Titan Industries – The Jewel in the Crown

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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.  
Titan Business Segments, JainMatrix Investments

Fig 1 – Titan Segment Revenues, JainMatrix Investments

  •  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.
Titan’s Business Segments, JainMatrix Investments

Fig 2 – Titan’s Business Segments, JainMatrix Investments

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.

Price history, JainMatrix Investments

Fig 3 – Titan Price History, JainMatrix Investments

  • 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.
Quarterly Sales and Margins, JainMatrix Investments

Fig 4 – Quarterly Sales and Margins, JainMatrix Investments

EPS Cash Flow and Dividend, JainMatrix Investments

Fig 5 – EPS Cash Flow and Dividend, JainMatrix Investments

  • 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.
Titan Price and PE, JainMatrix Investments

Fig 6 – Titan Price and PE, JainMatrix Investments

  • 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.
Titan Price and EPS, JainMatrix Investments

Fig 7 – Titan Price and EPS, JainMatrix Investments

  • 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

Benchmarking of Financials, JainMatrix Investments

Exhibit 8 – Benchmarking of Financials, JainMatrix Investments

  • 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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This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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A Titan for the long term

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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

Titan Industries

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:

Titan Industries

Price and Dividend History

Fig 2 – Price and Annual dividend history

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

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

Titan Industries

EPS and Cash Flow

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.
Titan Industries

Price and PE

Fig 5 – Price and PE Graph

Titan Industries

Price and EPS

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/
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