Titan Company Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Diamond & Jewellery

Company

Titan Company Ltd

Diamond & Jewellery


November 29, 2017

Sensex: 33602.76


CNX Nifty: 10361.30

NSE: TITAN


BSE: 500114

Reco Price
Rs. 821
Price Target (1 Year)
Rs. 990
Upside
20.58%

Date

November 29, 2017

Sensex

33602.76

CNX Nifty

10361.30

Exchange

Code

NSE

TITAN

BSE

500114

Stock Data

CMP (Rs)
818.10
Face value (Rs)
1
52 Week Range (Rs)
838.90 - 305.25
Market cap (Rs Crores)
72731.88
Price To Book Value (x)
15.56
P/E Ratio (x)
69.06
EV/EBIDTA (x)
44.86

One Year indexed Stock Performance

Titan Company Ltd Sensex
Titan Company Ltd
Return (%)
1m
6m
12m
36m
Absolute
32.67
73.55
161.87
110.25
Sensex
1.01
8.02
27.31
17.66

Shareholders

(in %)
30-Sep
Promoter
52.91
Public
47.09
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

Increase in revenue expected from jewellry segment will be a key trigger for the company

Revenue growth visibility from wedding jewellery:
The wedding segment accounts for ~60% of the jewellery market in India, out of which Tanishq’s penetration is still very low signifying greater opportunity can be captured in this market. The company’s prolonged efforts to increase focus on the wedding jewellery is visible through the launch of new collections such as ‘Rivaah’ and ‘Shubham’. This helped the company witness healthy traction showing 19% YoY growth in FY17 for revenues from jewellery segment. Also, in order to foray into wedding segment, Tanishq launched ‘Jewels of Royalty’ and jewellery associated with the Bollywood movie ‘Padmavati’ which could be a key revenue driver going forward. Titan has well strategized to scale up its share in not only wedding jewellery segment but also in high value studded jewellery which will enable the company in gaining operating leverage to aid operating margins.

In-house manufacturing of frames:
Due to increase in dependency on imports of frames from Asian countries especially China, Titan has recently invested Rs. 30 crores in its manufacturing plant in Bengaluru to produce frames. This new facility is expected to be operational from January 2018 and frames will hit the market by March. The manufacturing unit has the capacity to produce 10 lakh frames annually but initially it will produce only 50,000 units and step up gradually based on demand. Titan has appointed a dedicated team to design frames to keep it up with international eye wear trends and will also ensure quality which will be a key differentiator. There are currently 483 Titan Eyeplus showrooms across 200 cities in India and the company is seeking to expand rapidly and will launch another 50-100 stores per year. The sunglass market and the contact lens market continue to be underpenetrated and focus on these segments would also be looked going forward.

Segmental Performance:
Watches: The watches division reported revenue of Rs. 570 crores; growth of 9% on YoY basis. Domestic watches sales grew by 16% with volume growth of 15%. The growth in the watches business was on account of festive season building up and channel restocking post GST. The company has also added three World of Titan stores, eight Helios stores and five Fastrack stores during the year.

Jewellery: Jewellery sales increased by 36.4% to Rs. 2710.76 crores. During Q2FY18, jewellery business was impacted by the new Prevention of Money Laundering Act (PMLA) regulations at the beginning of the quarter but the roll back just before festive season provided a boost to the business. We expect the jewellery business to gain traction on account of introduction of new collections having higher focus on wedding jewellery.

Eyewear: Eyewear segment reported revenue of Rs. 98.5 crores – an increase of 3.5% on YoY basis and Titan Eye+ sales increased 10% for Q2FY18. The company opened 26 new stores in the last 6 months and also closed down its eyewear business in unprofitable locations.

Future Outlook:
Over the next few years, the company expects Tanishq to be overall market leader. Its share in wedding segment is much lower and the company seeks to capitalize on the opportunities. The jewellery business converted 19 of its Goldplus stores into Tanishq and this move has yielded greater visibility and profits for the company. High Value Diamond Jewellery accounts for more than 2/3rd of the total diamond jewellery segment and Tanishq is a small player. With the right initiatives, this can also become a big driver of growth and profits and the early signs are already visible. Also, there are many cities in India where Tanishq has been present for more than a decade but is still not in the top 3 and multiple initiatives are being put in place for this share gain.

Industry

Watches: The watches category has witnessed a tepid, single-digit Compounded Annual Growth Rate in sales in the past four years. However, the introduction of technology, smart watches and other disruptive trends, has revitalized the market, and has rekindled interest in watches as a fashion statement. Globally, watchmakers are coping up with the downturn by downsizing, inventory streamlining, consolidation and retail restructuring. Product innovation is moving in tandem with the latest technology, and globally, a ‘vintage-inspired’ trend is visible. Further, contemporarily relevant customer groups like women, businessmen-on-the-move etc. are being targeted. Placed as an accessory near to jewellery, the women’s watch segment is particularly gaining focus.

Jewellery: The jewellery sector plays a significant role in the Indian economy, contributing around 6-7% of the country’s GDP and is one of the fastest growing sectors. The gold demand in India rose by 30% YoY to 298.4 tonnes between January-June 2017, backed by robust buying towards the end of quarter ending June 2017. In the coming years, growth in jewellery sector is expected to be largely contributed by the development of large retailers/brands. Also, the relaxation of restrictions of gold import is likely to provide a boost to the industry. The improvement in availability along with the reintroduction of low cost gold metal loans and likely stabilization of gold prices at lower levels is expected to drive volume growth for jewelers over short to medium term.

Profile

Titan Company Ltd (Titan) is a joint venture between the TATA Group and the Tamil Nadu Industrial Development Corporation (TIDCO) which commenced operations in 1984. Titan is the fifth largest integrated own brand watch manufacturer in the world. Over the last three decades, the company has expanded and explored into under penetrated markets and created leading brands across categories.

Titan has a retail footprint of over 1400 stores over a total area of more 1.8 m sq ft and is India’s largest specialty retail network spanning over 240 towns. Today, Titan Company is TATA’s largest consumer company, and India’s leading producer and retailer of watches, jewellery, eyewear and accessories.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Column1 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E
Net Sales 11913.41 11275.89 12978.86 15834.21 19001.05 22801.26
Growth (%) -5.35 15.10 22.00 20.00 20.00
Total Expenditure 10765.01 10366.74 11824.55 14329.96 17100.95 20475.53
EBITDA 1148.40 909.15 1154.31 1504.25 1900.11 2325.73
% Margin 9.64 8.06 8.89 9.50 10.00 10.20
Other Income 70.75 99.51 71.67 85.00 100.00 100.00
Operating Profit 1219.15 1008.66 1225.98 1589.25 2000.11 2425.73
Interest 80.69 42.36 37.74 42.00 46.00 46.00
PBDT 1138.46 966.30 1188.24 1547.25 1954.11 2379.73
Depreciation 89.57 98.19 110.53 117.50 125.00 130.00
Profit Before Taxation & Exceptional Items 1048.89 868.11 1077.71 1429.75 1829.11 2249.73
Exceptional Expense 0.00 0.00 -102.69 0.00 0.00 0.00
Tax 232.64 191.59 275.97 357.44 457.28 562.43
Profit After Tax 816.25 676.52 699.05 1072.31 1371.83 1687.30
Minority Interest 0.00 0.00 14.19 0.00 0.00 0.00
Share of Associates 0.01 -2.00 -1.77 0.00 0.00 0.00
Consolidated Net Profit 816.26 674.52 711.47 1072.31 1371.83 1687.30
Adjusted EPS 9.19 7.60 8.01 12.08 15.45 19.01
Source: Stockaxis Research, Company Data

Valuation

Titan is confident of gaining market share from both unorganized sector and even branded players due to the rollout of GST. The company is also increasing its presence in wedding jewellery as well as steadily expanding its network. Hence, given the strong earnings growth trajectory for the company, we recommend a ‘Buy’ with a target price of Rs. 990 at a valuation of 52x its FY20E earnings with a holding period of 1 year.