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• Date: November 9, 2012
• CMP: Rs 294
• Large Cap – Mkt Cap 26,000 crores
• Advice:  Buy systematically

Titan Industries is a power brand and runs the largest specialty retail chain in India. Following the pioneering success in watches and jewellery, it is now building the eyewear, precision components and accessories businesses. The FY12 turnover of Rs 8791 and profit Rs 600 crore reflect a 5 year CAGR of 34% & 45% resp. Titan is at a very early stage of revenue and profit growth. Invest.

This is an update of my June 2011 report, A Titan for the Long Term.

Titan Industries – Description and Profile

• Titan Industries is a Bangalore based Tata group company selling watches, jewellery, eye wear and precision components. It has built strong brands and India’s largest specialty retail network.
• It started in 1984 with a JV between the Tatas and Tamil Nadu Industrial Development Corporation for watches, later expanded in 1995 into jewellery and in 2007 into eye wear.
• Turnover in FY12 was 8971crores and PAT 600 cr. Sales have grown 34% CAGR over the last 5 years. Market Cap is 26,000 cr, making it about #55 in India.
• The 6,000+ employees manage over 879 retail stores (India) with area 10 lakh sq.ft., two design studios for watches and jewellery and 9 manufacturing units.
• Shareholding pattern is: Indian Promoters – 53.4%, MFs/ DII 4.5%; FIIs 15%, Bodies Corporate plus others 2.4%, General Public 24.7%. Rakesh Jhunjhunwala, a big investor, owns 11% of Titan.
• Key Executives are: Bhaskar Bhat, MD and C K Venkataraman, CEO, Jewellery.
• The FY2015 target is $3 billion (Rs 15,000 cr.) as per the MD.

Business Notes

• The Jewellery division is the largest in Titan, accounting for 78% of revenues. The next are Watches, Eyewear and precision parts.
• Overall growth YoY has been 36% for the firm.  

•  For exports, Titan has been cautious. It sells only watches and only in Asia and the Middle East. It sells through 1,850 overseas outlets, with more than 1,000 in the Middle East.
• Overall exports make up less than 5% of total revenue

Titan’s Brands and Industry Notes

• Titan products are linked to consumer disposable incomes and straddle multiple segments.
• Titan operates 85% of its stores through franchisees, allowing scalability and low cost expansion.
• In the Annual Survey for the Top 100 Brands-2009 conducted by Economic Times, both Titan (#4) and Sonata (#86) were featured. Titan was also ranked #1 in the consumer durables category.
• Here is a graphic Fig 2 of Titan’s products, distribution, brands and future growth drivers.

Watches

• Titan’s own brands are Titan, Fastrack, Xylys, Zoop, and Sonata. High end licensed watch brands include Tommy Hilfiger, FCUK, Hugo Boss and Helios, and Retail formats include World of Titan – 348 showrooms, Fastrack – 122 stores/ kiosks and Helios – 32 stores. There are 726 Service centers.
• Competition includes Citizen, Swatch, HMT, Timex, and (high end) Tissot, Seiko, Rolex, Tag Heuer.
• The market size is estimated at 5000 cr., of which around 45% is organized sector. It is one of the most organised retail categories in the country. Titan dominates this organized sector in India with 32% share of total market (around 70% of organized sector).
• Industry body Assocham has in a study predicted the market will grow 3 times – 15,000 cr by 2020.
• Watch parts which were sourced from China, are now being produced in house in India. This gives Titan better prices, greater control over the supply chain and quality control.
• The average selling price per watch in FY12 was Rs 1234.

Jewellery

• Titan has less than a 6% market share in the $30 billion (Rs 1,50,000cr) gems and jewelry market. The unorganised sector accounts for 90% of retail market in India, according to (CRISIL Research),
• Major Brands are Tanishq, GoldPlus and Zoya; sub-brands are Mia, and FQ teen diamonds.
• Manufacturing facilities in Hosur (Tamil Nadu), Dehradun and Pantnagar (Uttarakhand)
• Tanishq brand has 136 retail stores including 2 Zoya stores; GoldPlus has 32 stores
• Most of the competition is from unorganized sector – local jewelers.
• Organised sector players include Reliance Retail, Damas Jewellery, Gitanjali Gems, Swarovski, Diamond Trading Company, Tribhovandas Bhimji Zaveri, Vardhaman Developers, Dubai-based Joy Alukkas, Viswa and Devji Diamonds and Gold Souk India.

Eyewear

• 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. Titan Eye Plus retails eyewear brands such as Tommy Hilfiger, Hugo Boss, Cabana, Switchers, Flexx, Vybes and Versace, and in-house brands.
• The organized sector accounts for about 25% of the overall domestic eyewear industry with a share of over Rs 5,200 cr. of a market size around 21,000 cr.
• Titan operates India’s largest optical retail chain with 209 retail outlets across 78 towns. The management has guided breakeven for this segment in 4QFY13.

Recent Events and Strategies

• Gold prices rose in CY12, as a result, jewellery sales volumes fell. With some recent stability and even a fall in prices, Titan now expects demand to increase. The third quarter every year is also the traditional festival and marriage season and this should also help to boost volumes.
• Titan has expanded its accessories division by launching belts and wallets under men’s apparels, in addition to wristwatches. Soon it will offer Belts and handbags for ladies.
• Titan Eye Plus recently launched Vision Check – a self-administered online vision test facility. It accurately establishes the need for vision correction if required. To take the test, participants have to visit the Titan Eye Plus website at www.titaneyeplus.com.The jewellery site is www.tanishq.co.in
• Titan recently launched the Titan Edge watch collection, a slimmer high end product.
• Titan has appointed VikramKapur, principal secretary of Tamil Nadu state’s industries department, as its chairman and a director on the board of the company.
• Titan is planning to expand into 400 second-tier cities with populations of 200,000 or more.

Stock Evaluation, Performance and Returns

The Price and Dividend history of Titan is detailed in Fig 3.

• The Titan share had a low of 33 in Mar 2009, in the banking crisis aftermath, but today is near all-time highs of 297. See Fig 3 – Price History
• The share has given investors a 39% CAGR return over the last 5 years.
• Revenues have grown at 34% CAGR over the last 5 years. See Fig 4 – Quarterly Sales & Profits.
• Operating and Profit Margins have improved to 12% and 8% respectively in FY12.

• Over the same period, EPS has grown 45%, a remarkable performance.
• Dividend payments have improved steadily, giving a yield today of 0.6%.
• However, cash from operating activities improved until FY12, where it fell. This is because Titan is investing in the retail chain as well as in the manufacturing facilities.

• The Price and PE graph Fig 6, shows that the 5 year average PE is 40 times. Investors seem to have always expected more from Titan.
• Today it is at this average level, indicating that there is substantial upside potential.
• Over 5 years, EPS has increased, barring 08-09 when the economy had slowed, by about 45% CAGR.

• Fig 7 shows that Price and EPS seem to be fairly correlated, and in fact if anything EPS has accelerated ahead of Price. The channel indicates the likely trajectory of EPS
• EBITDA and Net Profit have also grown at 38% and 45% respectively.
• ROCE has accelerated to an amazing 60% in FY2012. RONW is at a very healthy 41%.
• PEG is at 0.89 – indicates safety and undervalued status.
• Negligible debt, and good cash position indicates strength in the balance sheet.
• Putting these together, Titan continues on its path of a multi-year business acceleration.

Benchmarking of Financials

In a Benchmarking exercise, we have compared Titan to Whirlpool, TTK Prestige (both consumer durables) and Pantaloon Retail (a retail leader). See Exhibit 8

• Titan appears overpriced, until one sees a higher dividend, higher ROCE and good ROE.
• TTK certainly appears interesting with its good growth and higher Inventory turnover ratios.
• Pantaloon seems weighed down by a debt burden

Risks

• Volatility in Gold prices affects Titan. A rise can dampen demand, while a sharp fall can affect Titan’s inventory value. Titan is consciously expanding beyond Gold jewellery to Diamond and Platinum.
• Competition in India is intense with a host of jewellery and eye wear brands challenging Titan.
• There is an entry of foreign brands and possibly retail networks after FDI being allowed in Retail.
• A slump in the economy will affect demand at Titan, as discretionary funds will dry up.
• With Titan’s Watch, Jewellery and Eye-Care initiatives in place, Titan needs to plan to enter into new businesses that fall in its sweet spot of- winning business from unorganized sector, precision manufacturing and consumer pull, where its strong brands can be redeployed. If it does not, business in India can taper off in the next 5-6 years. Strong candidates can be fashion accessories, leather products (non-shoes), etc.

Opinion, Outlook and Recommendation

• In India the ‘demographic dividend’ and GDP growth have pulled the per capita income to over Rs 61,000. 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.
• Titan has enjoyed premium valuations. It may have to do with its Tata roots, or its pioneering retail story, or its leadership in watch/ jewellery categories, or even the strong brands.
• In Jewellery and eye care, Titan is addressing a relatively unorganized sector market. By developing brands and a national distribution network, it has attracted new consumers and built loyalty.This is a sustainable model, and Titan enjoys a first mover advantage.
• Titan has built capabilities in branding, design and manufacturing that are strong core competencies.
• In the last 2 years, share price has appreciated 54%. For new investors, it may appear that the share has run up too much and will fall soon. However, this stock is expected to continue to perform strongly for several years to come.
• Buy Titan systematically.

This is an update of my June 2011 report, A Titan for the long term.

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