titan company -...

Titan Company

“Creating building blocks to achieve Vision 2023”; BUY

May 14, 2018

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Analyst Meet Update

Amnish Aggarwal [email protected] +91‐22‐66322233

Nishita Doshi [email protected] +91‐22‐66322381

Rating BUY

Price Rs921

Target Price Rs1,114

Implied Upside 21.0%

Sensex 35,557

Nifty 10,807

(Prices as on May 14, 2018)

Trading data

Market Cap. (Rs bn) 817.7

Shares o/s (m) 887.8

3M Avg. Daily value (Rs m) 2519.2

Major shareholders

Promoters 53.07%

Foreign 20.72%

Domestic Inst. 6.11%

Public & Other 20.10%

Stock Performance

(%) 1M 6M 12M

Absolute (6.5) 19.1 86.2

Relative (10.5) 11.2 68.5

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2019 18.5 16.7 11.0

2020 21.6 21.2 1.6

Price Performance (RIC: TITN.BO, BB: TTAN IN)

Source: Bloomberg

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May‐17

Jul‐17

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(Rs)

TTAN Mgt reiterated their vision to achieve Rs500bn sales (consumer prices level)

and having 50mn consumers. TTAN is building an organisation to deal with

changing environment with factors like 1) Digital 2) Youth and GEN A 3) Omni

channel 4) Rural India 5) Premiumisation and rising affluence and 6) emerging

women power at the core of its strategy.

Jewellery business is likely to be the centre point of growth with accelerating

addition of 40 stores are 2.5x sales by 2023. It is looking at more sales in middle

India, higher share of high value diamond jewellery, and sustained increase in

share of wedding jewellery to drive sales. TTAN seems confident of achieving 25%

sales growth in the current year given that the operating environment is highly

favourable given strong brand, shift towards organised trade and difficulty faced

by small shops post GST, Demon and PMLA.

Watch business seem to be on steady recovery led by 1) increased focus on tech

centric watches 2) cost rationalisation 3) increase in import duty from 10% to 20%

and 4) reduction in GST from 28% to 18%. It believes that smart watches in

Fastrack and growing share in LFS and premium watches will enable the business

report steady margin expansion.

Eyewear business is entering a new phase of investment led by store renovations,

new products at lower price points, Omni channel play, frames unit and focus on

service aspect in prescription eyewear. Eyewear is likely to witness significant

increase in adspend and pressure on margins in the near term. TTAN is investing in

SKINN, Mont Blanc, Taneira, Fabre Leuva and Caratlane to create luxury businesses

which can add value in the long term.

We estimate 26.7% PAT CAGR over FY18‐FY20. We value the stock at 45xSept20

EPS and arrive at a target price of Rs1115. We expect premium valuations to

sustain, although returns might be back ended. Retain Buy.

Key financials (Y/e March) 2017 2018 2019E 2020E

Revenues (Rs m) 126,197 153,415 190,611 228,257

Growth (%) 13.8 21.6 24.2 19.7

EBITDA (Rs m) 12,005 17,092 23,080 27,245

PAT (Rs m) 8,582 16,382 16,467 19,155

EPS (Rs) 9.7 18.5 18.5 21.6

Growth (%) 23.0 90.9 0.5 16.3

Net DPS (Rs) — 2.6 3.8 5.0

Profitability & Valuation 2017 2018 2019E 2020E

EBITDA margin (%) 9.5 11.1 12.1 11.9

RoE (%) 21.9 32.8 26.2 25.2

RoCE (%) 22.2 33.4 26.5 25.5

EV / sales (x) 6.5 5.3 4.3 3.6

EV / EBITDA (x) 68.0 47.7 35.3 29.9

PE (x) 95.3 49.9 49.7 42.7

P / BV (x) 19.0 14.4 11.9 9.8

Net dividend yield (%) — 0.3 0.4 0.5

Source: Company Data; PL Research

May 14, 2018 2

Titan Company

Jewellery: 2.5xFY18 sales by 2023, 25% sales growth target in FY19

Titan Reiterated 2.5x of Fy18 sales by 2023 and 10% market share (5.5‐6% currently).

The company is looking at 20% CAGR in sales as against 6% sales growth for the

industry. Industry environment is favourable for Tanishq and focus on wedding

jewellery, high value diamond jewellery, middle India and sub brands like Zoya,

Caratlane Lane and Mia will enable company sustain 20% CAGR. FY19 sales are

expected to increase by 25% although, 1Q is likely to soft due to high base.

Key drivers are:

Rs1‐5mn income group which is witnessing 23% CAGR in income

Rising focus on adornment rather than investment for jewellery

Environment favourable for Tanishq post Demon, Modi/ choksi event and GST

impact

Fear of buying from unknown and small jeweller is rising as GST has made it

difficult for small jeweller to conduct business. Hallmarking and PMLA are

further working to the advantage of TTAN

Tanishq has increased share of wedding jewellery from 20% to 35% in past 3

years, it is targeting increase in share to 50% by 2023 in gold jewellery. Rising

share of wedding jewellery is also positive for profitability

TTAN plans to increase the share of high value diamond jewellery from 30% to

50% of studded sales by 2023.

TTAN plans to add 40 stores in the current year and has indicated at least 400

stores by 2023. The number of city presence will increase to 250 from 150.

Tanishq has huge scope in middle India as cities like Faizabad, jaunpur, Aungul,

Azamfarg etc. have huge pent up demand and scope for growth

Tanishq has seen an increase in gold exchange from 20% of gold jewellery sales

to 40%, it is planning to increase the same to 50% by 2023 which will

significantly de‐risk the business model. Tanishq had reduced the exchange

charges to Zero, however higher ticket size has compensated for not making any

margin on taking old gold

It is looking at sales of Rs7.5bn from Mia, Rs5.0bn from Aveer and Rs5bn from

Zoya by 2023.

TTAN is targeting sales of Rs17.5bn from 100 stores with EBIT margin of 5% and

ROCE of 20% from caratlane

Tanishq is looking at 25% sales growth in FY19 sales, although 1Q might show

some adjustment due to high base

May 14, 2018 3

Titan Company

Watches – expect sustained improvement in profitability

TTAN has shown sharp improvement in FY18 profits as margins have increased to

13% from a low base. Sales volumes, value and EBIT have grown by 8%, 10% and

34% respectively. Although sales have been effected, brand salience has improved

significantly.

Fastrack has seen significant overhaul in Fy18 and grew by 14% last year. It is

likely to increase presence in smart bands and emerging smart watch segment

Titan is growing faster in Rs4000‐5000 price band

LFS and After sales service has achieved breakeven in Fy18, Helios and

Accessories will achieve breakeven in FY19. LFS has achieved Rs3bn in sales and

E Com sales are up 90% YoY

Sonata and Fastrack are likely to be volume drivers for the company

Titan is looking at adding 20 World of Titan Stores, 10 Fastrack and 10 Helios

Stores. 100 stores will be renovated across brands while service centers will be

set up at select Fastrack and Helios stores.

Tie up with Amazon for US markets has worked well and it is likely to be

extended to other markets in North America

Fabre Leuva will see brand investments to establish in US, Japan, Middle east

etc, long term aim is the success in India

Eyewear: Entering high investment phase, margin pressure in FY19

Watch business has achieved sales and EBIT of Rs4.15bn and Rs24mn in FY18. SSG in

Titan Eye+ was 6% and sales were up 13%. Sunglass business has been under

pressure post reduction in GST rates from 28% to 18% given that the trade channel is

multibrand outlets. The eyewear business is facing intense competition from online

retailers like Lenskart on one hand and offline players like Reliance vision and other

local chains on the other. It is present in 500 Titan Eye+ stores, 4500 MBO’s,

0.325mn sq ft of retail space, one central and 4 satellite labs.

Eyewear business plans to increase the number of customers from 2.4mn in

Fy18 to 10mn by 2023.

Eyewear has high competition, high price sensitivity and is purchased out of

compulsion and not choice

The category is facing online disruptions and has high fashion quotient

Titan has increased the number of optometrists from 1 to 2 /store and has

improved delivery time post commissioning of satellite labs

Titan has invested in frame manufacturing and is looking at renovating the

stores

May 14, 2018 4

Titan Company

Titan aims to launch lower priced products (Rs100‐2000) in order to shed image

of higher prices and significantly increased advertising and marketing

It plans to open 40 stores and use Omni channel to compete with price

disrupters

TTAN is also looking at converting small mom and pop stores into Titan Eye+

stores

New businesses – seeding future growth drivers

Titan is seeding small but high growth potential segments to drive long term growth

in businesses. It has invested in SKINN, caratlane, Titan Automation, Favre Leuva,

Mont Blanc and Taneira as segments which have long term potential

Titan Engineering and Automation (TEAL): it achieved Rs2.5bn sales and

Rs210mn profit. Rs1.48bn are in automation and rest in aerospace. Order book

is Rs2.7bn and holds huge potential for growth.

Mont Blanc: It has 10 stores in Pens, watches and leather accessories. Titan has

49% stake in this company. 80% sales are from non‐metros and it is a learning

experience to sell luxury products. It has achieved store level breakeven

Taneira: It is focusing on special occasion wear and sells sarees, dress material

etc. it has 2 stores in Bangalore and plans to extend to other Metros like

Chennai and Delhi. The potential for this kind of a model is huge given that

consumers are shifting towards traditional wear for occasions

Exhibit 1: Q4FY18 Results; Adj. PAT up 78.8% on strong margin beat in Jewellery and lower tax rate

Y/e March (Rs mn) Q4FY18 Q4FY17 YoY gr. (%) Q2FY18 FY18 FY17 YoY gr. (%)

Net Sales 39,168 35,075 11.7 41,366 153,415 126,145 21.6

Gross Profit 11,360 9,377 21.1 10,052 39,687 33,406 18.8

% of NS 29.0 26.7 2.3 24.3 25.9 26.5

Adv & Sales Pro 1022 1322 (22.7) 1364 4500 4504 (0.1)

% of NS 2.6 3.8 3.3 2.9 3.6

Total Expenses 34,614 32,354 7.0 36,918 136,323 114,192 19.4

% of NS 88.4 92.2 89.2 88.9 90.5

EBITDA 4,554 2,721 67.4 4,447 17,092 11,954 43.0

Margins % 11.6 7.8 10.8 11.1 9.5

Depreciation 301 224 34.1 295 1,097 932 17.6

Interest 124 82 50.7 104 477 371 28.4

Other Income 200 273 (26.8) 184 1,102 648 70.1

PBT 4,329 2,687 61.1 4,233 16,621 11,298 47.1

Tax 701 658 6.5 1,151 4,078 2,716 50.2

Tax rate % 16.2 24.5 27.2 24.5 24.0

Adjusted PAT 3,628 2,029 78.8 3,082 12,542 8,582 46.1

Source: Company Data, PL Research

May 14, 2018 5

Titan Company

Exhibit 2: Jewellery EBIT up 60% as margins expanded 400bps, Watches EBIT up 190% on low base

(Rs m) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18

Total Sales 24,062 27,745 26,236 38,713 35,438 39,482 34,057 41,414 39,215

Watches 4,491 4,997 5,237 5,083 5,026 5,099 5,700 5,324 4,940

YoY Growth ‐12.1% 3.0% ‐5.2% 5.1% 11.9% 2.0% 8.8% 4.7% ‐1.7%

Jewellery 18,466 21,506 19,875 32,550 29,131 33,077 27,108 34,968 32,921

YoY Growth 1.0% 3.7% 0.2% 15.4% 57.8% 53.8% 36.4% 7.4% 13.0%

Eyewear 970 1,105 952 907 1,116 1,107 985 904 1,089

YoY Growth 10.0% 3.3% 6.6% 12.4% 15.0% 0.2% 3.5% ‐0.3% ‐2.4%

Others 136 137 172 174 166 199 263 219 265

YoY Growth ‐82.2% ‐70.9% ‐71.7% ‐66.9% 21.5% 45.7% 53.1% 26.2% 60.4%

Total EBIT 2,194 2,890 2,753 3,776 2,899 3,949 4,472 4,506 4,766

Watches 77 702 643 529 121 588 914 826 351

YoY Growth ‐84.2% 48.2% ‐23.0% 63.1% 56.7% ‐16.3% 42.1% 56.2% 190.4%

EBIT Margin 1.7% 14.0% 12.3% 10.4% 2.4% 11.5% 16.0% 15.5% 7.1%

Jewellery 2,078 2,179 2,182 3,343 2,824 3,391 3,676 3,847 4,519

YoY Growth ‐10.5% 20.0% 81.1% 15.1% 35.9% 55.7% 68.5% 15.1% 60.0%

EBIT Margin 11.3% 10.1% 11.0% 10.3% 9.7% 10.3% 13.6% 11.0% 13.7%

Eyewear 134 70 20 ‐29 108 32 14 ‐44 23

YoY Growth 40.4% 218.7% ‐54.3% ‐502.7% ‐19.6% ‐54.6% ‐31.8% 50.3% ‐78.6%

EBIT Margin 13.8% 6.3% 2.1% ‐3.2% 9.6% 2.9% 1.4% ‐4.9% 2.1%

Others (95) (60) (92) (66) (154) (61) (132) (123) (127)


May 14, 2018 6

Titan Company

Exhibit 3: Watches: Domestic volumes declines 1% on distribution revamp, LFS report strong growth

4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18

Watches

Sales Growth % ‐13 1 ‐5.2 9 10.8 2 13.6 11 ‐1.7

Volume Growth % ‐19 1 ‐9 4 10 5 9 11 ‐1

World Of Titan

Sales Growth % ‐6 11 4 12 8 9 7 8 ‐3

LTL Sales growth % ‐9 6 ‐2 9 5 6 5 7 ‐4

Stores 452 458 467 470 474 482 485 481 486

Helios

Sales Growth % 12 7 1 16 4 40 9 37 32

LTL Sales growth % 15 13 1 11 ‐3 24 ‐9 4 5

Stores 41 41 44 47 49 53 62 67 70

Fastrack

Sales Growth % 2 4 ‐1 3 0 ‐3 4 10 1

LTL Sales growth % ‐5 ‐1 ‐5 1 ‐1 ‐3 2 6 ‐6

Stores 159 160 163 155 155 160 166 164 166

LFS

Sales Growth % 1 15 11 28 12 20 4 11 14

LTL Sales growth % ‐7 16 4 13 3 8 1 6 11


Exhibit 4: Eyewear‐ tepid growth phase continues, prescription eyewear recovers, sunglasses remain under pressure

Eyewear 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18

Sales Gr % 18 9 10 10 9 10 10 ‐0.3 10

LTL Growth % (Titan Eye+) 7 ‐2 4 4 1 3 3 1.1 1

Stores 404 405 413 428 448 457 462 478 500

Area (sq Ft) 293000 301000 304000 327000 331000


Exhibit 5: Gold Prices up 4.7% YoY and 3.8% QoQ in Q4FY18

2643

2809

2964

2791 2773 2790 2777 27982903

2000

2200

2400

2600

2800

3000

3200

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18

Q3FY18

Q4FY18

Rs/10gm

(22kt)

Gold price

Source: Bloomberg, PL Research

Golden Harvest accounted for 17‐18% of

sales while Gold on loan has declined to

40% due to higher consumer incentive on

exchange of gold.

May 14, 2018 7

Titan Company

Exhibit 6: Volumes up 6%: studded share 36%, store addition guidance at 40, gold on loan declines to 40%, gold exchange not margin dilutive

4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18

Jewellery

Volume Gr % 15 6 ‐32 4 37 49 49 6 6

Studded Share % 34 23.8 42 21 34 23.4 36 25 36

Sales Gr % ‐1.0 3.0 0.2 15.0 55.0 55.0 36.4 7.4% 13.0%

Tanishq

Sales Gr % ‐1 9 9 20 55 55 22 15 19

LTL Growth % ‐5 3 4 15 52 51 18 12 17

Stores 193 197 198 204 210 221 229 243 256

Area (sq Ft) 815000 830000 835000 847000 875000 900000 940000 971000 1010000

Source: Company Data/ PL Research

Exhibit 7: Jewellery growth momentum to continue in FY19& FY20, Watches to see steady margin expansion from low base

(Rs m) FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Jewellery

Sales 86,274 94,206 87,227 102,373 130,359 160,757 194,533

Growth % 7.4 9.2 (7.4) 17.4 27.3 23.3 21.0

EBIDTA 8,728 9,699 8,189 10,951 15,895 20,480 25,330

Growth % 4.4 11.1 (15.6) 33.7 45.1 28.9 23.7

EBIDTA Margin % 10.1 10.3 9.4 10.7 12.2 12.7 13.0

Watches

Sales 17,889 19,188 19,633 19,882 21,264 23,603 26,199

Growth % 7.3 7.3 2.3 1.3 7.0 11.0 11.0

EBIDTA 2,112 2,373 2,004 2,376 2,928 3,540 3,930

Growth % (3.1) 12.4 (15.5) 18.5 23.2 20.9 11.0

EBIDTA Margin % 11.8 12.4 10.2 12.0 13.8 15.0 15.0

Source: PL Research

May 14, 2018 8

Titan Company

May 14, 2018 9

Titan Company

Taneira is being extended into other Metros like Delhi and Chennai

May 14, 2018 10

Titan Company

May 14, 2018 11

Titan Company

Watch Business: On a path to gradual and sustained growth and margin expansion

May 14, 2018 12

Titan Company

Income Statement (Rs m)

Y/e March 2017 2018 2019E 2020E

Net Revenue 126,197 153,415 190,611 228,257

Raw Material Expenses 92,740 113,892 144,703 171,587

Gross Profit 33,457 39,522 45,908 56,670

Employee Cost 7,010 7,623 8,564 9,564

Other Expenses 14,442 14,808 14,264 19,861

EBITDA 12,005 17,092 23,080 27,245

Depr. & Amortization 894 1,072 1,218 1,360

Net Interest (225) (387) (178) (594)

Other Income 635 889 525 1,021

Profit before Tax 11,375 16,432 22,064 26,504

Total Tax 2,716 — 5,547 7,298

Profit after Tax 8,659 16,432 16,517 19,205

Ex‐Od items / Min. Int. (1,927) — — —

Adj. PAT 8,582 16,382 16,467 19,155

Avg. Shares O/S (m) 887.8 887.8 887.8 887.8

EPS (Rs.) 9.7 18.5 18.5 21.6

Cash Flow Abstract (Rs m)

Y/e March 2017 2018 2019E 2020E

C/F from Operations 3,577 3,581 1,686 2,702

C/F from Investing (7,351) (1,434) (2,087) (2,337)

C/F from Financing 4,085 2,376 1,148 (188)

Inc. / Dec. in Cash 311 4,523 747 177

Opening Cash 1,117 1,427 1,895 2,643

Closing Cash 1,427 1,895 2,643 2,820

FCFF 17,865 (1,434) 14,745 12,953

FCFE 16,735 (1,433) 14,746 12,954

Key Financial Metrics

Y/e March 2017 2018 2019E 2020E

Growth

Revenue (%) 13.8 21.6 24.2 19.7

EBITDA (%) 26.0 42.4 35.0 18.0

PAT (%) 23.0 90.9 0.5 16.3

EPS (%) 23.0 90.9 0.5 16.3

Profitability

EBITDA Margin (%) 9.5 11.1 12.1 11.9

PAT Margin (%) 6.8 10.7 8.6 8.4

RoCE (%) 22.2 33.4 26.5 25.5

RoE (%) 21.9 32.8 26.2 25.2

Balance Sheet

Net Debt : Equity — — — —

Net Wrkng Cap. (days) 84 139 122 122

Valuation

PER (x) 95.3 49.9 49.7 42.7

P / B (x) 19.0 14.4 11.9 9.8

EV / EBITDA (x) 68.0 47.7 35.3 29.9

EV / Sales (x) 6.5 5.3 4.3 3.6

Earnings Quality

Eff. Tax Rate 24.0 — 25.2 27.6

Other Inc / PBT 5.3 5.3 2.3 3.8

Eff. Depr. Rate (%) 6.7 7.3 7.5 7.5

FCFE / PAT 195.0 (8.7) 89.5 67.6

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2017 2018 2019E 2020E

Shareholder's Funds 43,120 56,878 68,814 83,358

Total Debt 2 3 4 5

Other Liabilities (22) (77) (95) (114)

Total Liabilities 43,100 56,805 68,722 83,249

Net Fixed Assets 8,552 8,864 9,708 10,660

Goodwill 2 3 4 5

Investments 15,161 6,493 15,503 23,212

Net Current Assets 19,385 37,366 39,429 45,294

Cash & Equivalents 1,427 1,895 2,643 2,820

Other Current Assets 58,361 69,980 80,550 95,077

Current Liabilities 40,404 34,510 43,764 52,603

Other Assets — — — —

Total Assets 43,100 52,726 64,644 79,170

Quarterly Financials (Rs m)

Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18

Net Revenue 39,096 33,785 41,366 39,168

EBITDA 3,885 4,206 4,447 4,554

% of revenue 9.9 12.4 10.8 11.6

Depr. & Amortization 248 254 295 301

Net Interest 106 143 104 124

Other Income 276 443 184 200

Profit before Tax 3,707 4,245 4,233 3,522

Total Tax 1,038 1,189 1,151 701

Profit after Tax 2,669 3,056 3,082 2,821

Adj. PAT 2,769 3,063 3,082 3,628

Key Operating Metrics

Y/e March 2017 2018 2019E 2020E

Watch sales Growth 1.3 7.0 11.0 11.0

Watch EBIT Growth % 18.5 23.2 20.9 11.0

Watch Margins 12.0 13.8 15.0 15.0

Jewelry Sales Growth 17.4 27.3 23.3 21.0

Jewellery EBIT Growth % 33.7 45.1 28.9 23.7

Source: Company Data, PL Research.

May 14, 2018 13

Titan Company

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

43.4% 44.2%

12.4%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% of Total Coverage

BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months

Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month

Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES

ANALYST CERTIFICATION

We/I, Mr. Amnish Aggarwal (MBA, CFA), Ms. Nishita Doshi (CA, CFA Level 1, B.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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