Titan Company (TITIND) CMP: | 1800 Target: | 2110 (17%) Target Period: 12 months BUY August 5, 2021 Strong business model to aid faster recovery… About the stock: Titan has transformed itself from a watch maker into an enviable lifestyle company, with jewellery being the leading vertical (82% of revenues). Robust distribution network comprises 1900+ stores spread across 2.5mn sq. ft. Titan has consistently displayed its ability to gain market share amid a tough Particulars industry scenario owing to its robust balance sheet (30%+ RoCE and cash Particular Amount & investments worth | 2000+ crore) and strong brand patronage Market Capitalisation (| Crore) 1,59,801.5 Debt (FY21) (| Crore) 165.0 Update Result Q1FY22 Results: Covid induced lockdowns disrupted the performance for Titan in Cash & investments (FY21) (| Crore) 3,407.3 Q1FY22. Green-shoots were visible with strong pent-up demand from July onwards. EV (| Crore) 1,56,559.2 Revenue (excluding bullion sale) grew 120% YoY to | 3004 crore (~60% of 52 week H/L 1858 / 1048 pre-Covid levels). Reported revenue grew 75% YoY to | 3473 crore Equity Capital (| Crore) 88.8 Face Value (|) 1 Curtailment of marketing spends and overheads resulted in Titan reporting EBITDA margin of 3.9% vs. EBITDA loss of | 253 crore in Q1FY21 Shareholding pattern PAT was at | 18.0 crore vs. net loss of | 294 crore in Q1FY21 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 What should investors do? Titan has been an exceptional performer in the Promoter 52.9 52.9 52.9 52.9 52.9 discretionary space with stock price appreciating at ~34% CAGR in last five years. FII 17.6 18.1 18.6 18.1 18.4 DII 10.8 10.9 11.0 11.1 9.9 We continue to remain structurally positive and maintain BUY rating Others 18.7 18.2 17.5 17.9 18.8 Target Price and Valuation: We value Titan at | 2110 i.e. 60x FY24E EPS Price Chart Key triggers for future price performance: 2000 25000 1500 20000 Robust balance sheet and asset light distribution model has enabled it to 15000 1000 outpace peers in terms of store addition (to add ~35 Tanishq stores in FY22) 10000 500 Thrust on wedding space is bearing fruit with wedding jewellery becoming 5000 a critical growth driver and its share in overall jewellery revenue increasing 0 0 Apr-21 Apr-20 meaningfully Apr-19 Dec-18 Dec-19 Dec-20 Aug-19 Aug-20 Aug-21 Aug-18 Retail Equity Research Equity Retail Gradual recovery in studded ratio to aid margins, going forward Titan BSE 500 – With share of ~6%, Tanishq’s penetration is still at a very nascent stage in Key risks the Indian jewellery market. This provides immense opportunity for Titan to enhance its market share. Mandatory gold hallmarking would further (i) Extended lockdown can lower enhance market share gains from unorganised space sales (ii) Delay in expansion of store Working capital management has been a priority for the company with tight network control on inventory and higher focus on gold on lease replenishment. Research Analyst Securities ICICI Subsequently, the company has substantially improved its cash position Bharat Chhoda We bake in revenue, earnings CAGR of 20%, 47%, respectively, in FY21-24E [email protected] Cheragh Sidhwa Alternate Stock Idea: Apart from Titan, in our retail coverage we also like Trent [email protected] Inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model position Trent as a key beneficiary of economic unlock BUY with a target price of | 1,060/share Key Financial Summary 5 year CAGR FY22E FY23E FY24E 3 year CAGR Financials FY20 FY21 (FY16-21) (FY21-24E) Net Sales 21,051.5 21,644.0 14.0 25,804.4 31,865.0 37,814.5 20.4 EBITDA 2,466.6 1,724.0 13.0 2,985.2 4,039.2 4,825.9 40.9 PAT 1,501.4 973.0 1,941.6 2,716.6 3,129.1 47.6 EPS (|) 16.9 11.0 21.9 30.6 35.2 P/E (x) 106.4 164.2 82.3 58.8 51.1 EV/Sales (x) 7.6 7.2 6.1 4.9 4.2 EV/EBITDA (x) 64.9 90.8 52.3 38.5 32.7 RoCE (%) 28.7 17.6 28.5 32.0 32.0 RoE (%) 22.5 13.0 21.4 24.1 23.0 Source: Company, ICICI Direct Research Result Update | Titan Company ICICI Direct Research Key takeaways of recent quarter & conference call highlights Jewellery division: As guided by the management in its pre-quarterly update, the jewellery division (excluding gold bullion sale) reported 115% YoY revenue growth (~63% recovery rate on base of Q1FY20). During the quarter, the company optimised excess inventory by selling excess raw gold worth | 424 crore (| 601 crore in Q1FY21). Overall jewellery sales were at | 3050 crore (up 67% YoY). Studded ratio was at 22% vs. 18% in Q1FY21, while share of gold coins halved to 7% in Q1FY22. Total store operational days were at 73%, 10% and 58% for April, May and June, respectively, and 47% for the quarter. With a gradual lifting of restrictions on stores, sales have bounced back sharply towards Q1 end with good momentum till date. The management indicated that underlying gross margins (excluding impact of ineffective hedging and bullion sale) in Q1FY22 were at the best levels in five quarters. EBIT margins for the jewellery division were at 6.5% (Q4FY21: 10.7%, Q1FY21: (-)3.0%). Robust performance in challenging times reaffirms our thesis of long term market share gains for Titan. Expect revenue recovery to pick up pace from Q3 onwards (festive season) and build in revenue CAGR of 20% in FY21-24E Watches & other divisions: Watches division reported 285% YoY growth (~40% of Q1FY20 base) to | 293 crore. The division witnessed rapid recovery in walk-ins with re-opening of stores, which was seen in only jewellery division last year. Total store operational days were at 70%, 24% and 51% for April, May and June, respectively. Eyewear division reported revenue growth of 123% YoY (45% of Q1FY20 base) to | 67 crore Reported gross margins improved 50 bps YoY to 22.4% but the management indicated that underling gross margins (excluding impact of ineffective hedging and bullion sale) was significantly better owing to favourable product mix. Sharp curtailment of expenses (marketing and other expenses down 51% and 38% QoQ, respectively) resulted in the company reporting EBITDA margins of 3.9% (I-direct estimate: 3.6%). The company reported EBITDA of | 137.0 crore. PBT for Q1FY22 was at | 39.0 crore (Q1FY21: loss of | 357 crore). Higher tax rate (53%) resulted in the company reporting PAT of | 18.0 crore (Q1FY21 loss of | 294 crore) Q1FY22 Earnings conference call highlights: Jewellery division: On demand trends, the first half of July has been better owing to higher number of wedding days while the second half of July was comparatively slower. The studded activation in July has seen good traction. Studded mix at retail level was 25% in Q1FY22 vs. 21% in Q1FY21 and 28% in Q1FY20. The recovery has been better but has not yet reached pre-Covid levels Titan’s wholly owned subsidiary Titan Commodity Trading started its operations and Titan has started hedging gold through its subsidiary. Titan has incorporated the subsidiary to reduce counter party risk in gold hedging and also save on costs related to gold hedging The company indicated that in the last two to three years Tanishq Jewellery stores have opened in many smaller towns. The sales per store is lower in smaller towns but the overall productivity and profitability is in line with majority of the store network. Titan has guided for 35 new store additions for FY22 On the region specific performance, Tamil Nadu has performed well for the company (gained market share). The company is doing a lot of localised activities in Uttar Pradesh, Bihar, Jharkhand and Odisha. Also, Titan is exploring a couple of other new markets but waiting for normalisation of trade scenario. In all these regions, the company is looking to provide the customer with state specific jewellery product design & customisations ICICI Securities | Retail Research 2 Result Update | Titan Company ICICI Direct Research On the competitive intensity front, the competition continues to be high with varied offers and discounting resorted to by competition. However, the company is not looking to participate in higher discounting and is likely to continue its focus on providing better products and customer service Titan considers compulsory hallmarking of gold to be beneficial for larger players as smaller players would need to increase their making charges. Lower difference in making charge between local players and Tanishq would enhance the desirability of Tanishq products. Also, product design capabilities and other customer service attributes would increase the affinity for branded jewellery players Other segments: The contribution of wearables to the watches division revenue is less than 5% of watches revenue. Wearables have been growing faster than watches while the recovery in wearables is also better than watches On the eyewear business front, the company is planning a rapid expansion of store network in seven to eight major cities along with entering new smaller towns and cities. The branding focus has shifted from eyewear to eye care On Taneira (ethnic wear and saree brand), the management indicated that it has aspirations of scaling the business significantly and is waiting for normalcy in trade scenario to push growth Despite various headwinds, Titan has, over the years, withstood challenges and emerged as a resilient player.