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basant
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Quote basant Replybullet Topic: Titan - A classic specialty retailing play
    Posted: 20/Mar/2008 at 11:52am

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
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Quote anandv Replybullet Posted: 21/Mar/2008 at 12:05pm
Sir,
 
Thank you very much for this detailed post on Titan. It will help all TEDdies to look at new opportunities to invest. Could you also highliight probable Risk Factors to the Investments, so that we can look for those news items and be more agile this time.
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Quote kulman Replybullet Posted: 21/Mar/2008 at 12:09pm
Good exhaustive analysis.
 
Incidentally, today Biz Std carries this article:
 
While there is undoubtedly strong demand for branded jewellery, the sharp rise in the price of gold, currently ruling at around Rs13,000 for 10 gm, could see demand for gold jewellery tapering off.

Thus, volumes for the Tata-owned retailer could moderate over the next couple of years, to below 20 per cent compared with a volume growth of over 30 per cent in the last couple of years.

While jewellery sold under the upmarket Tanishq brand could continue to see good demand, there could be some moderation in the sales for the Gold Plus brand, under which plain gold jewellery is retailed in semi-urban and rural areas.

The Rs 2,000 crore organised jewellery market, representing currently just 3 per cent of the total jewellery market in the country, is tipped to grow by 25-30 per cent in each of the next three years, driven by rising disposable incomes and aspirations.

However, the overall slowdown in the economy coupled with rising gold prices could see Titan’s jewellery volumes growing less than expected.
 
The firm’s jewellery business, it is estimated, will grow by about 40 per cent to Rs 5,500 crore in three years time from about Rs 2,000 crore in FY08, driven mainly by the high- margin diamond studded segment.
 
The division should contribute approximately 68 per cent of the company’s revenues in FY08 and is expected to account for a larger share, of close to 75 per cent by FY11. Titan is expected to close FY 08 with revenues of about Rs 2,900 crore and net profits of Rs 115 crore.
 
In the following year, the company should manage sales of about Rs 4,500 and profits of Rs 160 crore.
 
At these levels the stock trades at 25 times estimated FY09 earnings and while it is a great play on the growing consumerism in the country, appears somewhat expensive in the current situation
 
Link: Titan : Losing some lustre
 
 
 
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Quote basant Replybullet Posted: 21/Mar/2008 at 12:18pm
Originally posted by anandv

Sir,
 
Thank you very much for this detailed post on Titan. It will help all TEDdies to look at new opportunities to invest. Could you also highliight probable Risk Factors to the Investments, so that we can look for those news items and be more agile this time.
 
the main risk is the ones which Business STandard carried out today. people staggering jewellery purchases because of rising gold prices but that is for the discretionary part, daughters will still need to be married off and the incremental savings from changes in tax slabs growing middleclass etc should more then compensate this aspect.
 
Apart from that valuations have significantly corrected from the highs and should make up for whatever slowdown we see in gold sales.
 
Also Indians do not buy gold on weightage but in grams or tolas so people will still buy ornaments for Rs 100,000 just that the gold that they get would be lesser in volume terms.
 
In the long run these things should not matter! I think that rising gold prices could motivate people to buy more of Gold who had till now been thinking of Gold as a dead investment.
 
 
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Quote Ajith Replybullet Posted: 21/Mar/2008 at 12:30pm
 The main charm in Titan for the very long-term-despite current slowdown if any- is the Tata name which induces trust and so they can take market away from some of the  smaller players  who are worth hundreds of crores built all from gold business but whose quality and reliability are questionable.


Edited by Ajith - 21/Mar/2008 at 12:33pm
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Quote kulman Replybullet Posted: 21/Mar/2008 at 12:37pm
Originally posted by basant

..... but that is for the discretionary part, daughters will still need to be married off
 
The gold ornaments for marriage are often bought from traditional family jeweller for many reasosn such as:
1. Wider variety of special ornaments like kangans, Baali, Mangalsutra
2. Known Seth ji since Dadi maa, nani maa days...huge emotional attachment.
3. Custom made designs in some cases.
 
However the Techies, working couples types prefer to shop at branded shops for other events such as Anniversaries, Birthdays, Valentine's Day etc...
 
My observation could be biased & cannot be generalised as it is based on few recent weddings in families of relatives & close friends.
 
Originally posted by basant

I think that rising gold prices could motivate people to buy more of Gold who had till now been thinking of Gold as a dead investment.
 
Gold ETFs could be a major competitor for investment demand. 
 
 
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Quote smartcat Replybullet Posted: 21/Mar/2008 at 12:41pm
Watch Division Comments:
 
27% of Indians already owning watches doesn't exactly imply that it is an under-penetrated market. Remember that mobile penetration in India is around 14% and people are already talking about growth slowdown in the telecom market.
 
I've also noticed mobiles doubling up as watches. I expect the long-term growth of the watch division to be around 12 - 15% rather than 20%.
 
However, Titan is an innovative company - they seem to be keeping consumers interest in watches high by launching 'series' of watch themes like Aviator Series, Octane Series (for adventure sports enthusiasts), Heritage Collection (Indian monuments in background) etc.
 
 
Eye Wear Division Comments:
 
The growth in the eye wear industry is likely to sustain at 15-20% per annum
 
Isn't that a bit low? They've just started out - I expect growth in this segment to be in high 60s CAGR.
 
Titan Eye Wear is being positioned as a premium brand. After a visit to the store and making a purchase from the store for my friend, I'm guessing that the average spend per customer would be a minimum of Rs. 1,200 (frame + glasses).
 
General Comments:
 
Has any global company made lots of money selling watches? Timex, Citizen, all those Swiss companies - after all these years, are there any large companies?
 
Ditto with Eye Wear companies. I've only heard of Bausch & Lomb - and it is not listed. Essilor (France) is a $12 billion company - but they make and sell branded lenses like Crizal, Varilux etc.
 
What about Jewellery retailing companies? Any big names come to mind?
 
But yes, Titan is selling all three products + precision engineering products. So how big can Titan become by selling watches, jewellery, eye wear and other consumer products after XX number of years?
 
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Quote basant Replybullet Posted: 21/Mar/2008 at 12:50pm
Watches: Mobile is fully in the organized segment whereas with watches some part of the sales would move from organized into the organized segment so while the Industry growth would be low companies like Titan should grow at more then that.
 
Eyewear That Rs 600 was an industry wide market size computation. Titan's average ticket size should be at around what you mentioned Rs 1000- Rs 1500.
 
Jewellery: Even with the dadi and the nanis this division is growing at more tyen 60% CAGR for the last 4 -5 years. So Tanishq is growing inspite of that cultural block!I expect it to continue growing thatb way.Tiffany whose market cap is US$ 5bn is an example and mind you Indians consume more gold then their US counterparts!
 
Best part which no one has comemnted upon is company needs zero incremental equity funding. Look at the RoCE so its growth is ot market dependent.
 
 
 


Edited by basant - 21/Mar/2008 at 12:51pm
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