ATS Research Desk

ATS Research Desk Titan Company Limited FUNDAMENTAL REPORT

Titan Company Ltd Titan Company Ltd (earlier known as Titan Industries Ltd) is a joint venture between the Tata Group and Tamil Nadu Industrial Development Corporation that commenced operations in 1984 under the name Titan Watches Limited. In 1994, titan diversified into jewellery with Tanishq and subsequently into eyewear with Titan Eyeplus. In 2013, Titan entered fragrances segment and helmets under its brand Fastrack. Titan is Tata Group’s largest consumer company. The company operates four main divisions: CMP (as on 27/01/2017) 423.00    

Watches and Accessories Division Jewellery Division Eyewear Division Precision engineering division

52 Week H/L Market Cap (Rs Cr) Equity Capital (Rs Cr) Face Value (Rs) Promoters Holding Non-Promoters Holding Total

445/296.30 37,553.35 88.78 1.00 53.05% 46.95% 100%

Investment Rationale     

High Market Share of 60-65% in Watches segment Jewellery brand presence and high goodwill Cheaper sourcing of material and labour – Well established Gold, Aluminium and Steel industry High potential to carve out market share in the branded jewellery segment. High profit margin in studded Diamond jewellery.

Particulars (Rs Cr) Net Sales Operating Profit Net Profit EPS (Rs) PE (x)

FY12 8848.43 929.83 601.50 6.49 35.22

FY13 10123.29 1113.38 724.94 7.81 32.84

FY14 10927.39

FY15 11913.41

FY16

1164.55

1219.15

996.31

734.75 7.92 33.14

816.25 8.73 44.90

689.56

11277.94

7.32 46.28

Outlook Titan Company is a major player in the Indian watch market and has nearly 65% market share in the watches segment. With the recent merger of the brand ‘Gold Plus’ with Tanishq, the company is on the way to carve out a market share in the branded jewellery market space. The growth in revenue has dipped by 14.2% for FY 2016 and the net profits have reduced by 5.4%. This can have negative impact on the long term performance of the company. Despite the temporary setback, we feel that the fundamentals have been strong over the last 5 years, and the company can perform well in the future.

Recommendation According to the fundamental overview, the recommendation is BUY. The company’s fundamentals are strong, the company has a high market share in the consumer segment in which it operates and it generates revenue of 2 to 4.5 times the capital employed, which indicates efficient management of funds to keep the company on a growth trajectory.

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Company Overview The company’s major sources of revenue are watches and jewellery which contributed to 18% and 77% respectively in FY16. The eyewear and precision engineering divisions contribute to 3% and 2% of the revenue respectively. Titan industry earned Rs. 161 crore from exports in FY16 which contributed to approximately 1% of the total revenues.

Product Revenue Breakup FY16 3% 2% 18%

Watches Jewellery Eyewear

77%

International 1%

Others

Sales Domestic 99%

Chart 1: Revenue breakup

The company operates in four primary divisions:  Watches and Accessories The watch products division is where the Titan Company began. The division has placed Titan among the world’s largest Retail Networks. Titan is the fifth largest integrated watch manufacturer in the world. It have over 3000 employees spread across 3 business units in Bangalore, India and a manufacturing unit at Hosur and 3 assembly plants located at the north of India. Titan Company’s watches division has the following brands under its portfolio: -

Titan Edge Titan Raga Nebula Sonata Xylys


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-

Fastrack

The brand Titan has a 65% market share in the organized watch market in India. The brand ‘Titan Raga’ is a well know watch brand for exquisite and speciality design watches for women. The brand ‘Fastrack’a youth watch and accessories brand was launched in 2005 The watches and accessories division also markets some well known brands such as Tommy Hilfiger, Timberland, Police and FCUK under a licensed agreement. The division has sold over a million watches through a retail format-where both in-house and licensed brands are offered-through a vast network of dealers and lifestyle stores in Indian and over 30 countries worldwide. The division offers an after-sales service network that has been considered a benchmark operation in the industry.  Jewellery Division Tanishq, Titan’s flagship line of jewellery, is India’s fastest growing Jewellery Brand, with a premium range of jewellery, studded with diamonds or colored gems in 18kt gold, 22kt pure gold and platinum jewellery. Titan felt a need and created a means to offer elegant gold jewellery to smaller towns and rural markets. The recently launched brand 'Goldplus', caters to this need. Tanishq is a certified division under the ISO 9001:2008 Quality Management System Standards and the current version of Environment Management System Standard is ISO 14001:2004. Both brands are competing in a market comprising over 400,000 independent jewellers. The brand Tanishq is evolving faster than the market and closing gaps between competitors in urban markets. The Jewellery division continuously tracks technological developments in the industry and adapts them as relevant to the operations. The machine-made jewellery facility established during 2014-15 has yielded production to the tune of Rs.40 crore during the year. The division has further expanded its machine made manufacturing facility with auto-lathe, diamond-cutting and laser technologies for new product features through the manufacturing route. Investments of over Rs. 10 crore were made in the upgradation of existing machineries and technologies in casting, finishing and component making areas of jewellery manufacturing. Automation projects like stone play detector, kitting machines and component making machines have been integrated at manufacturing locations. These investments enable improved efficiencies and thus result in better performance in manufacturing operations of the company.  Eyewear Division Titan Eye+, the third major venture of consumer business by the Titan Company, was launched into the organized eyewear segment in March 2007. Titan Eye+ offers Indian consumers, contemporary design and style coupled with optical expertise as a result of technical collaboration with Sankara Netralaya, India’s premier eyecare institute. Benchmarked internationally, Titan Eye+ had organized optical retail market in India by offering free insurance of spectacles, transparency in pricing etc. It has recently introduced a remote online eye testing facility.  Precision Engineering Division Leveraging the precision engineering core competencies from watch making, Titan initiated a precision engineering division in 2005, catering to global majors across industry verticals such as aerospace, ATS Wealth Managers Pvt Ltd

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automotive, oil & gas, engineering, hydraulics, solar and medical instruments. Precision Engineering Division, located in Hosur, is ISO 9001:2000 and ISO 14001:2004 certified. Additionally, the unit catering to Aerospace segment is AS 9100B certified and the unit catering to automotive segment is TS 16949 certified. The division has consistent quality and delivery performance through several customer accolades like the ford Q1 award and the continuous improvement award received from the CEO of UTC, Louis Chenevert. The division has clients like 3M, Delphi, Honeywell, Siemens, ISRO, Bosch, Tata Motors, L&T, IFB, FordUSA, Visteon and others. The division has the following capabilities. Aerospace and Defence Aero Engine and Accessories Engine Propulsion and Control system Fuel-Injection System Auxillary Power Units Electronic Engine Controls Environment Control Systems Actuator Systems Gear-Box Lubrication Compressor Blades Landing Gear System Surveillance and Seeking Device Laser Target Designators

Oil & Gas Off-Shore and On-shore Drilling Seismography

Automotive & Industrial Fittings for Off Highway Equipment Rocker arm parts for TwoWheelers

Telemetry Equipment

With an investment of over $10 million, the division setup has four main business units. ATS Wealth Managers Pvt Ltd

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1. 2. 3. 4.

Precision Engineering Components and Sub-Assemblies (PECSA) Machine Building and Automation Solutions Tooling Solutions: Electronic Sub-Assemblies:

Key Ratios Debt-Equity Ratio Current Ratio Total Asset Turnover Ratio Inventory Turnover Ratio Price/Earnings Price/Book Value EV/EBITDA Market Cap/Sales

FY16 0.03 1.86 1.76 2.54 42.62 8.56 30.17 2.67

FY15 0.03 1.80 2.03 2.94 42.30 11.26 28.45 2.92

FY14 0.32 1.49 1.78 2.82 31.42 9.23 19.93 2.13

FY13 0.0 1.34 1.72 2.75 31.39 11.59 19.43 2.25

FY12 0.0 1.31 1.88 3.07 33.82 14.00 20.79 2.30

The current ratio is increasing YOY, which is a positive indicator due to reducing debt. The company had no debt in FY12 and FY13, the debt to equity ratio increased marginally from 0.0 in FY12 to 0.03 in FY 16. The consistent turnover of inventory is a healthy indicator of the sales capacity of the company. Likewise, the consistent turnover of assets indicated effective utilization of assets to make sales, the revenue has been 2 to 4.5 times the capital employed, which indicates efficient management of funds to keep the company on a growth trajectory.

Industry Overview Gems and Jewellery sector plays an important role in the Indian economy, contributing around 6-7% of the country’s GDP. As one of the fastest growing sectors, it is extremely export oriented and labour intensive. The two major segments of the sector in India are gold jewellery and diamonds. Gold jewellery forms around 80% of the Indian Jewellery market, with the balance comprising of fabricated studded jewellery that includes diamonds and coloured gemstones. The gems and jewellery market in India is home to more than 500,000 players, with the majority being small players. UAE, US, Russia, Singapore, Hong Kong, Latin America and China are the biggest importers of Indian jewellery. According to a report by Research and Markets, the jewellery market in India is expected to grow at a Compound Annual Growth Rate (CAGR) of 15.95 per cent over the period 2014-2019. India’s Gold and Jewellery industry is highly unorganized and fragmented with 96% of the total players being familyowned businesses. The gold processing industry has around 15,000 players, with only 80 having revenues of over $5 million. India is also home to around 4,50,000 goldsmiths, 100,000 gold jewelers along with 6000 diamond processing units and 8000 diamond jewellers. The value chain of the industry starts from sourcing and mining of the metals and extends to jewellery retail. While India is not a major miner of precious metals and gemstones, the country’s inexpensive and well skilled workforce makes it a world leader in processing of diamonds.


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India’s organized gold jewellery sector is likely to witness 10-12% growth in revenues in FY17. The branded jewellery companies like Tanishq and Gitanjali have 4-6% market share in the gold jewellery market, the rest is controlled by traditional jewelers and goldsmiths.

Chart 2: Gold Jewellery consumption in India

The watch Industry is populated by both Indian and foreign brands. The leading brands in the Indian watch industry are Titan, Timex, Citizen, Esprit, Omega, Rado, Tag Heuer, Swatch and Tissot. Indian watch market can be categorized into three segments: Low end range (Rs.1000 or less) mostly available with local watch makers and jewellers, mid-range watches in which Titan commands 65% market share(Rs. 1000 to Rs. 10,000). Other major brands are Timex and Citizen watches. High-end watches (Rs.10,000 and above) are dominated by foreign watchmakers (mainly Swiss watch-makers) like Rolex, Omega, and Swatch etc.

With sales of about 45 crore pieces of glass lenses, the prescription eyewear market in India is estimated at about Rs.21,000 crore. The Eyewear industry in India continued to witness strong value and volume growth in FY16, driven by improving conditions in the country, is set to touch Rs. 43,000 crore in FY17. Young consumers in India continue to spend on eyewear products, as a fashion statement and changing lifestyles. Growth in online retailers and increasing penetration of branded players helped drive growth ATS Wealth Managers Pvt Ltd

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in eyewear sales. Innovations by eyewear manufacturers provided a wide range of products for consumers to choose from. The Indian eyewear market is fragmented and is flooded with local and regional eyewear players, which account for majority of eyewear sales in the country. However, the penetration of branded eyewear products was on the rise due to growth in internet-retailing and store based expansion by branded players.

Investment Rationale  High Market Share and underpenetrated watch market According to estimates, only 27% in Indians own a wrist watch, the market is highly under-penetrated. Despite the competition, the watch market is growing by 9% per year. Titan Company has 60-65% market share in the Indian watch industry along with franchises for global brands in India. This creates an attractive investment opportunity in the company.  Branded jewellery and Luxury goods market offering opportunity for expansion in industry dominated by local jewellers Though gold still dominates the jewellery market in India, the demand for diamond, platinum and other kind of jewellery is steadily increasing, especially branded jewellery. The branded jewellery market is expected to post a CAGR of 16.06% from 2016-19. Despite the presence of a large unorganized sector in India, which includes family owned shops and trusted local jewelers, the branded jewellery segment is growing, due to consumer inclination towards certifications and hallmarks (assuring purity of gold). Titan launched its Gold Plus brand in 2005 for small towns in South India so it could cater better to the more traditional needs of customers in those areas, it said in the latest filing. It has 30 stores under the brand spread across Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Maharashtra.  Well known Brand and high goodwill Titan Company has tied up with Tata Group’s Tanishq brand to market Jewellery and accessories, which increases the company’s goodwill. Indian watch market can be categorized into three segments: Low end range mostly available with local watch makers and jewelers, mid-range watches in which Titan commands 65% market share. Other major brands are Timex and Citizen watches. High-end watches prices Rs.10,000 and above are dominated by foreign watchmakers (mainly Swiss watch-makers) like Rolex, Omega, and Swatch etc.  Cheaper sourcing of material and labour Indians are traditionally consumers of gold and gold jewellery. Seasonal demand can be strong and drop in gold prices over last 4 years is a strong driver for growth in the jewellery industry due to cheaper prices of raw material (i.e. gold). This has added to the profit margins of Watches and Jewellery divisions.  High profit margins in Studded Diamond Jewellery In a highly fragmented and unorganized market, Tanishq has been growing steadily to carve out a 4% market share in a $2.6 billion industry. The diamonds industry is growing at a rate of 27% per annum which presents a huge opportunity to organized diamond jewellery sellers such as Gitanjali and Tanishq.


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Financials Balance Sheet (Consolidated)(In Rs Cr)

EQUITIES AND LIABILITIES SHAREHOLDER’S FUNDS Equity Share Capital Total Share Capital Reserves and Surplus Total Reserves and Surplus Total Shareholders’ Funds NON-CURRENT LIABILITIES Long-Term Borrowings Deferred Tax Liabilities(Net) Other Long-Term Liabilities Long-Term Provisions Total Non-Current Liabilities CURRENT LIABILITIES Short-Term Borrowings Trade Payables Other Current Liabilities Short-Term Provisions Total Current Liabilities Total Capital and Liabilities ASSETS NON-CURRENT ASSETS Tangible Assets Intangible Assets Capital Work-in Progress Fixed Assets Non-Current Investments Deferred Tax Assets(Net) Long-Term Loans and Advances Total Non-Current Assets CURRENT ASSETS Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short-Term Loans and Advances Other Current Assets Total Current Assets Total Assets


FY16

FY15

FY14

FY13

FY12

88.78 88.78 3,401.22 3,401.22 3,490.00

88.78 88.78 2,995.09 2,995.09 3,083.87

88.78 88.78 2,433.96 2,433.96 2,522.74

88.78 88.78 1,881.07 1,881.07 1,969.85

88.78 88.78 1,372.14 1,372.14 1,460.92

0.00 0.42 0.00 108.98 109.40

0.00 0.33 0.00 90.46 90.79

0.00 0.55 0.00 74.05 74.61

0.00 0.00 0.00 65.10 65.10

5.89 0.00 11.45 59.33 76.67

113.05 1,746.23 821.99 84.75 2,766.02 6,365.42

99.79 1,939.63 309.36 344.85 2,693.63 5,868.29

806.84 859.44 1,536.49 311.32 3,514.09 6,111.44

0.00 2,097.99 1,457.05 293.28 3,848.32 5,883.28

0.00 1,752.92 1,188.60 236.78 3,178.30 4,715.89

770.24 18.70 106.80 895.74 2.96 23.93 274.76 1,197.39

688.88 10.23 55.19 754.30 3.10 19.67 243.79 1,020.86

600.50 13.73 32.87 647.10 3.09 9.35 204.55 864.09

446.62 17.28 41.76 505.67 2.91 7.81 185.79 702.18

363.05 20.87 24.85 408.77 2.44 3.50 128.17 542.88

2.50 4,453.50 192.50 129.18 386.58 3.77 5,168.03 6,365.42

0.00 4,049.30 189.73 213.81 390.21 4.38 4,847.43 5,868.29

0.00 3,869.39 154.13 892.67 314.45 16.71 5,247.35 6,111.44

0.00 3,680.33 165.83 1,139.04 186.37 9.52 5,181.10 5,883.28

0.00 2,882.02 165.19 967.09 125.92 32.78 4,173.00 4,715.89

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Profit and Loss Account (Consolidated)(In Rs Cr)

INCOME Revenue from Operations(Gross) Less: Excise/Service Tax/Other levies Revenue From Operations(Net) Other Operating Revenues Total Operating Revenues Other Income Total Revenue EXPENSES Cost of Materials Consumed Purchase of Stock in Trade Changes in Inventories Employee Benefit Expenses Finance Costs Depreciation and Amortization Expenses Other Expenses Total Expenses Profit/Loss Before Exceptional, Extraordinary items and Tax Profit/Loss before Tax Total Tax Expenses Profit/Loss after tax and before Extraordinary Items Profit/Loss from Continuing operations Profit/Loss for the period EARNINGS PER SHARE Basic EPS (Rs) Diluted EPS (Rs)


FY16

FY15

FY14

FY13

FY12

11,208.11 31.21 11,176.90 87.63 11,264.53 64.36 11,328.89

11,824.54 33.50 11,791.04 112.17 11,903.21 70.58 11,973.79

10,854.43 39.35 10,815.08 100.71 10,915.79 120.19 11,035.98

10,102.74 93.69 10,009.05 103.62 10,112.67 100.77 10,213.44

8,876.88 132.48 8,744.40 93.98 8,838.38 94.11 8,932.49

7,423.95 956.23 -191.39 681.18 42.28 96.91

7,833.99 1,123.94 -204.32 625.65 80.66 87.39

6,558.78 1,591.42 -99.57 534.49 87.11 65.59

6,772.92 1,555.10 -812.88 484.53 50.64 54.49

6,145.08 1,150.88 -751.85 392.34 43.72 44.90

1,449.07 10,458.23 870.66

1,370.59 10,917.90 1,055.89

1,282.23 10,020.05 1,015.93

1,102.39 9,207.17 1,006.27

1,068.99 8,094.05 838.44

870.66 164.81 705.85

1,055.89 232.82 823.07

1,015.93 274.79 741.14

1,006.27 281.09 725.18

838.44 238.28 600.16

705.85 705.85

823.07 823.07

741.14 741.14

725.18 725.18

600.16 600.16

7.95 7.95

9.27 9.27

8.35 8.35

8.17 8.17

6.76 6.76

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Stock Price Chart

Research by: Vivek. S. Anavatti Equity Research Analyst ATS Wealth Managers Pvt Ltd. Email: [email protected]

Disclaimer: This report is only for the information of our customers. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be constructed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.


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