Titan Company. Source: Company Data; PL Research

Transcription

1 Creating building blocks to achieve Vision 2023 ; BUY May 14, 2018 Amnish Aggarwal amnishaggarwal@plindia.com Nishita Doshi nishitadoshi@plindia.com Rating BUY Price Rs921 Target Price Rs1,114 Implied Upside 21.0% Sensex 35,557 Nifty 10,807 (Prices as on May 14, 2018) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 53.07% Foreign 20.72% Domestic Inst. 6.11% Public & Other 20.10% Stock Performance (%) 1M 6M 12M Absolute (6.5) Relative (10.5) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: TITN.BO, BB: TTAN IN) (Rs) 1,200 1, May 17 Jul 17 Source: Bloomberg Sep 17 Nov 17 Jan 18 Mar 18 TTAN Mgt reiterated their vision to achieve Rs500bn sales (consumer prices level) and having 50mn consumers. TTAN is building an organisation to deal with changing environment with factors like 1) Digital 2) Youth and GEN A 3) Omni channel 4) Rural India 5) Premiumisation and rising affluence and 6) emerging women power at the core of its strategy. Jewellery business is likely to be the centre point of growth with accelerating addition of 40 stores are 2.5x sales by It is looking at more sales in middle India, higher share of high value diamond jewellery, and sustained increase in share of wedding jewellery to drive sales. TTAN seems confident of achieving 25% sales growth in the current year given that the operating environment is highly favourable given strong brand, shift towards organised trade and difficulty faced by small shops post GST, Demon and PMLA. Watch business seem to be on steady recovery led by 1) increased focus on tech centric watches 2) cost rationalisation 3) increase in import duty from 10% to 20% and 4) reduction in GST from 28% to 18%. It believes that smart watches in Fastrack and growing share in LFS and premium watches will enable the business report steady margin expansion. Eyewear business is entering a new phase of investment led by store renovations, new products at lower price points, Omni channel play, frames unit and focus on service aspect in prescription eyewear. Eyewear is likely to witness significant increase in adspend and pressure on margins in the near term. TTAN is investing in SKINN, Mont Blanc, Taneira, Fabre Leuva and Caratlane to create luxury businesses which can add value in the long term. We estimate 26.7% PAT CAGR over FY18 FY20. We value the stock at 45xSept20 EPS and arrive at a target price of Rs1115. We expect premium valuations to sustain, although returns might be back ended. Retain Buy. Key financials (Y/e March) E 2020E Revenues (Rs m) 126, , , ,257 Growth (%) EBITDA (Rs m) 12,005 17,092 23,080 27,245 PAT (Rs m) 8,582 16,382 16,467 19,155 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2020E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Analyst Meet Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Jewellery: 2.5xFY18 sales by 2023, 25% sales growth target in FY19 Titan Reiterated 2.5x of Fy18 sales by 2023 and 10% market share (5.5 6% currently). The company is looking at 20% CAGR in sales as against 6% sales growth for the industry. Industry environment is favourable for Tanishq and focus on wedding jewellery, high value diamond jewellery, middle India and sub brands like Zoya, Caratlane Lane and Mia will enable company sustain 20% CAGR. FY19 sales are expected to increase by 25% although, 1Q is likely to soft due to high base. Key drivers are: Rs1 5mn income group which is witnessing 23% CAGR in income Rising focus on adornment rather than investment for jewellery Environment favourable for Tanishq post Demon, Modi/ choksi event and GST impact Fear of buying from unknown and small jeweller is rising as GST has made it difficult for small jeweller to conduct business. Hallmarking and PMLA are further working to the advantage of TTAN Tanishq has increased share of wedding jewellery from 20% to 35% in past 3 years, it is targeting increase in share to 50% by 2023 in gold jewellery. Rising share of wedding jewellery is also positive for profitability TTAN plans to increase the share of high value diamond jewellery from 30% to 50% of studded sales by TTAN plans to add 40 stores in the current year and has indicated at least 400 stores by The number of city presence will increase to 250 from 150. Tanishq has huge scope in middle India as cities like Faizabad, jaunpur, Aungul, Azamfarg etc. have huge pent up demand and scope for growth Tanishq has seen an increase in gold exchange from 20% of gold jewellery sales to 40%, it is planning to increase the same to 50% by 2023 which will significantly de risk the business model. Tanishq had reduced the exchange charges to Zero, however higher ticket size has compensated for not making any margin on taking old gold It is looking at sales of Rs7.5bn from Mia, Rs5.0bn from Aveer and Rs5bn from Zoya by TTAN is targeting sales of Rs17.5bn from 100 stores with EBIT margin of 5% and ROCE of 20% from caratlane Tanishq is looking at 25% sales growth in FY19 sales, although 1Q might show some adjustment due to high base May 14,

3 Watches expect sustained improvement in profitability TTAN has shown sharp improvement in FY18 profits as margins have increased to 13% from a low base. Sales volumes, value and EBIT have grown by 8%, 10% and 34% respectively. Although sales have been effected, brand salience has improved significantly. Fastrack has seen significant overhaul in Fy18 and grew by 14% last year. It is likely to increase presence in smart bands and emerging smart watch segment Titan is growing faster in Rs price band LFS and After sales service has achieved breakeven in Fy18, Helios and Accessories will achieve breakeven in FY19. LFS has achieved Rs3bn in sales and E Com sales are up 90% YoY Sonata and Fastrack are likely to be volume drivers for the company Titan is looking at adding 20 World of Titan Stores, 10 Fastrack and 10 Helios Stores. 100 stores will be renovated across brands while service centers will be set up at select Fastrack and Helios stores. Tie up with Amazon for US markets has worked well and it is likely to be extended to other markets in North America Fabre Leuva will see brand investments to establish in US, Japan, Middle east etc, long term aim is the success in India Eyewear: Entering high investment phase, margin pressure in FY19 Watch business has achieved sales and EBIT of Rs4.15bn and Rs24mn in FY18. SSG in Titan Eye+ was 6% and sales were up 13%. Sunglass business has been under pressure post reduction in GST rates from 28% to 18% given that the trade channel is multibrand outlets. The eyewear business is facing intense competition from online retailers like Lenskart on one hand and offline players like Reliance vision and other local chains on the other. It is present in 500 Titan Eye+ stores, 4500 MBO s, 0.325mn sq ft of retail space, one central and 4 satellite labs. Eyewear business plans to increase the number of customers from 2.4mn in Fy18 to 10mn by Eyewear has high competition, high price sensitivity and is purchased out of compulsion and not choice The category is facing online disruptions and has high fashion quotient Titan has increased the number of optometrists from 1 to 2 /store and has improved delivery time post commissioning of satellite labs Titan has invested in frame manufacturing and is looking at renovating the stores May 14,

4 Titan aims to launch lower priced products (Rs ) in order to shed image of higher prices and significantly increased advertising and marketing It plans to open 40 stores and use Omni channel to compete with price disrupters TTAN is also looking at converting small mom and pop stores into Titan Eye+ stores New businesses seeding future growth drivers Titan is seeding small but high growth potential segments to drive long term growth in businesses. It has invested in SKINN, caratlane, Titan Automation, Favre Leuva, Mont Blanc and Taneira as segments which have long term potential Titan Engineering and Automation (TEAL): it achieved Rs2.5bn sales and Rs210mn profit. Rs1.48bn are in automation and rest in aerospace. Order book is Rs2.7bn and holds huge potential for growth. Mont Blanc: It has 10 stores in Pens, watches and leather accessories. Titan has 49% stake in this company. 80% sales are from non metros and it is a learning experience to sell luxury products. It has achieved store level breakeven Taneira: It is focusing on special occasion wear and sells sarees, dress material etc. it has 2 stores in Bangalore and plans to extend to other Metros like Chennai and Delhi. The potential for this kind of a model is huge given that consumers are shifting towards traditional wear for occasions Exhibit 1: Q4FY18 Results; Adj. PAT up 78.8% on strong margin beat in Jewellery and lower tax rate Y/e March (Rs mn) Q4FY18 Q4FY17 YoY gr. (%) Q2FY18 FY18 FY17 YoY gr. (%) Net Sales 39,168 35, , , , Gross Profit 11,360 9, ,052 39,687 33, % of NS Adv & Sales Pro (22.7) (0.1) % of NS Total Expenses 34,614 32, , , , % of NS EBITDA 4,554 2, ,447 17,092 11, Margins % Depreciation , Interest Other Income (26.8) 184 1, PBT 4,329 2, ,233 16,621 11, Tax ,151 4,078 2, Tax rate % Adjusted PAT 3,628 2, ,082 12,542 8, Source: Company Data, PL Research May 14,

5 Exhibit 2: Jewellery EBIT up 60% as margins expanded 400bps, Watches EBIT up 190% on low base (Rs m) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Total Sales 24,062 27,745 26,236 38,713 35,438 39,482 34,057 41,414 39,215 Watches 4,491 4,997 5,237 5,083 5,026 5,099 5,700 5,324 4,940 YoY Growth 12.1% 3.0% 5.2% 5.1% 11.9% 2.0% 8.8% 4.7% 1.7% Jewellery 18,466 21,506 19,875 32,550 29,131 33,077 27,108 34,968 32,921 YoY Growth 1.0% 3.7% 0.2% 15.4% 57.8% 53.8% 36.4% 7.4% 13.0% Eyewear 970 1, ,116 1, ,089 YoY Growth 10.0% 3.3% 6.6% 12.4% 15.0% 0.2% 3.5% 0.3% 2.4% Others YoY Growth 82.2% 70.9% 71.7% 66.9% 21.5% 45.7% 53.1% 26.2% 60.4% Total EBIT 2,194 2,890 2,753 3,776 2,899 3,949 4,472 4,506 4,766 Watches YoY Growth 84.2% 48.2% 23.0% 63.1% 56.7% 16.3% 42.1% 56.2% 190.4% EBIT Margin 1.7% 14.0% 12.3% 10.4% 2.4% 11.5% 16.0% 15.5% 7.1% Jewellery 2,078 2,179 2,182 3,343 2,824 3,391 3,676 3,847 4,519 YoY Growth 10.5% 20.0% 81.1% 15.1% 35.9% 55.7% 68.5% 15.1% 60.0% EBIT Margin 11.3% 10.1% 11.0% 10.3% 9.7% 10.3% 13.6% 11.0% 13.7% Eyewear YoY Growth 40.4% 218.7% 54.3% 502.7% 19.6% 54.6% 31.8% 50.3% 78.6% EBIT Margin 13.8% 6.3% 2.1% 3.2% 9.6% 2.9% 1.4% 4.9% 2.1% Others (95) (60) (92) (66) (154) (61) (132) (123) (127) Source: Company Data, PL Research May 14,

6 Exhibit 3: Watches: Domestic volumes declines 1% on distribution revamp, LFS report strong growth 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Watches Sales Growth % Volume Growth % World Of Titan Sales Growth % LTL Sales growth % Stores Helios Sales Growth % LTL Sales growth % Stores Fastrack Sales Growth % LTL Sales growth % Stores LFS Sales Growth % LTL Sales growth % Source: Company Data, PL Research Exhibit 4: Eyewear tepid growth phase continues, prescription eyewear recovers, sunglasses remain under pressure Eyewear 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Sales Gr % LTL Growth % (Titan Eye+) Stores Area (sq Ft) Source: Company Data, PL Research Golden Harvest accounted for 17 18% of sales while Gold on loan has declined to 40% due to higher consumer incentive on exchange of gold. Exhibit 5: Gold Prices up 4.7% YoY and 3.8% QoQ in Q4FY18 Gold price Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Rs/10gm (22kt) Source: Bloomberg, PL Research May 14,

7 Exhibit 6: Volumes up 6%: studded share 36%, store addition guidance at 40, gold on loan declines to 40%, gold exchange not margin dilutive 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Jewellery Volume Gr % Studded Share % Sales Gr % % 13.0% Tanishq Sales Gr % LTL Growth % Stores Area (sq Ft) Source: Company Data/ PL Research Exhibit 7: Jewellery growth momentum to continue in FY19& FY20, Watches to see steady margin expansion from low base (Rs m) FY14 FY15 FY16 FY17 FY18 FY19E FY20E Jewellery Sales 86,274 94,206 87, , , , ,533 Growth % (7.4) EBIDTA 8,728 9,699 8,189 10,951 15,895 20,480 25,330 Growth % (15.6) EBIDTA Margin % Watches Sales 17,889 19,188 19,633 19,882 21,264 23,603 26,199 Growth % EBIDTA 2,112 2,373 2,004 2,376 2,928 3,540 3,930 Growth % (3.1) 12.4 (15.5) EBIDTA Margin % Source: PL Research May 14,

8 May 14,

9 Taneira is being extended into other Metros like Delhi and Chennai May 14,

10 May 14,

11 Watch Business: On a path to gradual and sustained growth and margin expansion May 14,

12 Income Statement (Rs m) Y/e March E 2020E Net Revenue 126, , , ,257 Raw Material Expenses 92, , , ,587 Gross Profit 33,457 39,522 45,908 56,670 Employee Cost 7,010 7,623 8,564 9,564 Other Expenses 14,442 14,808 14,264 19,861 EBITDA 12,005 17,092 23,080 27,245 Depr. & Amortization 894 1,072 1,218 1,360 Net Interest (225) (387) (178) (594) Other Income ,021 Profit before Tax 11,375 16,432 22,064 26,504 Total Tax 2,716 5,547 7,298 Profit after Tax 8,659 16,432 16,517 19,205 Ex Od items / Min. Int. (1,927) Adj. PAT 8,582 16,382 16,467 19,155 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) Y/e March E 2020E C/F from Operations 3,577 3,581 1,686 2,702 C/F from Investing (7,351) (1,434) (2,087) (2,337) C/F from Financing 4,085 2,376 1,148 (188) Inc. / Dec. in Cash 311 4, Opening Cash 1,117 1,427 1,895 2,643 Closing Cash 1,427 1,895 2,643 2,820 FCFF 17,865 (1,434) 14,745 12,953 FCFE 16,735 (1,433) 14,746 12,954 Key Financial Metrics Y/e March E 2020E Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT (8.7) Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Y/e March E 2020E Shareholder's Funds 43,120 56,878 68,814 83,358 Total Debt Other Liabilities (22) (77) (95) (114) Total Liabilities 43,100 56,805 68,722 83,249 Net Fixed Assets 8,552 8,864 9,708 10,660 Goodwill Investments 15,161 6,493 15,503 23,212 Net Current Assets 19,385 37,366 39,429 45,294 Cash & Equivalents 1,427 1,895 2,643 2,820 Other Current Assets 58,361 69,980 80,550 95,077 Current Liabilities 40,404 34,510 43,764 52,603 Other Assets Total Assets 43,100 52,726 64,644 79,170 Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 Net Revenue 39,096 33,785 41,366 39,168 EBITDA 3,885 4,206 4,447 4,554 % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax 3,707 4,245 4,233 3,522 Total Tax 1,038 1,189 1, Profit after Tax 2,669 3,056 3,082 2,821 Adj. PAT 2,769 3,063 3,082 3,628 Key Operating Metrics Y/e March E 2020E Watch sales Growth Watch EBIT Growth % Watch Margins Jewelry Sales Growth Jewellery EBIT Growth % Source: Company Data, PL Research. May 14,

13 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 43.4% 44.2% 12.4% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Amnish Aggarwal (MBA, CFA), Ms. Nishita Doshi (CA, CFA Level 1, B.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at This document has been prepared by the Research Division of PL 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 PL. 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, PL has not independently verified the accuracy or completeness of the same. Neither PL 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 expert/advisor. Either PL 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. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Amnish Aggarwal (MBA, CFA), Ms. Nishita Doshi (CA, CFA Level 1, B.Com), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. May 14,