Titan - A classic specialty retailing play!
Titan (CMP Rs 920) is specialty retailing play operating in the luxury segment of the Indian Retail Market. The company has four business verticals but the major part of the company’s revenues consists of the fast growing (60 %+) jewellery market. Additionally the company is also into the retailing manufacture and of watches (growing at 20%+), has initiated forays in the eye care prescription segment and should ramp up its Precision engineering and International business.
CMP |
Rs 920 |
Market cap |
Rs 4060 crores |
Book value Fy08 |
Rs 101 |
RoE |
30% and expanding |
Annualized Growth |
45% - 50% |
Size of opportunity |
Huge |
|
Fy09 |
Fy10 |
Growth will increase as weightage of the jewellery division rises in the overall Sales mix |
Revenues |
Rs4400crs |
Rs6000crs |
EPS |
Rs 46 |
Rs 70 |
PE |
20 times |
13 times |
Market Cap to Sales |
0.9 times |
0.67 times |
The RoCE is expanding One of the best aspects of Titan is its ability to fund itself on its own capital. The company has diluted capital by only once (3%) over the past 5 years and has sustained its growth on its own funds. This makes it insulated to market vagaries for its growth. The RoCE for its watch and jewellery division indicated alongside explains this phenomenon very clearly.
The RoCE is expanding |
|
Watch |
Jewellery |
2004 - 05 |
39% |
29% |
2005 -06
|
50% |
34% |
2006 – 07
|
50% |
61% |
Why such a high RoCE: Unlike common perception Titan is not a capex modeled company. The company appoints franchises who in effect run the stores and Titan merely lends its brand name. Therefore growth is not funded from the company’s Balance Sheet.
Titan manages the inventory, designs and lends marketing support. The goods are sold through its franchises. The opening of news stores is done by existing franchises in respective cities and one franchise told me that demand for new store franchise is exceeding far then what the company wants to give.
The Watch Division: Titan is the world’s 6th largest, integrated manufacturer and brand for watches with a 60%+ market share of the organized watch market. India is an under-penetrated market for watches – only 27 % of Indians own a watch.
Every year Indians buy 40 million watches and the annual spend is close to Rs 2500 crores. 68% of the market segment is below the Rs 500 range and the company will immensely benefit with the change in income stream as people move from the lower segment to the upper ones. As consumers upgrade to the higher priced brand margins are only going to strengthen from here.
Jewellery:
a) Tanishq: The total jewellery market in India is about Rs 65,000 crores out of which 38% is located out of urban India. The branded jewellery segment is around 4% - 5% of this market. Tanishq remains India’s largest player in the branded jewellery segment
Overall the jewellery market is based out of trust and as people become educated they would replace the old family jeweler with the Tata name. Rising incomes, changing lifestyles, increasing penetration of women at work will all drive jewellery sales.
With a more then 40% market share in branded jewellery, the company has 101 stores in 70 towns – mostly in prime high street locations. Last year about 15 lac people shopped from Tanishq
b) Gold Plus: India is the world’s largest consumer of Gold provides immense potential as people move into the organized market from the unorganized segment which is heavily fragmented with impurities from underkartage still prevalent in many parts of the country. Margins in this segment is lower compared to Tanishq but volumes are higher and this format is ideally suited for rural and semi urban penetration. Semi-urban and rural market estimated to be as much as 50% of the total jewellery market.
The Eye Wear Business: In Fy 05 Titan forayed into the business of eye wear by marketing sunglasses under the “Fastrack” brand. This segment was targeted at the youth and later on the company expanded into the eye prescription business. As on December 07 there are 8 Titan Eye+ outlets and the company is planning to have more then 50 outlets by Fy09
This is a super high margin segment with marked up retail price equaling 4 times the landed cost of the eyewear.
It is assumed that 30% of the population suffers from bad vision. Assuming an affordability number at 300 million the company assumes a market size of: 84mn users. Assuming a change in glass once every 3-4 years the total number of people in the addressable market is around 30 million units per annum. Putting an average cost of glasses at Rs 600 this comes out to a market size of Rs 1800 crores which is as big as the watch industry.
The growth in the eye wear industry is likely to sustain at 15-20% per annum. Demand drivers for the eye wear vertical revolve around the same aspects of the Indian economy namely: Urbanization, literacy, Penetration of TV & computers, Poor eye health due to lifestyles/ improper diet, etc.
The company says that overall mark ups of up to 300% exist between landed cost & retail price of the eye wear business! The company has no plans to manufacture the spectacles/lenses and that should help the company in maintaining its objective of increasing RoCE.
Store Format |
March Fy08 |
Tanishq stores |
88 TO 106 |
World of Titan stores |
207 TO 258 |
Gold plus stores |
10 TO 25 |
Sonata stores |
14 TO 20 |
Fast Track Kiosks
|
10 TO 40
|
Titan Eye++
|
1 TO 12 |
Time zones |
117 |
Watch Care Centres |
135 |
International Business: Titan is present in over 26 countries outside India and is noted as one in the top three brands in some Asian countries. Though the total export turnover is estimated at Rs 100 crores the company’s growth will be supplemented by these verticals. Now present in 30 countries. The company is selling close to 1 million watches annually with increasing presence in jewellery
Precision Engineering Business: Titan is also engaged in the manufacture of precision engineering components. The opportunity of this segment is expected to be around Rs 135,000 crores and unlike plain vanilla BPO businesses this is assumed to be a high end job. The company’s customers in this segment include the likes of Schlumberger, Ford, Bosch, Tyco Electronics, Stanadyne, Tata Motors etc. Presently in the gestation stage the next 5 years could create a US $150 mn or Rs 600 crore business from this vertical
Sales Mix: Presently the jewellery division makes up around 65% of the revenues whereas the other 35% is made up from the watch and the eye wear division. Since the jewellery division is growing at more then 60% its weightage would increase and therefore push the overall growth of the company a bit higher over the coming times. Eye wear and Precision engineering are still being ramped up and are therefore not contributing significantly to the topline.
The eyewear business should significantly add to the bottomline over the next couple of years because of its super high margins.
Segments |
Sales mix |
Growth |
Cons. CAGR |
Jewellery |
70% |
60%CAGR+ |
45%to 50% |
Watch + Eyewear |
30% |
20% CAGR+ |
Conclusion: Titan is a great bet on the Indian luxury retailing segment. It combines well with Buffett’s idea of buying Jewellery retailing companies. India with the highest annual Gold consumption provides excellent opportunity for this brand to grow.
The top management is an IIT-IIM alumni and my experience with managements of that pedigree has been very satisfying. This is Bhaskar Bhatt’s long term vision for the company ”It is time that we make our brands Titan, Tanishq, Sonata, Fastrack and Titan Eye+ match world standards. So, in the next 10 years we plan to take the company from the best in India to the best in the world. While in terms of brand recognition and marketing we have done really well, it is time to convert this success economically for the company,”
The company is on an expansion spree and should aggressively increase the number of store count in Fy09. Increase in price of gold does not proportionately increase the margins because gold is a pass through and the company charges just for conversion cost. Hence higher gold prices would proportionately increase revenues but not the margins.
I have an aggressive position in this company and would add at declines.
P.S:Just received a emailed reply from Jim Rogers. He reckons that if history is any guide people will buy more of Gold as prices go up during times of uncertainity.
"Throughout history people have looked to precious metals and stones as ways to preserve wealth" he says. This time also it should not be too different..
Edited by basant - 27/Mar/2008 at 9:35am