Mix Q4, long term growth levers intact

Powered by the Sharekhan 3R Research Philosophy Consumer Discretionary Sharekhan code: TITAN Result Update Update Stock

3R MATRIX + = - Summary Š Titan Company Limited’s (Titan) Q4FY2021 was mix with OPM was lower than our as well street Right Sector (RS) ü expectation to 10.9% due drop in margins of Jewellery and watches businesses; revenue grew by strong 60% to Rs. 7,494 crore boosted by strong double digit growth in Jewellery business. Š Q4 was a strong quarter for jewellery sales (excluding Bullion sales), which grew by 70% because of Right Quality (RQ) ü pick-up in demand due to a decline in gold prices and higher billing value. Margins of the business were affected by lower studded ratio, higher sales of coins, and loss from custom duty cut on gold. Right Valuation (RV) ü Š Good growth momentum in jewellery business sustained in April. However, localised lockdown due to rise in COVID-19 cases resulted in 50% store closure. The demand environment looks uncertain in the near term. Pent-up demand (especially in the wedding category) and market share gains from smaller + Positive = Neutral - Negative players would help in posting faster recovery. Š We have reduced our earnings estimates for FY2022 to factor in lower sales in H1FY2022; broadly What has changed in 3R MATRIX maintaining it for FY2023. We maintain our Buy recommendation on the stock with a PT of Rs. 1,710.

Old New For Q4FY2021, Titan Company Limited (Titan) posted a mix performance. Performance was strong on the revenue front but disappointing on the margins front. As stated in the pre-quarterly update, the company RS delivered robust sales growth of 60% with strong growth of 70% in the jewellery business. Consolidated  OPM declined by 210 bps y-o-y to 10.9% mainly on account of lower gross margins in both jewellery and watches business. Thus, operating profit grew by just 33.4% less than revenue growth during the RQ  quarter. Titan’s jewellery business retained its strong growth momentum because of market share gains and a sharp decline in gold prices, boosting high gold demand during the quarter. This resulted in robust growth of ~70% in the jewellery business (also aided by low base of Q4FY2020). Combined RV  months of January-February 2021 registered revenue growth of 32% y-o-y. Ticket size has normalised compared to initial period of last year after the lockdown and it has improved on a y-o-y basis. Further, footfalls have seen strong recovery with robust double-digit growth during the quarter. Q4 also had a Reco/View Change large B2B order in the quarter, contributing to about 10% of the quarter’s revenue growth. Margins of the jewellery business were lower on a y-o-y basis due to reduction in customs duty on gold in February, Reco: Buy lower studded ratio, and higher contribution from low-margin coin sales. Region-wise demand was strong  in east India, followed by South India, while west India is yet to get back to pre-COVID levels due to CMP: Rs. 1,506 underperformance of . Tier 2-3 towns continued to lead the growth compared to metros/ cities. Watches business, which saw recovery to 90% in January-February 2021, has registered flat sales for the quarter. On the other hand, eyewear business registered 20% growth (with the first two months Price Target: Rs. 1,710  registering 4% growth). April started on a good note with the first 15-20 days seeing good demand for wedding jewellery. However, with rise in COVID-19 cases and consequential localised lockdown by á Upgrade  Maintain â Downgrade various state governments, around 50% of Titan’s jewellery stores closed operations. Considering the strong pent-up demand in the jewellery business after the first wave of COVID-19 surge, management is confident of recovery in sales once COVID-19 situation eases down in the coming months. Higher demand Company details for wedding jewellery due to a delayed wedding season, market share from small jewellers, and adding more store in the tier-2 and tier-3 towns would help the jewellery business achieve double-digit growth in Market cap: Rs. 133,701 cr the medium to long term. Other businesses, such as watches, are expected to recover post improvement in the discretionary environment. Jewellery business margins are expected to improve in the coming years 52-week high/low: Rs. 1621/810 due to better revenue mix and higher billing value. Better operating leverage would help watches margins to improve in the coming years. NSE volume: 23.3 lakh (No of shares) Key positives Š Jewellery sales grew by 32% in January-February on a comparable basis, led by strong BSE code: 500114 improvement in footfalls and bill value. Š Cash on books improved to Rs. 3,000 crore because of better working capital management. NSE code: TITAN Š Caratlane registered yet another quarter of strong revenue growth of 59%, with strong improvement in profitability. Free float: 41.8 cr (No of shares) Key negatives Š Gross margins decreased by 832 bps due unfavourable mix in the jewellery and watches business. Shareholding (%) Š TEAL’s (subsidiary of Titan) revenue decreased by 25% as the aerospace business continues to face headwinds in the industry. Promoters 52.9 Our Call View - Retain Buy with an unchanged PT of Rs. 1,710: We have reduced our earnings estimates for FY2022 FII 18.1 to factor in lower sales in H1FY2022, broadly maintaining it for FY2023. We expect strong recovery in the business performance of Titan post the easing of COVID-19 uncertainties due to market share gains and pent-up demand (largely in the wedding jewellery segment). Balance sheet strength will help it to compete DII 11.1 well with strong regional and large players in the domestic market. The stock is currently trading at 53x its FY2023E earnings. Strong brand recognition in the jewellery space, balance sheet strength, and good return Others 17.9 ratios make it one of the better plays in the retail space. We maintain our Buy recommendation on the stock with an unchanged price target (PT) of Rs. 1,710. Price chart Key Risks 1700 Any disruption in the recovery of the jewellery business due to spike in COVID-19 cases in various states 1500 would act as a key risk to earnings estimates. 1300 Valuation (consolidated) Rs cr 1100 Particulars FY19 FY20 FY21 FY22E FY23E 900 Revenue 19,779 21,052 21,644 24,995 30,545 700 OPM (%) 11.0 11.8 8.0 11.2 12.8 20 20 20 21 - - - - Adjusted PAT 1,519 1,519 984 1,708 2,505 Apr Apr Dec Aug % Y-o-Y growth 35.1 0.0 -35.2 73.6 46.6 Price performance Adjusted EPS (Rs.) 17.1 17.0 11.0 19.2 28.2 (%) 1m 3m 6m 12m P/E (x) 88.3 88.5 137.3 78.3 53.4 P/B (x) 22.0 20.0 17.8 15.4 12.5 Absolute -3.0 6.0 29.3 62.8 EV/EBIDTA (x) 61.2 54.4 78.2 48.1 34.2 Relative to -2.3 -0.2 4.6 7.8 RoNW (%) 27.2 23.8 13.8 21.1 25.9 Sensex RoCE (%) 37.2 30.6 17.2 27.0 34.4 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

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Consolidated revenue up ~60%; OPM at 10.9%: Consolidated revenue grew by 59.1% y-o-y to Rs. 7,494 crore, driven by 70% growth in the jewellery business (excluding bullion sales). Gross margin declined by 832 bps to 22.1% due to unfavourable revenue mix in the jewellery and watches segment. OPM declined by 210 bps to 10.9%, in line with our expectation of 11.2%. Operating profit grew by 33.4% to Rs. 817 crore. Higher other income, lower depreciation charges, and lower incidence of tax led to 65.7% growth in reported PAT. Jewellery business – Strong growth momentum sustained in Q4 The jewellery business’ revenue grew by 71% to Rs. 6,422 crore because of market share gains and a sharp decline in gold prices, boosting high gold demand during the quarter. Growth is driven by double-digit growth in both the number of buyers (invoices) and average ticket size, compared to last year. Underlying retail growth stood at 32% in the first two months of the quarter. The studded category also had healthy growth, however the plain segment and coins saw much better growth, leading to studded mix being at only 30% in Q4FY2021 compared to 37% in Q4FY2020. Gold coins contributed 5% to revenue in Q4FY2021 compared to 3% in the previous year. Excluding bullion sales, studded mix stood at 27% in FY2021 compared to 32% in FY2020. EBIT margin was impacted by lower studded mix, loss from custom duty cut on gold, lower margin on B2B sale, and higher coin sales. Watches – Revenue stood flat on a low base Watches business registered flat revenue of Rs. 555 crore in the quarter. Recovery in the comparable two months of January and February was at ~90%. Margins were muted as gross margins were lower due to higher sale of lower- margin products, particularly wearables. EBIT of the watches business was down 36% y-o-y. The E-commerce channel continues to have higher salience, with all other channels also making good progress. Metros and mall stores have seen better recovery during the quarter compared to last quarter. Eyewear – Revenue grew by 18%; Strong margin expansion Revenue of the eyewear business grew by 18% y-o-y to Rs. 127 crore. January and February registered 4% growth on a comparable basis. The company has a No. 2 position in terms of volume in the eyewear business. A better product mix, lower discounts as compared to last year, and cost-control led to EBIT improvement to Rs. 23 crore, with EBIT margin of 18.1%. Eyewear will continue to post better profitability in the coming quarters. Subsidiaries’ performance Š Titan Engineering and Automation Limited (TEAL), which is a wholly owned subsidiary, registered a 25% y-o-y decline in revenue to Rs. 105 crore as the aerospace business continues to face challenges due to continued headwinds in the industry. The automation business has been doing well, with the increase in enquiries for automation solutions in the recent past and improving order book. The business registered EBIT of Rs. 9 crore in Q4FY2021 as against Rs. 21 crore in Q4FY2020. Š Caratlane (72.3% owned subsidiary) posted strong growth in Q4 with revenue growth of 59%. While online demand had remained strong from Q2, retail stores also saw a huge pick up from mid-October once the festive season kicked in. Strong revenue growth enabled the company to report EBIT of Rs. 15 crore for the quarter.

Results (Consolidated) Rs cr Particulars Q4FY21 Q4FY20 y-o-y (%) Q3FY21 q-o-q (%) Total Revenue 7494.0 4711.5 59.1 7619.0 -1.6 Raw material cost 5837.0 3277.9 78.1 5900.0 -1.1 Employee cost 290.0 284.7 1.9 267.0 8.6 Advertising 101.0 97.1 4.0 105.0 -3.8 Other expenses 449.0 439.3 2.2 499.0 -10.0 Total operating cost 6677.0 4099.1 62.9 6771.0 -1.4 Operating profit 817.0 612.5 33.4 848.0 -3.7 Other income 57.0 41.7 36.7 40.0 42.5 Interest & other financial cost 51.0 42.7 19.3 51.0 0.0 Depreciation 93.0 102.1 -8.9 96.0 -3.1 Profit Before Tax 730.0 509.3 43.3 741.0 -1.5 Tax 162.0 166.2 -2.5 211.0 -23.2 Adjusted PAT before MI 568.0 343.2 65.5 530.0 7.2 Extraordinary item 0.0 0.3 - 0.0 - Minority Interest (MI) 0.0 -0.1 - 0.0 - Reported PAT 568.0 342.8 65.7 530.0 7.2 Adjusted EPS (Rs.) 6.4 3.9 65.6 6.0 7.2 bps bps GPM (%) 22.1 30.4 -832 22.6 -45 OPM (%) 10.9 13.0 -210 11.1 -23 Source: Company; Sharekhan Research

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Result snapshot (Standalone) Rs cr Particulars Q4FY21 Q4FY20 y-o-y (%) Q3FY21 q-o-q (%) Total Revenue 7135.0 4428.8 61.1 7287.0 -2.1 Total operating cost 6340.0 3825.1 65.7 6429.0 -1.4 Operating profit 795.0 603.7 31.7 858.0 -7.3 Other income 34.0 40.1 -15.2 37.0 -8.1 Interest & other financial cost 45.0 37.9 18.6 46.0 -2.2 Depreciation 82.0 90.2 -9.1 84.0 -2.4 Profit Before Tax 702.0 515.6 36.1 765.0 -8.2 Tax 173.0 158.8 8.9 236.4 -26.8 Adjusted PAT before MI 529.0 356.8 48.3 528.6 0.1 Extraordinary item 0.0 0.0 - 109.6 - Reported PAT 529.0 356.8 48.3 419.0 26.3 Adjusted EPS (Rs.) 6.0 4.0 48.3 6.0 0.1 bps bps GPM (%) 21.4 30.1 -869 21.9 -52 OPM (%) 11.1 13.6 -249 11.8 -63 Source: Company; Sharekhan Research

Segmental and subsidiaries revenue Rs cr Particulars Q4FY21 Q4FY20 y-o-y (%) Watches 555 557 -0.4 Jewellery (including bullion sales) 6422 3754 71.1 Eyewear 127 108 17.6 Others/Corporate 65 50 30.0 Standalone 7169 4469 60.4

Caratlane 255 160 59.4 TEAL 105 140 -25.0 Others/Consol. Adj. 23 -15 - Consolidated 7552 4754 58.9 Source: Company; Sharekhan Research

Segmental and subsidiaries EBIT Rs cr Particulars Q4FY21 Q4FY20 y-o-y (%) Watches 46 72 -36.1 Jewellery 703 534 31.6 Eyewear 23 2 - Others/Corporate -25 -54 - Standalone 747 554 34.8

Caratlane 15 -3 - TEAL 9 21 -57.1 Others/Consol. Adj. 11 -20 - Consolidated 782 552 41.7 Source: Company; Sharekhan Research

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Outlook and Valuation n Sector view - Recovery would take some more time; Long-term growth prospects intact Most branded apparel and retail companies were hoping of business recovering to 100% of pre-COVID levels by Q1FY2022. However, the recent spike in COVID-19 cases in India would further slowdown the recovery, as few states have put restrictions on the operations of malls or have implemented localised lockdowns to curb free movement of people in the city. Two key factors that make us believe that recovery would be faster once the rate of growing cases slows down are 1) Trend of month-on-month improvement in footfalls and higher purchases prior to the second wave of COVID-19 cases; and 2) increased pace of vaccination in India. Further, changing aspirations, higher sales through the e-commerce platform, and expansion in retail footprints in tier 3 and 4 towns would help keep intact the long-term structural story of the retail industry in India. n Company outlook - Recovery would be faster in post easing of COVID-19 crisis Despite no sales in Q1FY2021 (affected by the first wave of COVID-19 surge), Titan registered low single- digit growth in FY2021 mainly on account of strong recovery (especially in the jewellery business) in the subsequent quarters. The company was supposed to post strong recovery in FY2022 due to higher wedding demand and strong growth in tier 2 and 3 towns. However, recent developments in COVID-19 cases will put a halt to recovery. Considering strong pent-up demand in the jewellery business after the first wave of COVID-19 surge, management is confident of recovery in sales once COVID-19 situation eases down in the coming months. Higher demand for wedding jewellery due to a delayed wedding season, market share from small jewellers, and adding more stores in tier-2 and tier-3 towns would help the jewellery business to achieve double-digit growth in the medium to long term. Strong recovery in revenue of all business verticals would help profitability to improve in the coming years. n Valuation - Retain Buy with an unchanged PT of Rs. 1,710 We have reduced our earnings estimates for FY2022 to factor in lower sales in H1FY2022, broadly maintaining it for FY2023. We expect strong recovery in the business performance of Titan post the easing of COVID-19 uncertainties due to market share gains and pent-up demand (largely in the wedding jewellery segment). Balance sheet strength will help it to compete well with strong regional and large players in the domestic market. The stock is currently trading at 53x its FY2023E earnings. Strong brand recognition in the jewellery space, balance sheet strength, and good return ratios make it one of the better plays in the retail space. We maintain our Buy recommendation on the stock with an unchanged PT of Rs. 1,710.

One-year forward P/E (x) band

1800.0

1600.0 75x 1400.0 65x 1200.0 55x 1000.0

45x 800.0

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400.0

200.0

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Source: Sharekhan Research

Peer Comparison P/E (x) EV/EBIDTA (x) RoCE (%) Particulars FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E Trent - - - 98.6 38.1 30.0 1.1 9.6 12.8 Titan Company 137.3 78.3 53.4 78.2 48.1 34.2 17.2 27.0 34.4 Source: Company, Sharekhan estimates

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About company Titan is a joint venture between and Tamil Nadu Industrial Development Corporation (TIDCO). The company is a leading organised jeweller in India with its trusted brand, . The company started as a watch company under the brand, Titan, and is the fifth largest integrated own brand watch manufacturer in the world. The company’s key watch brands are Titan, Fastrack, and Sonata. The company is present in the eyewear segment with its brand, Titan Eyeplus, and in other segments such as perfumes. The company recently entered the saree market with its brand, Taneira. Titan has a retail chain of 1,829 stores across India with a retail area crossing 2.4 million sq. ft. nationally for all its brands.

Investment theme Titan is one of India’s top retailers with a strong presence in discretionary product categories such as jewellery, watches, and eyewear. The company is one of the top brands in the watches segment; while in the jewellery space, it is gaining good acceptance because of the shift from non-branded to the branded space and expansion in middle income towns. The company endeavours to grow by 2.5x by FY2023 in its jewellery business.

Key Risks Š Increased gold prices: Any increase in gold prices would affect profitability of the jewellery segment and earnings growth of the company. Š Slowdown in discretionary consumption: Any slowdown in discretionary consumption would act as a key risk to demand of the jewellery and watches division. Š Increased competition in highly penetrated categories: Increased competition in the highly penetrated categories such as watches or jewellery would act as a threat to revenue growth.

Additional Data Key management personnel C K Venkataraman Managing Director N Muruganandam Chairman N N Tata Vice Chairman S Subramaniam Chief Financial Officer Dinesh Shetty Company Secretary Source: Company

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Republic of India 28.2 2 Jhunjhunwala Rakesh 4.2 3 Life Insurance Corporation of India 3.6 4 BlackRock Inc 2.15 5 Vanguard Group Inc 1.4 6 SBI Funds Management Pvt Ltd 1.1 7 Jhunjhunwala Rekha Rakesh 1.09 8 Matthews International Capital Management 0.76 9 Sands Capital Management 0.68 10 ICICI Prudential Asset Management Co Ltd 1.11 Source: Bloomberg (old data)

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

April 29, 2021 20 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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