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There is an update of this report dated Nov2012, Titan – The Jewel in the Crown 

Titan Industries is a power brand and the largest specialty retail chain in India. It is translating the success in watches into new categories by adding one every 5-7 years, and now also straddles jewellery, eye wear and precision components. Titan is at a very early stage of revenue and profit growth. Invest.

Titan Industries – Description and Profile

• Titan Industries is a Tata group company selling watches, jewellery, eye wear and precision components. Titan has built excellent brands that drive sales in these consumer categories.
• They have also set up specialty retail chains to display these products and improve the customer experience. This chain is the largest specialty retail chain in India.
• Started in 1984 with a joint venture between the Tatas and the Tamil Nadu Industrial Development Corporation for watches, it expanded in 1995 into jewellery and in 2007 into eye wear.
• Today the turnover is 6050 crores, PAT 430 cr and sales has grown 35% CAGR over the last 6 years.
• Here is a graphic of Titan’s products, distribution, brands and future growth drivers

Fig 1 – A snapshot of Titan’s products, brands, distribution and future growth (click to enlarge)

• The demand for Titan products depends on consumer disposable incomes, and straddle the mid to high end segments

• In watches, the owned brands are Fastrack, Xylys, Titan and Sonata. High end licensed watch brands include Tommy Hilfiger, fcuk and Hugo Boss.
• In eye wear, the three in-house brands are Titan, Eye+ and Dash, while the international and luxury brands include Gucci, D&G, Armani, BOSS, Esprit, Daniel Swarowski and Mont Blanc

• There has been a steady growth in consumer demand except for 2008-09. Recovery is complete, and this trend is expected to continue and even accelerate.
• Watch parts which were sourced from China, are now being transitioned to production in house in India. This is due to increase in prices from Chinese parts. Even though Titan’s investments requirements and cost of production increase, this gives Titan greater control over the supply chain and quality control.
• Titan operates 85–90% of its stores through the franchisee model – this allows flexibility in scale and lower cost expansion

Stock evaluation, performance and returns

The Price and Dividend history of Titan is detailed below:

Fig 2 – Price and Annual dividend history

(Dividend in Rs/share, FV Rs 1) Click to enlarge graphic

Fig 3 – Quarterly revenues and Profits have grown steadily over the last 8 years

Fig 4 – Cash Flow and EPS are up substantially

• Sales are growing at 35% CAGR over the last 6 years.
• Over the same period, EPS (on a steady equity base) has grown 57%. This is remarkable profitability.
• However, cash from operating activities is up only 19.8% – this is because Titan is investing in building the retail chain as well as in the manufacturing facilities.
• Putting these together, Titan appears to be in a virtuous cycle of investment – growth – profits that (barring any India/ global slowdown) – is a multi year business acceleration.

Fig 5 – Price and PE Graph

Fig 6 – Price and EPS Graph

• Even with the rapid appreciation of Titan’s share price in the last 2 years, the PE is around 46. This is historically in the medium/ average range for Titan over the last 7-8 years. Investors seem to have always expected more from Titan :-)
• EPS  has increased steadily, barring the 2008-09 period where overall the economy had slowed. Post this period, the earnings have rebounded and caught up with the previous growth path
• ROCE has been at an amazing 42-48% in the last 2 years.
• PEG is at 0.81 – indicates safety and still undervalued status
• Very low debt equity ratio, and good cash position indicates strength in the balance sheet.
• The company has recently approved a share split to 1 Re face value (from 10Rs), and a bonus issue of 1 for 1 held. This will reduce market price by 1/20 and boost retail participation (and shareholder returns in the short run).

Risks:

• Titan is seen as a proxy for gold. In recent times, Titan has been enjoying appreciation on the inventory due to gold appreciating. A fall in price of gold can be a risk to the gold inventory and the jewellery demand at Titan.
• Competition in India is intensifying with a host of jewellery and eye wear brands challenging Titan.
• Precision components is a commodity type business, needing volumes, compared to watches, jewellery and eye-care, which are branding, manufacturing and retailing oriented. This business may never reach profitability levels compared to the other three.
• So what next after eye care? In the next 2-4 years Titan needs to enter into a new business that falls in it’s sweet spot of takeover of unorganized sector – precision manufacturing – consumer retail where it’s strong brand can be deployed successfully. If it does not, business in India can taper off in the next 7-10 years.

Opinion, Outlook and Recommendation

• In India the ‘demographic dividend’ and GDP growth have pulled the per capita income to over Rs 54,000. Experts expect consumption to accelerate now, as consumers have more discretionary spending power, (and spend less of total income on food). Titan’s watch, jewellery and eye care categories will ride this consumption wave.
• In Jewellery and eye care, Titan is addressing a relatively unorganized sector, and by leveraging it’s national brand and distribution network, building credibility and loyal consumers. This is a sustainable model, and Titan enjoys a first mover advantage.
• Exports too are a big driver of future growth, as the Indian success story is replicated in 26+ countries. In these business categories, margins can be much higher in developed countries, so there is high potential here.
• Precision components manufacture, while being a lower margin business, has a very large global potential. Anecdotal evidence from Titan’s procurement for watch parts suggests that Indian parts are gaining in competitiveness compared to Chinese equivalents.
• Titan has built capabilities in branding, design and manufacturing that are strong core competencies.
• In the last 2 years, share price has appreciated 4 times. For new investors, it may appear to be a case of, closing the stable door after the horse has bolted :-). However, this stock is expected to continue to perform strongly for several years to come.
• Invest now and systematically for long term outperformance

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/