

7,95

5

9,68

4

40.5

20.1

2.1

11.1

-3.4

21.7

2012 2013 2014 2015 2016E 2017E

PAT (INR m) PAT growth (%)

48.942.5

29.4 26.622.0 22.6

63.756.1

43.838.0

30.0 31.0

2012 2013 2014 2015 2016E 2017E

RoE (%) RoCE (%)

Titan Company

13 August 2015 9

Financials and valuations

Income Statement FY12 FY13 FY14 (INR Million) Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E Net Sales 46,744 65,209 88,384 101,127 109,158 119,032 120,746 139,187 Change (%) 22.9 39.5 35.5 14.4 7.9 9.0 1.4 15.3 Total Expenditure 42,929 59,352 80,054 91,011 98,673 107,498 109,836 125,967 EBITDA 3,816 5,857 8,329 10,116 10,484 11,534 10,910 13,219 Change (%) 17.2 53.5 42.2 21.4 3.6 10.0 -5.4 21.2 Margin (%) 8.2 9.0 9.4 10.0 9.6 9.7 9.0 9.5 Depreciation 360 345 449 545 656 874 841 976 Int. and Fin. Charges 254 82 437 506 871 807 702 814 Other Income - Recurring 119 561 941 1,008 1,202 706 832 985 Profit before Taxes 3,320 5,991 8,385 10,072 10,159 10,559 10,198 12,415 Change (%) 24.7 80.5 40.0 20.1 0.9 3.9 -3.4 21.7 Margin (%) 7.1 9.2 9.5 10.0 9.3 8.9 8.4 8.9 Tax 838 1,718 2,389 2,854 2,761 2,410 2,199 2,677 Deferred Tax 134 32 53 43 13 82 45 55 Tax Rate (%) 21.2 28.1 27.9 27.9 27.0 22.0 22.0 22.0 Profit after Taxes 2,615 4,305 6,048 7,262 7,411 8,231 7,955 9,684 Change (%) 24.7 64.6 40.5 20.1 2.1 11.1 -3.4 21.7 Margin (%) 5.6 6.6 6.8 7.2 6.8 6.9 6.6 7.0 Extraordinary income -112 -32 -47 0 0 0 0 0 Reported PAT 2,503 4,273 6,002 7,262 7,411 8,231 7,955 9,684

Balance Sheet

(INR Million) Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E Share Capital 444 444 888 888 888 888 888 888 Reserves 6,800 9,810 13,611 18,761 24,352 30,032 35,275 42,054 Net Worth 7,244 10,254 14,499 19,649 25,240 30,920 36,163 42,942 Loans 728 677 59 60 8,063 998 1,998 2,998 Deferred Tax 48 15 -38 -80 -93 -197 -242 -296 Capital Employed 8,019 10,946 14,520 19,629 33,209 31,721 37,919 45,643 Gross Block 5,611 6,089 7,271 8,480 10,399 11,902 13,977 16,052 Less: Accum. Depn. 3,145 3,393 3,693 4,078 4,495 5,103 5,944 6,920 Net Fixed Assets 2,466 2,696 3,578 4,402 5,903 6,799 8,033 9,132 Intangibles 160 135 110 84 59 34 34 34 Capital WIP 123 194 249 417 329 549 549 549 Investments 76 91 160 185 230 290 290 290 Curr. Assets, L&A 18,037 33,800 42,802 53,579 54,456 50,854 56,205 66,965 Inventory 13,403 19,938 28,787 36,779 38,672 40,474 41,785 46,295 Account Receivables 936 1,137 1,631 1,638 1,520 1,874 1,892 2,142 Cash and Bank Balance 1,867 10,965 9,605 11,365 8,925 2,138 6,685 12,010 Others 1,831 1,760 2,779 3,797 5,338 6,368 5,844 6,518 Curr. Liab. and Prov. 12,843 25,969 32,378 39,039 27,768 26,804 27,191 31,327 Current Liabilities 11,496 24,184 29,435 35,478 23,938 22,483 22,816 26,226 Provisions 1,347 1,786 2,942 3,561 3,830 4,322 4,375 5,101 Net Current Assets 5,194 7,830 10,424 14,541 26,688 24,050 29,014 35,639 Application of Funds 8,019 10,946 14,520 19,629 33,209 31,721 37,920 45,643 E: MOSL Estimates 0 0 0 0

Titan Company

13 August 2015 10

Financials and valuations

Ratios

-863 -1,140 -4,687 Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E Basic (INR)

EPS 2.9 4.8 6.8 8.2 8.3 9.3 9.0 10.9 Cash EPS 3.3 5.2 7.3 8.8 9.1 10.3 9.9 12.0 BV/Share 8.2 11.5 16.3 22.1 28.4 34.8 40.7 48.4 DPS 0.9 1.5 2.0 2.5 2.4 2.8 2.7 3.3 Payout % 31.0 30.2 30.1 30.0 28.6 30.0 30.0 30.0

Valuation (x)

P/E 48.4 40.3 39.5 35.6 36.8 30.3 Cash P/E 45.4 37.5 36.3 32.2 33.3 27.5 EV/Sales 3.2 2.8 2.7 2.4 2.4 2.0 EV/EBITDA 34.0 27.8 27.8 25.3 26.4 21.5 P/BV 20.2 14.9 11.6 9.5 8.1 6.8 Dividend Yield (%) 0.6 0.7 0.7 0.8 0.8 1.0

Return Ratios (%)

RoE 41.0 49.2 48.9 42.5 29.4 26.6 22.0 22.6 RoCE 54.2 63.0 63.7 56.1 43.8 38.0 30.0 31.0

Working Capital Ratios

Debtor (Days) 7 6 7 6 5 6 6 6 Asset Turnover (x) 5.8 6.0 6.1 5.2 3.3 3.8 3.2 3.0

Leverage Ratio

Debt/Equity (x) 0.1 0.1 0.0 0.0 0.3 0.0 0.1 0.1

Cash Flow Statement

(INR Million) Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E OP/(loss) before Tax 3,320 5,991 8,385 10,072 10,159 10,559 10,198 12,415 Int./Div. Received -119 -561 -941 -1,008 -1,202 -706 -832 -985 Deferred Revenue Exp. 0 0 0 0 0 0 0 0 Depreciation & Amort. 360 345 449 545 656 874 841 976 Interest Paid 254 82 437 506 871 807 702 814 Direct Taxes Paid 838 1,718 2,389 2,854 2,761 2,410 2,199 2,677 Incr in WC -558 -6,461 3,953 2,357 14,588 4,149 418 1,299 CF from Operations 3,535 10,600 1,987 4,906 -6,864 4,975 8,294 9,243

Extraordinary Income -112 -32 -47 0 0 0 0 0 Incr in FA -63 524 1,212 1,352 1,806 1,698 2,075 2,075 Free Cash Flow 3,486 10,044 729 3,554 -8,670 3,276 6,219 7,168 Investments 0 15 69 25 44 61 0 0 CF from Invest. -49 -571 -1,328 -1,376 -1,850 -1,759 -2,075 -2,075

Issue of Shares 0 0 444 0 0 0 0 0 Incr in Debt -1,026 -51 -618 1 8,002 -7,065 1,000 1,000 Dividend Paid 519 776 1,290 1,806 2,181 2,116 2,469 2,386 Others 621 104 556 -35 -453 822 203 457 CF from Fin. Activity -2,166 -931 -2,020 -1,769 6,274 -10,003 -1,672 -1,843

Incr/Decr of Cash 1,320 9,098 -1,360 1,760 -2,440 -6,787 4,546 5,325 Add: Opening Balance 547 1,867 10,965 9,605 11,365 8,925 2,138 6,685 Closing Balance 1,867 10,965 9,605 11,366 8,925 2,138 6,685 12,010 E: MOSL Estimates

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13 August 2015 11

N O T E S

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13 August 2015 12

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Disclosure of Interest Statement TITAN Analyst ownership of the stock No Served as an officer, director or employee No

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