2044304358PC - Titan Initiating - Feb 2014 20140228100959

TitanCompany
Onegram=hugeleverage
PhillipCapital (India) Pvt. Ltd.
RETAIL:InitiatingCoverage
Performancestandsoutlikeatonofdiamonds.Nonperformancecanalways
beexplainedaway.HaroldGeneen,formerPresident,ITTCorporation
We believe Titans performance is set to improve substantially in the coming

quarters based on the following factors: 1), as more store space enters its
maturity phase, it will translate to better sales density and more operating
leverage,2,)ithasotheroperatingleverssuchasaddingmoreL1storesorasking
L2storestoshareinventoryriskorpruningtheircommissions,3),itsstateofthe
artuniquesupplychainmanagementsystemgivesitsbalancesheettheflexibility
toadjusttovariousscenariosofconsumerbehavior,4),competitiveintensityis
notashighasperceived,moreoverintermsofnumberofstoresandreach,Titan
iswayaheadofitsorganizedcompetition,and5),itistradingbelowitshistorical
PEaverage.
A1gram/sq.ft.improvementwillpropeltoplineby20%:Evenifsaleswereto
improvebyagram(whichtranslatesto5%growthpersq.ft.includingmaking
charges and share of studded jewelry and assuming steady gold prices), for
everyLTLsq.ft.,weestimatetoplinegrowthwillgrow20%.Webelievethatas
0.36mnsq.ft.ofspaceentermaturityphaseinFY15/16,evenaslightrevival
ofconsumersentimentswillpropelgrowthandprofitability.(seepg2)
Multipleoperatinglevers:TitanslargeretailnetworkexpansionoverFY12
14resultedinhigherrentalsandemployeecosts.Moreover,sales/sq.ft.fell
asnewstoreswereaddedandonpoorconsumersentiment.Infact,average
sales/sq.ft.isatitslowestsinceFY10.Therefore,fixedcostsremainunder
absorbedandareamarginlever.Titanalsohasotheroperatingleversinthe
form of its L2 (management agent) stores. Given current restrictions on
goldonleaseandthehighRoEsthatL2storesmake,itcouldlookatadding
moreL1(own)storestocapturethisRoE.(seepg4)
Competitive intensity is more noise than reality: Our city/regionwise
analysisrevealedthatwhilecompetitionisrealit'snotdirect.Fallindemand
hasbeenmoreamacroeconomicthanduetocompetition.(seepg9)
Supply chain is a distinct strength in adversity: Titan has continuously
investedinitssupplychainprocessesandsystemsandanunderstandingof
its working only reposes our faith in the efficient running of its complex
business.Withgoldonleasenolongeravailable,Titanisbetterpoisedthan
competitiontomanageitsinventory(withchanginggoldpricestightcontrol
becomescritical)forwhichitdeservesapremiumvaluation.(seepg5)
Restoration of goldonlease is an upside risk: If importing goldonlease is
allowedagain,Titanwillreverttonegativeworkingcapitalmoderesultingin
itsnetcashonthebooksnearlydoubling(inFY16byRs16.95bntoRs35bn).
Valuation:Weestimaterobustearningsgrowthof25%inFY1516onthebackof
operating leverage from new store maturity, marginal pickup in consumer
sentiments, and steady improvement inshare of studded jewelry. We see
earnings growth at 25% in FY16 based on strong brand franchise and proven
managementcapability.Thestockcurrentlytradesat19xFY16earningsandwe
assign a 25x PE (historical average) to its FY16 earnings growth to arrive at our
targetpriceofRs301.
PleaserefertoDisclosuresandDisclaimersattheendoftheResearchReport.
28February2014
BUY
TTANIN|CMPRS243
TARGETRS301(+24%)
CompanyData
O/SSHARES(MN):
MARKETCAP(RSBN):
MARKETCAP(USDBN):
52WKHI/LO(RS):
LIQUIDITY3M(USDMN):
FACEVALUE(RS):
888
215
3.5
302/200
5.4
1
ShareHoldingPattern,%
PROMOTERS:
FII/NRI:
FI/MF:
NONPROMOTERCORP.HOLDINGS:
PUBLIC&OTHERS:
53.1
21.6
2.0
1.6
21.8
PricePerformance,%
ABS
RELTOBSE
1mth
11.2
12.6
3mth
6.5
5.3
1yr
3.6
11.4
PriceVs.Sensex(Rebasedvalues)
400
300
200
100
0
Apr10 Apr11 Apr12 Apr13
Titan
BSESensex
Source:Bloomberg,PhillipCapitalResearch
OtherKeyRatios
Rsmn
FY14E FY15E
FY16E
NetSales
111,593 124,509 146,522
EBIDTA
10,601 12,077 15,092
NetProfit
7,461 8,545 10,694
EPS,Rs
8.4
9.6
12.0
PER,x
27.7
24.2
19.3
EV/EBIDTA,x
18.4
17.0
13.4
P/BV,x
8.1
6.5
5.2
ROE,%
33.1
29.8
29.7
Source:PhillipCapitalIndiaResearchEst.
AbhishekRanganathan(+912266679952)
abhishekr@phillipcapital.in
NehaGarg(+912266679996)
ngarg@phillipcapital.in
28February2014/INDIAEQUITYRESEARCH/TITANINDUSTRIESINITIATING
Operatingleveragefromstorematurity,salesdensity
With a large amount of store space added (355,000 sq. ft.) since FY12, its new square
footagetouches51%inFY14afterwhichitwillstarttapering.Asmorematurespacegets
added,itwilltranslatetobettersalesdensityandmoreoperatingleverage.
Morematurestorespaceoffershigheroperatingleverage
Titansrevenuepersq.ft.overFY13andFY14hasbeenimpactedbytwofactorsnew
spaceadditionandaslowdownindemand(grammagedegrowthoverFY1214was2%
duetopoorconsumersentiments).Infact,LTLsalessq.ft.isatitslowestinlast4years.
Sales:Rs/sq.ft.tapereddownwiththenewstoreaddition
Area(sqft)
900000
Sales(Rs/sqft)(rhs)
180,000
750000
600000
160,000
450000
300000
140,000
150000
0
120,000
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
Source:Company,PhillipCapitalIndiaResearch
Morematurestorespacewillleadto
highersalespersquarefeet
Titan nearly doubled its space to 697,000 sq. ft. between FY12 and FY14 this has
resultedinitsnewstore(<3yearsold)squarefootageincreasingto51%inFY14from
28%inFY12.Weexpectthisnumbertobe42%inFY15and33%inFY16asnewspace
addedoverFY1214(355,000sq.ft.)alsoentersitsoptimumoperatingphase.
Newstorestothetotalareaunderoperation
Particulars
Totaljewelryarea(sqft)
Areawhichislessthan3yearsold(sqft)
%newstoresovertotalarea
FY11
342,000
180,500
53%
FY12
FY13
FY14
461,000 602,000 697,000
128,500 270,600 355,000
28%
45%
51%
FY15E
797,000
336,000
42%
FY16E
897,000
295,000
33%
Source:Company,PhillipCapitalIndiaResearchEstimates;areainsquarefeet
RisingLTLspacewilldrivethesalesdensity(salespersq.ft.)ofitsentirestoreportfolio.
Thesensitivityofsalespersq.ft.(alsoafunctionofliketolikesales)isveryhighandas
the mature store area reaches 67% of the store portfolio in FY16, even a marginal
improvement(5%)inthesalespersq.ft.(5%=anadditionalgrampersq.ft.including
making charges and share of studded jewelry) would improve the top line by 20%.
Consequently we expect the overall sales per/sq. ft. to improve as the stores enter a
morematurephaseofoperation.Thereforeweexpectarevenuegrowthof12%inFY15
and19%inFY16inthejewelrydivision.
2of28
Sensitivity:Changeinthesales/sq.ft.tojewelrytopline
ChangeinPSFLTLgrowth
5%
3%
1%
0%
1%
3%
5%
7%
FY16JewelrySales(RsMn)
108,961
110,851
112,741
113,686
114,631
116,521
118,789
120,301
Revenuegrowth(FY16)
9%
11%
13%
14%
14%
16%
19%
20%
Source:PhillipCapitalIndiaResearch
Fixedcost absorption delayed due to expansion and poor economic

conditions
Overtheyearsthecompanyhasinvestedinstrengtheningitsretailsalesandmarketing
division.Consequently,keyoverheadlineitemssuchasemployeecostsandrentalshave
increased.Asstoresmaturethesecostswillgetbetterabsorbed.
Increaseinemployeeexpensesduetoincreasedstrengthinretailandmarketing
Factories
Supportfunctions
120%
10%
10%
8%
21%
26%
32%
Retail,Salesandmarketing
AvgEmployeeCost(Rsmn/p.a.)(rhs)
0.8
8%
6%
6%
0.8
100%
80%
38%
0.7
44%
45%
0.7
60%
40%
0.6
69%
20%
60%
54%
51%
49%
FY11
FY12
FY13
0.6
64%
0.5
0%
FY08
FY09
FY10
Rentalshaveincreasedduetospaceadditions
Area(sqft)(rhs)
1,600
L1:Storeoperatedandownedbythe
company,inventoryonthebooksofthe
company,opexbornebythecompany
managementagent,inventoryonthe
booksofthecompany,opexborneby
themanagementagent
franchisee,inventoryonthebooksof
thefranchisee,opexbornebythe
franchisee
Rentals(Rsmn)
700000
1,400
600000
1,200
500000
1,000
400000
800
300000
600
200000
400
100000
200
0
FY08
FY09
FY10
3of28
FY11
FY12
FY13
Otheroperatinglevers
CouldcaptureL2ROEsonitsownbooks,passonrisk,orreducecommissions
With the goldonlease model no longer available, Titan would be better off adding L1
(own)storesratherthanaddingtheL2stores(managementagent).Asthecompanyhas
tocarryinventoryriskonitsbooks(beitL1orL2),itcouldlookatincrementallyadding
moreL1sandcapturetheRoEsinitsownbooks.
L2franchiseeshaveenjoyedsubstantialRoIs(sincetheyhadtodealwithonlycapexand
opex,whileinventorywasmanagedbythecompany).Nowthatthegoldonleasemodel
is no longer available, Titan may have to consider reducing franchisee commissions or
pass on some of the inventory risk to them. Both moves are structural levers it could
implementifwarranted.
OperationalparametersforL2stores
Particulars
Revenue
Commission
Opex(includingnotionalrent)
EBITDA
Capex
AreaSq.ft.
RoI
SalesRspsf
CapexRspsf
Rsmn
350
21
10.5
10.5
15
3000
70%
116,667
5000
Abilitytotweakmakingcharges
Our analysis suggests that the company would be in a position to make up for loss of
profitsinascenariowherevolumegrowthlagsgoldpricecorrectionbytweakingmaking
chargesTitanseffectivesystemsandbackendwillfacilitatethisquicklyandsmoothly.
Importantly, while it will benefit the company quite a bit, the cost to its consumer
increasesonlymarginally.
Nonlinearbehaviorofvolumesandprices;abilitytotweakmakingcharges
Particulars
GoldPriceRs/gram
Gramssoldgm
MakingChargeschargedtoconsumer(blended)
Totalmakingcharges
ActualMakingchargesRs/gm(hasavariable
componenthereassumedtobefixed)
GrossProfit
ChangeinVolumetomaintainprofits
Impactwhenmakingchargeschange
Makingcharges%afterhike(100bps)
MakingchargesRs/gmafterhike
Gramssoldgm
GrossProfitonrevisedmakingcharges
ChangeinVolumetomaintainprofits
TotalCosttoConsumer
Costtoconsumerafterrevisedmakingcharges
Incrementalcost(%)toconsumer
4of28
Assumptions
23%
100
1%
ChangeinGoldPrice
0%
10%
20%
3,000
2,700
2,400
10.0
11.3
13.1
690
621
552
6,900
7,032
7,205
1,000
5,900
23%
690
10.0
5,900
36,900
36,900
1,132
5,900
13.2%
1,305
5,900
30.5%
24%
648
10.9
5,900
8.5%
37,608
37,914
0.81%
24%
576
12.5
5,900
15.3%
38,533
38,846
0.81%
Excellentsupplychainmanagement
A robust supply chain and demandforecasting mechanism places the company in a

positiontotapnewcategoriesanddesignproductsaccordingtoconsumersneedsand
demands. Consequently, we draw confidence in Titans ability to grow its revenues
eveninchallengingmacroenvironments
We believe that Titans supply chain management is one of its most understated and
underresearchedstrengths.Thecompanysrobust,scientific,andveryfluidsupplychain
systemgivesitsbalancesheettheflexibilitytoadjusttovariousscenariosofconsumer
behavior;thisallowsittoeffectivelymanagethequantum(veryimportantunderslowing
economicconditions)aswellasthetypeofmerchandiseitneedstostock.Consequently,
intheeventofworseningeconomicconditions,impactonmarginsislimited.
Capital employed (inventory pricerisk mitigated by hedging) is monitored centrally for

all of its 162 Tanishq stores and 33 GoldPlus stores across the country, including the
franchiseeonesthiscentralizedcontroladdstobalancesheetflexibility.
Moreover,thesystemisbuiltscientificallytodrawconsumersthroughdemandforecasting.
ThenewinitiativesoflowcostdiamondjewelryandMiajewelryforworkingwomencouldbe
aresultofthisforecasting.ThisleadsustobelievethatTitansreturnratiosareatriskonlyto
theextentofmargins(impactedbytheslowdowninconsumerspending).
Movementingoldconsumptionandaveragegoldprice
Go ld (Kg)
25,000
A verage Go ld P rice
35,000
20,000
30,000
15,000
25,000
10,000
20,000
5,000
15,000
10,000
FY09
FY10
FY11
FY12
FY13
FY14E
Supplychain:reducingleadtime,inventory,anddiamondbagging
Reducingtheleadtimeforcomingoutwithnewjewelrydesigns
Demand forecasting and understanding buying patterns helps the company to plan its
merchandise and also do assortment planning this is crucial in a jewelry business,
which has long lead times (it takes about eight months for a jewelry collection to be
designed). The long lead times increase the pressure to get the design equation right.
Titan has set up a process, which enables it to segment its jewelry SKUs in multiple
categories
Highsalesvelocity;lowshareofsales(e.g.rings)
Lowsalesvelocity;lowshareofsales(e.g.occasiondriven)
Highsalesvelocity;highshareofsales(e.g.neckwear;lightweight)
Lowsalesvelocity;highshareofsales(e.g.neckwear;studded)
5of28
Consequently,thecompanyisabletoensurethatithasaperpetual(highsalesvelocity)
inventory at its stores throughout and customize the lowsales velocity requirement
accordingtothestorelocation,thusensuringavailabilityandcustomerrequirementsat
optimumworkingcapitallevels.
Titanssupplychaindemandforecastingteamstreamlinesgoldinventorymanagement
Managingover20,000kgsofgoldannuallyisachallenge,giventherisksassociatedwith
physical gold and pilferage. Emphasis on systems and monitoring daily store level
inventoryandreplenishingithasresultedinastrongandrobustsupplychain,whichhas
improvedinventoryturns,thusoptimizingworkingcapital.Thisimprovementhasbeen
aidedbythesoftsideofthesupplychaindemandforecastingwhereacentralized
team assesses the performance of stockkeeping units (SKUs) at the store level and is
thereforeabletoforecastdemand.(SeeExhibitB)
Diamondbagging:Qualitycontrolfrominceptioneliminateserrorandbuildsconsumer
trust
Titanfurtherfinetunesitssupplychainwithinitiativessuchasdiamondbagging,which
isaprocessthattakesplaceinthejewelryindustryafterthepreciousstonesaregrouped
on the basis of their size, clarity, and colour. The company moved from a manual
diamondbaggingsystemtoanautomateddiamondbaggingmachineastheformerwas
prone to human error, thus ensuring that customers get the diamond that they are
paying for (given that the diamond market is opaque and involves very high trust
quotient).
Titan'sautomatedbaggingprocessusesrobotsandsensorsthroughacustommade
softwaretheseareconnectedtothesupplychainrequirementsofboutiques,whichare
routed through an ERP system. The diamonds are picked, weighed and bagged
automaticallyforfixingonthejewelry.Themovealsomeantthatthecompanywasable
toredeployemployeeswhowouldotherwisehavebeeninvolvedinthemanualbagging
process.
6of28
ExhibitA:assortmentplanningandthedemandforecastingprocessinitiated
The Issue:
Jewelry as a category has very wide offering. However, catering to different customer profiles through small/medium sized stores makes planning a
complex process
The earlier model: Each store placed its own order, subject to guidelines on total inventory drawn up by the supply chain team at the HO
Shortcomings of earlier model: Focus of store associates was on sales target leaving little time for scientific ordering process
The Solution: The supply chain team had the best access to sales (selling patterns, variants at various levels) and inventory data from all stores.
This combined with store specific knowledge of the store associates resulted in more refined process
High
High
% of sales
by value
Best sellers SKUs (national,

regional store) on auto replenishment
Total category inventory and
product attribute mix by store is
specified for the rest of the
SKUs.
Store staff modify order
quantities for the non best
selling SKUs, while adhering to
these specifications
Sales velocity
Low
Neckwear A
Neckwear B
Rings B
Rings A
Wedding
Main focus area for store

associates
Assortment is designed to
ensure high degree of variety
Low
Automated replenishment for the

entire category
Limited role played by store
associates
No focus on individual SKUs
Assortment selection based on
category inventory norms,
recommended product attribute
mix, and available inventory at
the factory
Guidelines on selling trends

provided based on analysis of
stores with similar
demographics
Store associates decide on
SKUs to include in
assortment
Order quantities set by store
associates to meet the
category level inventory
norms.
Source:AssortmentPlanning:ReviewofLiteratureandIndustryPractice2006
7of28
ExhibitB:supplychainchangesinitiated
BEFORE
Issues: High Inventory levels for finished goods- lack of ownership of finished goods inventory, irregular indenting of material and
improper category or assortment planning led to high lead-time for order fulfillment.
Production plan
Indent
Order Processing
RM Suppliers
Manufacturing
Hosur
L-1 Company
Boutiques
Bangalore
Gold Suppliers
Diamond
Suppliers
L-2 Management
Agents
Carry
Forward
Agents
FGS
In house facility
L-3 Franchisees
Boutiques
Kolkata
AFTER
Boutique stocks were scanned on a regular basis and
the sold variants were replenished every week in order
to prevent stock out. Once the factory stock level fell
below a threshold, production indent was generated.
Shortens the inventory cycle by setting up a

centralized supply chain system and complete visibility
of stock and sale across the chain
IT program- improved visibility of order

status, visibility of sales of each store,
track effectiveness of promotions and
marketing programs status
Outsourcing introduced to
cater to regional designs
Production plan
Indent
SCM
Stock control
RM Suppliers
Gold Suppliers
Manufacturing
GIT control
Hosur
FGS
In house facility
Diamond
Suppliers
Vendors
L-1 Company
Boutiques
Bangalore
Karigar /
MEADOW*
Kolkata
Carry
Forward
Agents
L-2 Management
Agents
L-3 Franchisees
Boutiques
Performance of existing and all newly

launched designs monitored and non-moving
designs were rationalized on a regular basis
Source:Corporateturnaroundthrougheffectivesupplychainmanagement
8of28
Competitiveintensitynotashighasperceived
Titan faces competition from both organized and unorganized players. If regional and
national players are included, organized retailers form approximately 1618% of the
jewelryretailmarket.However,ascanbeseeninthetablesbelow,intermsofnumber
ofstores,TitaniswayaheadofcompetitioninNorth,WestandEastIndia.
WhilecompetitiveintensityishighestinSouthIndia,ithasbeenlikethatformanyyears
regional players have been present there for generations. In North and East India
Tanishqcontinuestoenjoysignificantreachovercompetition,followedbytheWest.
TanishqsstoresarewelldistributedacrossnonmetrosandacrossIndia.Nearly60%of
these stores are in nonmetros. While competition put together has more than 75%
storesinnonmetros,theyareprimarilyinSouthIndia.Tocountercompetitionsheavy
presence in South India, which is mainly a gold jewelry market, Titan has 33 GoldPlus
storesexclusivelyinsouthIndia(thisisinadditiontoTanishqstores).
StoreexpansionofjewelryretailersinIndia
Players
Tanishq
Reliance
Joyalukkas
RajeshExports
TBZ
P.C.Chandra
Kirtilals
Type
National
National
National
National
Regional
Regional
Regional
No.ofstores
2010
2013
148
150
24
51
22
42
32
82
14
27
18
24
7
10
2005
84
0
6
0
2
10
3
9MFY14
162
54
46
82
27
24
10
Plannedforfuturegrowth
Planstoadd100000sq.ft.annually
NA
PanIndiaexpansionplanforFY15
Planstoopen500SHUBHjewelryshowroomsby2015
Planstoopen43storesfrom2013to2015;panIndiaexpansionplans
DoublepresencewithpanIndiaexpansionin2years
Focusonretailspaceexpansioninsteadofincreaseinstorenumbers
CompetitiveintensityforTitangeographywise
Zonewise
North
South
West
East
Totalstores
Titan*
50
35
36
18
139
Malabar
2
65
4
1
72
Kalyan
2
41
8
0
51
Joyalukkas
2
38
5
1
46
TBZ
2
4
18
3
27
PCJeweller
32
3
4
2
41
Competitiveintensityskewedtowardsnonmetros(largelySouthIndia)
Zonewise
Metros
NonMetros
Titan
56
83
Malabar
13
59
Kalyan
7
44
Joyalukkas
10
36
TBZ
12
15
PCJeweller
17
24
*Informationlimitedto139storesofthe162stores
Studdedjewelryshare:Titansshareofstuddedjewelrywillimproveonlygraduallyasits
stores establish their presence in new cities, given that gold jewelry is a likely to drive
initialsales.
Diamonds account for 15% of the total Indian jewelry market. Nowadays, consumers
prefer lowpriced diamond jewelry that is cheaper than puregold jewelry and is also
availablewithguaranteedbuybackschemesandcertification.Thegrossmarginearned
on diamond jewelry is around 40%45% as compared to 8%10% ingold jewelry. Thus,
theproductmixplaysanimportantrolefordeterminingtheprofitabilityofthejeweler.
Organizedretailersareadoptingvariousmarketingstrategiestoachieveahighershare
ofdiamondjewelryintheirsalestoearnhighergrossmargins.
9of28
Titansincreaseofstuddedshareoverperiodoftime
40%
35%
30%
25%
20%
15%
10%
5%
10of28
Y1
4
Q3
F
Y1
4
Q2
F
Y1
4
Q1
F
Y1
3
Q4
F
Y1
3
Q3
F
Y1
3
Q2
F
Y1
3
Q1
F
Y1
2
Q4
F
Y1
2
Q3
F
Y1
2
Q2
F
Q1
F
Y1
2
0%
RestoringgoldonLease
RBI discontinued goldonlease from June 2013 consequently Titan has had to carry
inventoryonitsbooksagainstupfrontpayment,turningitsoncenegativeworkingcapital
businessintoapositiveone.Theresulthasbeenanetdebtbalancesheet,andprofits
havebeenimpactedduetointerestcosts.Incasegoldonleaseisallowedagain,there
willbeapositiveimpactonearningsasinterestcostsareeliminatedandotherincome
increasesweestimatethatifRBIreversesitsdecision,earningimpactcouldbe15%in
FY15and30%inFY16.
Howgoldonleaseworks
Gold on lease brings in working capital efficiencies and reduces inventory risk. The
company used to procure most of its gold requirements under the goldlease scheme,
whichgaveitthefollowingbenefits:
Thecontractswereusuallyforsixmonths,whereinthecompanypaidforgoldatthe
endofsixmonths.Thus,itfreedupworkingcapitalevenonprocurementofahigh
valueproductsuchasgold.
The cost of funding, i.e., gold lease is lower than the conventional working capital
loans.
Gold was just a passthrough in its books as it booked the gold cost only after
bookingsales.Therefore,itsexposuretoinventoryrisksemanatingfromchangesin
gold prices was very limited only to the extent of the physical inventory it held,
whichusedtobearound15%oftotalinventory.
Workingofgoldonleasescheme
Gold price $1000
100kg (6mths)
1 Jan 2013
Bank
Gold price $1100

10kg
31 Mar 2013
Jewellers
Price fixed for 10kg @1100

but paid on 30 Jun 2013
Consumer
11of28
Brandequityandreach
Titan is the market leader in the watches and organized jewelry retailing business and
hasanedgeoveritscompetitorsbecauseofthefollowingstrengths:
Demographicshift will increase market share: We estimate that Titanhas around

5%marketshareoftheIndianjewelrymarket(where78%ofthemarketconstitutes
unorganizedplayers).Asthecustomerprofileshiftstowardstheyoungerpopulation
and mobility increases, consumers will gradually break the bonds with the
traditionalfamilyjeweler,resultinginashifttowardsbrandedjewelry.
Purity and caratage: Jewelry in India has been plagued with issues of trust with
respecttoweightsandpurity.Tanishqisoneofthefewjewelrybrandsthatenjoys
thetrustofitsconsumersandwasoneofthefirstjewelerstoprovidecertification
forthepurityofgoldusedinitsproducts.Thetrusthasbeenbuiltovertheyearsby
positioningitselfasaretailerwithastrongemphasisonpropercartageandcharging
netweightofgoldusedintheproduct(thepriceofstonesisaddedseparately).
Distributionreach:Favorableforchangingproductmix
o Watches: Titan enjoys a very strong and deep distribution network for its
watches with over 373 exclusive World of Titan stores and presence in over
11,000dealersin2,500towns.Itsdistributionnetwork,coupledwithover750
servicecentersforitswatches,givesitastrongplatformtopushandpromote
newerhighvalueproductsascustomersuptrade.
Watchdistributionnetwork
11,000 dealers
2500 towns
Retail All India
373 showrooms (9 added in 2013-14)
144towns 384k Sft
World of Titan
151 stores / kiosks (11 added in 2013-14)
74 towns 86k Sft
Fastrack
50 stores (4 added in 2013-14)
22 towns 68k Sft
Helios
751 outlets
268 towns
Service Centres
International
2164 outlets
31 countries
Jewelry:TitanisbyfarthelargestjewelryretailerinIndiawithover162Tanishq
(includingtwoZoya)outletsand33GoldPlusstores.Tanishq,itsdrivingformat,
is present across the country. Titan has a strong presence in the north (49
stores),whichistraditionallyastrongmarketfordiamondjewelry.Mostofits
33 GoldPlus stores are located in the South, where there is a preference for
puregoldjewelry.Itsdispersionofstoresandchoiceofformats,inourview,are
tunedtotheregionaltastesandpreferences.
12of28
Titansgeographicconcentration
East, 13%
South, 26%
West, 26%
North, 36%
Titansdivisionwiserevenueandoperatingprofitmix
RevenueMix(9MFY14)
EBITMix(9MFY14)
Others
4.5%
Others
0.1%
Watches
15.8%
Watches
17.9%
Jewellery
82.0%
Jewellery
79.7%
13of28
Valuation
We expectthe company to operate at EBITDA margins of 9.7% and 10.3% in FY15 and
FY16,respectively,aidedbyoperatingleveragefromnewstoreadditions,afterfactoring
forincreasedcustomeracquisitioncostsinaslowingeconomyandimprovementinthe
shareofstuddedjewelry.
Webelievethatitsearningsgrowthwillbe25%inFY16andthatthedownsidetoRoEsis
limited given that regulatory restrictions with respect to goldonlease are already in
force. We believe that Titans supply chain strength is already helping it to cope with
theserestrictionsbetterthanmostotherplayers.
Titan,withalarge22%marketshareoftheorganizedjewelryretailspaceandanetwork
of over 162 stores (FY14) present in over 90 towns offers an immense longterm
opportunity as consumers migrate towards branded jewelry. It is also a leader in its
watches segment Titan has over 11,000 dealers in 2,500 towns, in addition to its
presence through exclusive World of Titan Stores (373), and over 751 service outlets
covering268towns.
Thestockhashistoricallytradedatanaverage26xoneyearforwardPEratio.Weexpect
earnings growth of 25% over FY16 and given its strong brand franchise and proven
managementcapability,weassignatargetmultipleof25xtoourFY16earnings,arriving
atourtargetpriceofRs301.
We reiterate that the risks to RoE are limited to the income statement (due to more
promotions/discounts to acquire consumers) as there is clarity on the companys
leverage status after regulatory restrictions. Relaxation in regulatory restrictions is an
added upside to our estimates. In any case, backed by its robust and dynamic supply
chain,itcanadaptquicklytoanymarketenvironment.
WeinitiatecoverageonTitanwithaBUYratingandtargetpriceofRs301.
P/EBandChart
600
Rs
500
40x
400
30x
300
20x
200
10x
100
0
Apr05 Apr06 Apr07 Apr08 Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
14of28
Keyrisks
Correctioningoldprices(withoutasimilarincreaseinvolumes)Athreattomargins
As the company is hedged on gold (through MCX and now international markets), the
sourceofitsprofitsismakingcharges,whichisafunctionofthegoldprice.Afallingold
pricewouldnaturallyresultinlowermakingcharges.Thiscouldbeoffsetbyhighersales
volume (lower gold prices may lead to more consumption). However, if there is no
changeinvolumes,forevery5%correctioningoldprices,earningswoulddecrease4%.
NewCompaniesActcouldaffectitsGoldenHarvestSchemeimpactingworkingcapital
andotherincome
TitansGoldenHarvestisaschemewhereaconsumerpaysinequalinstallmentsfor11
monthsafterwhichTanishqwillpay(notionally)the12thInstallmentattheendofthe
term. While it effectively offers an 8.13% discount (customer acquisition cost), the
marginforegoneisoffsetbyinterestearnedontheadvancesreceived(reflectedinother
income)anduptrading(50%)bycustomersoncompletion.
The draft Companies Act guidelines prescribe that public companies cannot accept
depositsfromthepublicthatarerepayableaftersixmonthsormore.Iftheactcomes
into force, it could potentially impact cash collection from this scheme and thereby
impacttheotherincome.
Risingcompetitioninwatchesandjewelry
Watches: Competition is likely to increase with new players and lifestyle retailers
extending their brands in the segment. Citizens Q&Q brand is likely to be a major
competitorinsmallercitiesandcompeteagainstentrylevelTitanbrands.Rapidrollout
ofstoresandawidedistributionnetworkbycompetitorscanerodeTitansmarketshare,
especiallywithmultiplewatchownership.
Jewelry:Regionaljewelersenjoyloyaltyfromcustomersastheyofferdesignsthatcater
tothecustomersregionaltastesandpreferences.Expansionbysomeoftheseregional
players (such as Malabar Gold, Kalyan Jewellers) will increase competition for Tanishq
andGoldPlusandcouldaffectTitansgrowthrate.
Customerpancarddetails/taxcollectedatsource
The Government of India has levied a 1% Tax Collected at Source on jewelry
transactionsofRs500,000andabove,whenpaymentismadeincash.Inadditiontothis,
the jeweler is also required to take down the PANcarddetails of the consumer. If the
minimumtransactionlevelfordisclosingPANisloweredfurther,itcouldimpactjewelry
salesascustomerswouldbereluctanttosharethedetails.
Rupeedollarvolatilityimpactsprofitabilityofthewatchdivision
The watch division imports components for manufacturing of watches and changes in
the selling price come through with a lag. Also, price hikes in certain categories could
meetwithconsumerresistance.
15of28
Aboutthecompany
TitansdiversificationakintothatofBvlgari
Titan has extended its business beyond watches and jewelry to accessories, eyewear,
and perfumes, among other luxury goods. While this extension may be seen as taking
away from core business, we disagree. A good case in point is Bvlgari, which made a
nameforitselfwithjewelryandistodayawelldiversifiedluxurybrandthatsellsseveral
productlinesincludingwatches,fragrances,andaccessories.InIndia,Titanspotentialto
leverageonitsbrandandbrandextensions(inamarketthatisstilllargelyunorganized)
istremendous.
Titanhasbeenengagedinthemanufactureandmarketingofquartzwatchessince1987
and is Indias leading watch manufacturer. Its divisions include watches, jewelry,
prescription eyewear, precision engineering, accessories and licensed products, and
internationalmarketingoperations.
Organizationalchart
T i ta n C o m p a n y L i m i te d
W a tc h e s
J e w e lr y
A c c e s s o r ie s
P r e s c r ip tio n
E ye w e a r
P r e c is io n
E n g in e e r in g
K e y B ra n d s
K e y B ra n d s
K e y B ra n d s
K e y B ra n d s
B u s in e s s U n its
T a n is h q (1 6 0 )
G o ld p lu s (3 3 )
Z o y a (2 )
F a s tra c k (1 5 1 )
T ita n
T ita n E y e P lu s (2 7 0 )
P re c i s io n E n g in e e rin g
C o m p o n e n ts & S u b -A s s e m b li es
(P E C S A )
M a c h i n e B u i ld in g & A u to m a tio n
S o l u tio n s
T o o lin g S o lu tio n s
E l e c tro n ic s u b -a s s e m b lies
T ita n ,
S o n a ta
F a s tra c k
T ita n Z o o p
X y lu s
L ic e n s e B ra n d s
T o m m y H ilf ig e r
H u g o B oss
F re n c h C o n n e c ti o n
R e ta i l N e tw o rk
W o rld o f T ita n (3 7 3 )
F a s tra c k & K io s k s
(1 5 1 )
H e lio s (5 0 )
T ita n O n e (8 3 )
T ita n w a tc h c a re
c e n tre (7 5 1 )
In te rn a tio n a l (2 ,1 6 4
o u tle ts a c ro s s
3 1 c o u n trie s )
Watches
The company is the largest watchmaker in the country and the worlds fifthlargest. It
has manufacturing facilities at Hosur and Goa, and assembly plants at Roorkie,
PantanagarandDehradun.Itcommandsover65%marketshareintheorganisedwatch
market.Thewatchbusinesscontributed16%toTitansrevenuesand18%toitsoverall
EBITin9MFY14.
Brands(ownedandlicensed)
Owned:Titan,Sonata,Fastrack,Nebula,Xylus
Licensed:ThreeinternationalbrandsTommyHilfiger,Timberlandandfcuk
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Distributionnetwork
Thecompanysellsitswatchesthroughamultitiereddistributionstructurethatincludes
World of Titan showrooms (exclusive Titan outlets), Helios, redistribution stockists (a
channeltopenetratesmallerdealersinsmalltowns),traditionaloutlets,nontraditional
outletsandinstitutions.
Titan Company Limited
Institutions
World of Titan
Re Distribution
Stockist
Direct Dealers
Institutions
Customers
Indirect Dealers
CUSTOMERS
Watches:RevenueandEBITDA
Watches
18,000
EBITMargins(RHS)
16.0%
16,000
15.0%
14,000
12,000
14.0%
10,000
13.0%
8,000
6,000
12.0%
4,000
11.0%
2,000
0
10.0%
FY07
FY08
FY09
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FY10
FY11
FY12
FY13
9MFY14
Watches:Returnoncapitalemployed
CapitalEmployed
EBIT
ROCE(rhs)
8,000
80%
7,000
70%
6,000
60%
5,000
50%
4,000
40%
3,000
30%
2,000
20%
1,000
10%
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
9MFY14
Jewelry
Titan has established Indias largest branded jewelry manufacturing facilities at Hosur
andDehradunwithanareaof135,000sq.ft.andhasthefirstmoveradvantageasitis
theonlyjewelerwithanationalpresenceinthehighlyfragmentedjewellerymarketin
India.
Keyformatsanddistributionnetwork
The company has stuck to its overall strategy of offering various products for specific
price points and target audiences. As a part of its longterm strategy, the company
operatesthroughthreemajorbrandsinthisdivision,namely:
Tanishq: Tanishq has 22% market share in the branded jewelry market. Over the
years,thecompanyhasenhanceditsbrandimagebyfollowingethicalpracticeslike
certificationofpurityofmaterial,resellingpoliciesandcontinuedexpansion.Ithas
builtastrongdistributionnetworkwithover160storesacross90cities.
GoldPlus:GoldPluswaslaunchedin2005tocatertotheopportunityavailableinthe
semiurban and rural markets. This brand is still in the pilot stage with a current
presence in 33 towns spread across 6 states 35% of Indias jewellery demand
comesfromthesouthernregionandGoldPlusisthelargestjewelleryretailchainin
TamilNadu.
Zoya: The company launched Zoya in 2009, intended to be a chain of luxury
boutiques.Atpresent,thecompanyhastwostoreslocatedatMumbaiandDelhi.
Thejewellerybusinesscontributed~80%toTitansrevenuesand82%toitsoverallEBIT
in9MFY14.Thecompanysinitiativesofcorelatingmakingchargeswiththegoldprices
has resulted in improving the operating margins (EBIT) from 5.3% in FY08 to 10.1% in
FY13.
18of28
Jewellery:RevenueandEBITDA
Revenue
EBITMargins(RHS)
90,000
12%
80,000
10%
70,000
60,000
8%
50,000
6%
40,000
30,000
4%
20,000
2%
10,000
0
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
9MFY14
Jewellery:Returnoncapitalemployed
CapitalEmployed
EBIT
ROCE(rhs)
14,000
120%
12,000
100%
10,000
80%
8,000
60%
6,000
40%
4,000
20%
2,000
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
9MFY14
EyewearBusiness
StarteditsprescriptioneyewearbusinessinMarch2007bylaunchingachainofopticals
stores under the brand name Titan Eye+. As on 9MFY14 there are 270 Titan Eye+
outletsacross98towns.
EyewearBiz:SalesgrowthandLTLgrowth
100%
SalesGrowth
LTLGrowth
80%
60%
40%
20%
0%
20%
40%
Q1FY12
Q2FY12
Q3FY12
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Q4FY12
Q1FY13
Q2FY13
Q3FY13
Precisionengineeringbusiness
Titaninitiateditsprecisionengineeringbusinessin2002,withaviewtocapturethelarge
andgrowingmarket(Rs1,350bn:Source:Company)forprecisioncomponentsandsub
assemblies. Its clients include both domestic and international clients like Eaton (US),
Hamilton Sundstrand (US),Microtechnica(Italy), Pratt & Witney (US), Ford (UK), Bosch
(India),Timken(India).
Market Size
Rs 1,350bn
Market Size
Rs 5,750bn
Automotive
Precision
components
Dash board
instruments
Aerospace
Automation
Solutions
Sub systems
Domestic &
International
Market
Medical
Domestic
Market Only
TSMG
Study
20of28
IndustryDynamics
Indianjewelrymarket
ThedomesticjewelrymarketinIndiaiscurrentlyestimatedat~US$40bn.Thereisalsoa
largenonjewelrydomesticmarketprimarilygoldbarsandcoinswhichisestimated
tobe~US$17bn.(SourceA.T.Kearney,IndiaJewelleryReview2013).Accordingtothe
report,thedomesticjewelrymarketislikelytodoubleinthenextfiveyears.
India is the largest consumer of gold worldwide and within components of jewelry
making (including gold, diamond and precious stones), gold forms 80%. The domestic
jewelry market is largely fragmented and dominated by the unorganized players
however,thecontributionoforganizedretailhasincreasedfrombelow5%to18%over
thelastdecade(Source:ICRA).
Organizedretailerspreferredoverunorganized
Increasing significance of Hallmark and Certification: Earlier, the purchase of
jewelry in India was largely based on trust with family jewelers catering to
consumers.But,overaperiod,withtheincreaseincustomerawareness,organized
retailersaregainingpreferencebyprovidingcertificatesfortheassuranceofquality
andauthenticityofthejewelrypurchased.
Consumer preference towards more branded jewelry: In India, gold jewelry is
always regarded as an investment, but lately there is change in the mindset of
buyers and now the focus is more on trendy, affordable and lightweight jewelry.
Theshareofbrandedjewelryisstill57%inthetotalmarket,butwiththeincrease
inurbanizationitisexpectedtogrowrobustly.
Aggressivemarketingefforts:Organizedretailersareundertakingvariousmarketing
initiativestowardsbuildingtheirproductsbrandstrength,leadingtohighergrowth.
For instance, Tanishq had initiated an annual marketing promotion leading to a
growthintherangeof3040%initsdiamondbusiness.
Valuepropositionforcustomersamongdifferentplayers
ValueProposition
Trust
Range
PriceCompetitiveness
Design
Quality
BrandImage
Location
Services
Designer
jeweler
High
Low
Low
Highest
High
Highest
Low
High
Topend
Family
Jeweler
High
High
Neutral
Highest
High
Highest
High
Highest
Leading
Family
Jeweler
High
Highest
High
Low
Neutral
Neutral
Low
Highest
International
Brands
Highest
Neutral
Low
Highest
High
Highest
Low
Low
Source:ATKearnyIndiaJewelleryReview2013,PhillipCapitalIndia
21of28
Regional
Jeweler
High
High
High
High
Neutral
Highest
Neutral
High
National
Chain
Highest
Neutral
Neutral
High
High
Highest
Neutral
High
Localand
independentstore
designer
Neutral
Highest
Highest
Low
Low
Neutral
High
Highest
Diamond
brands
High
Neutral
Low
High
High
Highest
High
Low
Marketshare
Geographicalpercentage
Regional
chains,17%
North,20%
South,35%
National
chains,5%
East,15%
Localand
independent
stores,78%
West,30%
Source:ATKearnyIndiaJewelleryReview2013,PhillipCapitalIndiaResearch
DemanddriversforthejewelrymarketinIndia
Weddingsandfestiveoccasions:AccordingtoCare,asubstantialproportion(70%)
of the demand for gold and diamond jewelry in India comes from occasions like
weddings(estimated10mnmarriagesayear),forfestivals,andasgifts.
Demographicadvantageandhighdisposableincome:Indiaisoneoftheyoungest
countries in the world with an average age of around25years. An increase in the
younger population, increased urbanization (composition of urban population is
expectedtoincreaseto40%by2020,currentlyat29%)andthehigherpercentageof
working women will give rise to an increase in overall discretionary spend. This
drivesthedemandforgoldanddiamondjewelry.
Highpenetrationoftheorganizedretailers:Theorganizedplayersareresortingto
aggressive store expansions, enhancing customer access and expanding
geographical reach. This is also likely to trigger the demand for jewelry in near
future.
Increasingwomenworkforce:Withtheincreaseinworkingwomenpopulationand
resultinghigherearningcapacity,thedemandforjewelrywillalsoescalate.
Indiajewelrydemand(tonnes)andgoldprice(US$/oz.)
Tonnes(LHS)
US$/oz(RHS)
700
1,800
600
1,600
1,400
500
1,200
400
1,000
300
800
600
200
400
100
200
Dec13
Dec12
Dec11
Dec10
Dec09
Dec08
Dec07
Dec06
Dec05
Dec04
Dec03
Dec02
Dec01
Dec00
Dec99
Dec98
Dec97
Dec96
Dec95
Dec94
Dec93
Dec92
Source:WorldGoldCouncil,PhillipCapitalIndiaResearch
In 2010, demand for gold jewelry was at its historic peak (since 1992) as Indian
consumers expected that the gold price was likely to continue to rise this led to an
22of28
increaseindemand.Indianjewelrydemandalmostdoubledin2010witha69%risein
volumesandmorethan20%riseinthe(US$/oz.)price.
Surgingdemandfordiamondstuddedjewelry
Diamonds account for 15% of the total Indian jewelry market. Nowadays, consumers
prefer lowpriced diamond jewelry that is cheaper than pure gold jewelry and is also
availablewithguaranteedbuybackschemesandcertification.Thegrossmarginearned
on diamond jewelry is around 40%45% as compared to 8%10% ingold jewelry. Thus,
theproductmixplaysanimportantrolefordeterminingtheprofitabilityofthejeweler.
Organizedretailersareadoptingvariousmarketingstrategiestoachieveahighershare
ofdiamondjewelryintheirsalestoearnhighergrossmargins.
Keyregulationsacrossjewelryvaluechain
Sourcingandtrading
Currentregulations
ImportDuty
RBI Directive:2080 rule of

exportimportofgold
RBI directive: Gold deposit
scheme
SourcinggoldforETF
Design
Designregistrationrule
Manufacturing
SEZorEOUrules
RBI directive: Gold (metal)

loan
KYC norm (under Anti
moneyLaunderingAct)
Retailing
Consumer
Hallmarking
Conflictfreediamonds
Details
Comments
Customs duty of 10% for gold in August 2013 High import duty aimed to reduce gold importsMay
ascomparedto2%inJanuary2012
provide incentive to unofficial channels with 510%
differenceingoldprice;unofficialimportsofaround100
tonsin2012
Import agencies to ensure minimum onefifth Requirement for 20% export will constrain the gold
ofeachlotofgoldimportismadeavailablefor importsthroughofficialchannels
export(nonSEZsorEOUs,andsoon)
Gold deposit scheme: Banks can provide gold Change of minimum maturity period for gold deposit
deposit schemes of maturity between 6 schemefrom 3yearsto6monthshasmadethescheme
monthsand7years
moreattractive
Gold ETFs: Can source gold only from RBI SourcingofgoldfromLBMAaddstotheimportburdenof
refinery or London Bullion Metals Association the country since banks cannot buy domestic recycled
(LBMA)certifiedrefiners
gold
Jewelrydesignscanberegisteredtogiveowner Policy framework exists; need wider acceptance; Issues:
protectionagainstpiracy
enforcementdifficulties,lowawareness
SEZs and EOUs to promote exportsDutyfree FormationofSEZsandEOUsandminimumvalueaddition
inputs for manufacturingMinimum 3% value normhaspromotedjewelryexports;Highercustomsduty
addition requirement for units in SEZs; 15% onjewelryimportprotectsdomesticmanufacturersfrom
import duty on jewelry compared to 10% on imports
rawgold
Gold (metal) loans currently unavailable to Limitsfinancingoptionsforjewelrymanufacturers;Higher
domesticmanufacturers
workingcapitalrequirementsandgoldpricerisk
Gold and precious stone purchases over INR Significant gold transactions done in cash and hence
50,000 proposed to come under knowyour provide easy source of hoarding; the new regulation
customernorm(asagainstINR0.5mndoneon would make this difficult; Implementation may only be
TDSpurpose)
feasibleinlongterm,givencurrentinfrastructure
Gold hallmarking (BIS) recently made Limited implementation, particularly in the unorganized
mandatorybutlimitedimplementationsofar sector, exposes customers to risks related to quality or
undercaratage
No import or export of rough diamonds is Protects customers and ensures use of conflictfree
permitted unless accompanied by Kimberley diamonds
ProcessCertificate
Source:ATKearnyIndiaJewelleryReview2013,PhillipCapitalIndiaResearch
23of28
Indianwatchmarket
The Indian watch industry is estimated atRs 47bn witha volume of 55mn units and is
expectedtogrowannuallyat1015%.ThewatchindustryinIndiaisunderpenetrated
27%, lowest in the world and only 3.5% of the population owns multiple watches. The
sale of watches per 1,000 individuals in India is 40 as compared to 120 globally. This
untapped industry offers huge potential for the growth of organized players as the
marketislargelydominatedbyunorganizedplayers(60%intermsofvolumeand40%in
terms of value). The Indian market is pricesensitive and price forms the basis of
purchasedecisions.Theindustryissplitintothreecategories:
Mass:ComprisesofwatchesbelowRs1,00065%oftotalmarketvolumeand24%
invalue.Thesecustomersarehighlypricesensitiveandchangewatchesfrequently.
MidPremium:BetweenRs1,0005,000.Preferalloccasionwatches,pricesensitive.
Premium:AboveRs5,000.Around77%watchesfromimportedbrandsand23%are
local.Targetcustomersaremarketsavvyandpreferbrandedanddesignerwatches.
With the entry of Swiss watch brands, the demand for premium and luxury
categorieshasbeenrobust.
Titanpositionedbrandsatdifferentpricepoints
Formal / Classic
Raymond Weil
Omega, Rado,
Longines
Tissot
Sonata
HMT
Maxima
Nebula
Titan
XYLYS
Citizen
Price
Rs 250
1000
2000
4000
5000
10000
30000+
Timex
Zoop
Espirit, Swatch, Fossil,

iordano, DKNY, Carrera,
FCUK, Tommy Hilfiger
Fastrack
Fashion/Sporty
Source:Company
24of28
Tag Heuer
Hugo Boss
C Dior
Factorsdrivingthegrowthoftheindustry
Demand for multipleownership watches: In India, people owned one or two
watches, whereas in US and Europe, individuals possess around 67 watches. This
conceptofowningmultiplewatchesisfastcatchingupinIndiaaswatchesarenow
consideredalifestyleaccessoryratherthanatimekeepingdevice.
Accelerated growth from the luxury segment: The segment is seeing strong
demand,ledbyhighergrowthinHNIpopulation,morebrandconsciousconsumers
andanincreaseinluxuryretail.
Upgrading from the mass segment to midpremium segment: The mass segment
provideshugescopefortheseconsumerstoupgradetothemidpremiumsegment.
The rise in disposable income and consumer preference for quality and style will
leadtoconsumersupgrading.
Multichannelretailing:Theindustryiswitnessingtheconceptofspecialtyretailing
to reach out to the target customers through multiple retail channels like own
stores, multibranded outlets and national chain stores. This allows organized
players to focus on each segment of customers and their diversifying product
offerings.
Eyewearmarket
The Indian prescription eyewear market is estimated at around Rs 21bn. The eyewear
market is highly fragmented with organized retail commanding less than 5%. The
industryisexpectedtogrowatasustainable1520%,mainlydrivenbypooreyehealth,
low penetration of contact lens, rise in organized retail and increased consumer
awareness.
Productcategory
Spectacles
Sunglasses
Contactlenses
80%
18%
2%
AccordingtoTitan,30%oftheIndianpopulationneedsvisioncorrection,whichmaybe
corrected by surgery, laser therapy, spectacles or contact lenses. However, only 25%
have their vision corrected, of which 94% wear spectacles and on an average change
theirglasses/framesoncein3to4years,6%wearcontactlensesand2.5%wearboth.
Therefore,theindustryoffershugepotentialfororganizedretailerstomaketheirmark.
Totapthisopportunityorganizedplayersaretakingonvariousinitiativesthatwillleadto
highersalesgrowth.
Addon services: Organized players are providing eye testing facilities from trained
optometrists and lens consultants to attract customers. Other key differentiators are
styleconsultants,zeroerrorprescription,freeeyetesting,scratchresistantlenses,and
lensaccuracycertificates.
Diversifying product portfolio: Players in the market are offering diversified products
likeframes,sunglasses,contactlenses,lenscleaningsolutionsandotheraccessoriesto
attractdifferentconsumersegments.
Entryofluxuryeyewearportfolio:Withtheentryofinternationalbrands,thereisashift
in consumer preference from formandfunction to formandfashion. For instance,
sunglassesarenowusedmoreasafashionaccessoryratherthanaprotectivedevice.
25of28
Financials
CashFlow
IncomeStatement
Y/EMar,Rsmn
Netsales
Growth,%
Totalincome
Rawmaterialexpenses
Employeeexpenses
OtherOperatingexpenses
EBITDA(Core)
Growth,%
Margin,%
Depreciation
EBIT
Growth,%
Margin,%
Interestpaid
OtherNonOperatingIncome
Pretaxprofit
Taxprovided
Profitaftertax
Others(Minorities,Associates)
NetProfit
Growth,%
NetProfit(adjusted)
Unadj.shares(m)
Wtdavgshares(m)
FY13
FY14E
FY15E
FY16E
101,233 111,593 124,509 146,522
14
10
12
18
101,233 111,593 124,509 146,522
75,134 82,579 92,137 108,133
4,898
5,580
6,225
7,180
11,076 12,833 14,070 16,117
10,125 10,601 12,077 15,092
21.2
4.7
13.9
25.0
10.0
9.5
9.7
10.3
562
580
636
692
9,563 10,021 11,441 14,399
21.1
4.8
14.2
25.9
9.4
9.0
9.2
9.8
506
941
1,146
1,206
1,009
1,282
1,573
1,660
10,060 10,362 11,868 14,853
2,816
2,901
3,323
4,159
7,245
7,461
8,545 10,694
0
0
0
0
7,245
7,461
8,545 10,694
20.5
3.0
14.5
25.2
7,245
7,461
8,545 10,694
888
888
888
888
888
888
888
888
BalanceSheet
Y/EMar,Rsmn
Cash&bank
Debtors
Inventory
Loans&advances
Totalcurrentassets
Investments
Grossfixedassets
Less:Depreciation
Add:CapitalWIP
Netfixedassets
Totalassets
Currentliabilities
Totalcurrentliabilities
Noncurrentliabilities
Totalliabilities
Paidupcapital
Reserves&surplus
Shareholdersequity
Totalequity&liabilities
FY13
11,390
1,658
36,803
3,817
53,669
29
9,363
4,724
418
5,057
58,833
39,073
39,073
61
39,134
888
18,811
19,699
58,833
FY14E
22,489
1,834
36,199
3,571
64,093
29
10,363
5,305
418
5,476
69,677
33,203
33,203
11,061
44,263
888
24,526
25,413
69,677
Source:Company,PhillipCapitalIndiaResearchEstimates
FY15E
14,464
2,047
40,389
3,735
60,635
29
11,363
5,941
418
5,840
66,582
FY16E
16,957
2,409
47,401
4,396
71,162
29
12,363
6,634
418
6,148
77,417
21,562
21,562
13,061
34,623
888
31,071
31,959
66,582
25,206
25,206
12,061
37,267
888
39,263
40,151
77,417
Y/EMar,Rsmn
Pretaxprofit
Depreciation
Chginworkingcapital
Totaltaxpaid
Cashflowfromoperatingactivities
Capitalexpenditure
Chgininvestments
Cashflowfrominvestingactivities
Freecashflow
Debtraised/(repaid)
Dividend(incl.tax)
Cashflowfromfinancingactivities
Netchgincash
FY13
10,060
562
2,301
2,859
5,463
1,514
5
1,523
3,939
52
2,181
2,233
1,706
FY14E
FY15E
10,362 11,868
580
636
5,197 16,207
2,901 3,323
2,845 7,026
1,000 1,000
0
0
1,000 1,000
1,845 8,026
11,000
2,000
1,746 2,000
9,254
0
11,099 8,025
FY16E
14,853
692
4,391
4,159
6,996
1,000
0
1,000
5,996
1,000
2,503
3,503
2,494
FY14E
FY15E
FY16E
8.4
3.0
28.6
8.4
9.1
1.8
1.7
9.6
14.5
36.0
9.6
10.3
(9.7)
1.9
12.0
25.2
45.2
12.0
12.8
6.0
2.4
13.1
33.1
29.9
14.2
29.8
23.8
16.5
29.7
24.5
10.1
1.7
21.2
0.1
6.0
27.5
5.6
1.8
22.0
0.2
6.0
72.1
4.5
2.0
24.4
0.2
6.0
72.2
1.9
0.8
10.7
5.0
43.5
(45.0)
2.8
0.9
10.0
5.0
40.9
(4.4)
2.8
0.9
11.9
5.0
30.0
(12.2)
27.7
9.3
8.1
0.7
1.8
18.4
19.5
24.2
1.7
6.5
0.8
1.7
17.0
18.0
19.3
0.8
5.2
1.0
1.4
13.4
14.0
ValuationRatios&PerShareData
PerSharedata
EPS(INR)
Growth,%
BookNAV/share(INR)
FDEPS(INR)
CEPS(INR)
CFPS(INR)
DPS(INR)
Returnratios
Returnonassets(%)
Returnonequity(%)
Returnoncapitalemployed(%)
Turnoverratios
Assetturnover(x)
Sales/Totalassets(x)
Sales/NetFA(x)
Workingcapital/Sales(x)
Receivabledays
Workingcapitaldays
Liquidityratios
Currentratio(x)
Quickratio(x)
Interestcover(x)
Dividendcover(x)
Totaldebt/Equity(%)
Netdebt/Equity(%)
Valuation
PER(x)
PEG(x)yoygrowth
Price/Book(x)
Yield(%)
EV/Netsales(x)
EV/EBITDA(x)
EV/EBIT(x)
26of28
FY13
8.2
20.5
22.2
8.2
8.8
5.0
2.1
14.6
42.2
44.9
15.3
1.9
22.1
0.0
6.0
11.6
1.4
0.4
18.9
3.9
0.3
(57.5)
28.6
1.4
10.5
0.9
1.9
19.3
20.4
Management
VineetBhatnagar(ManagingDirector)
JigneshShah(HeadEquityDerivatives)
(9122)23002999
(9122)66679735
Research
Automobiles
DeepakJain
PriyaRanjan
Banking,NBFCs
ManishAgarwalla
SachitMotwani,CFA,FRM
Consumer,Media,Telecom
NaveenKulkarni,CFA,FRM
VivekanandSubbaraman
ManishPushkar
(9122)66679758
(9122)66679965
Engineering,CapitalGoods
AnkurSharma
AdityaBahety
(9122)66679962
(9122)66679953
Infrastructure&ITServices
VibhorSinghal
VarunVijayan
(9122)66679947
(9122)66679766
(9122)66679764
Cement
VaibhavAgarwal
(9122)66679967
Economics
AnjaliVerma
(9122)66679969
Metals
DhawalDoshi
DharmeshShah
(9122)66679759
(9122)66679986
(9122)66679949
(9122)66679992
(9122)66679769
(9122)66679974
Oil&Gas,AgriInputs
GauriAnand
DeepakPareek
(9122)66679943
(9122)66679950
SalesTrader
DileshDoshi
SuniilPandit
(9122)66679747
(9122)66679745
Pharma
SuryaPatra
(9122)66679768
Retail,RealEstate
AbhishekRanganathan,CFA
NehaGarg
(9122)66679952
(9122)66679996
Technicals
SubodhGupta
(9122)66679762
DatabaseManager
VishalRandive
(9122)66679944
Sr.ManagerEquitiesSupport
RosieFerns
(9122)66679971
Sales&Distribution
KinshukTiwari
AshvinPatil
ShubhangiAgrawal
KishorBinwal
SidharthAgrawal
DipeshSohani
(9122)66679946
(9122)66679991
(9122)66679964
(9122)66679989
(9122)66679934
(9122)66679756
Execution
MayurShah
(9122)66679945
SINGAPORE
PhillipSecuritiesPteLtd
250NorthBridgeRoad,#0600RafflesCityTower,
Singapore179101
Tel:(65)65336001Fax:(65)65353834
www.phillip.com.sg
ContactInformation(RegionalMemberCompanies)
MALAYSIA
PhillipCapitalManagementSdnBhd
B36BlockBLevel3,MeganAvenueII,
No.12,JalanYapKwanSeng,50450KualaLumpur
Tel(60)321628841Fax(60)321665099
www.poems.com.my
HONGKONG
PhillipSecurities(HK)Ltd
11/FUnitedCentre95QueenswayHongKong
Tel(852)22776600Fax:(852)28685307
www.phillip.com.hk
JAPAN
PhillipSecuritiesJapan,Ltd
42NihonbashiKabutocho,Chuoku
Tokyo1030026
Tel:(81)336662101Fax:(81)336640141
www.phillip.co.jp
INDONESIA
PTPhillipSecuritiesIndonesia
ANZTowerLevel23B,JlJendSudirmanKav33A,
Jakarta10220,Indonesia
Tel(62)2157900800Fax:(62)2157900809
www.phillip.co.id
CHINA
PhillipFinancialAdvisory(Shanghai)Co.Ltd.
No550YanAnEastRoad,OceanTowerUnit2318
Shanghai200001
Tel(86)2151699200Fax:(86)2163512940
www.phillip.com.cn
THAILAND
PhillipSecurities(Thailand)PublicCo.Ltd.
15thFloor,VorawatBuilding,849SilomRoad,
Silom,Bangrak,Bangkok10500Thailand
Tel(66)222680999Fax:(66)222680921
www.phillip.co.th
FRANCE
King&ShaxsonCapitalLtd.
3rdFloor,35RuedelaBienfaisance
75008ParisFrance
Tel(33)145633100Fax:(33)145636017
www.kingandshaxson.com
UNITEDKINGDOM
King&ShaxsonLtd.
6thFloor,CandlewickHouse,120CannonStreet
London,EC4N6AS
Tel(44)2079295300Fax:(44)2072836835
www.kingandshaxson.com
UNITEDSTATES
PhillipFuturesInc.
141WJacksonBlvdSte3050
TheChicagoBoardofTradeBuilding
Chicago,IL60604USA
Tel(1)3123569000Fax:(1)3123569005
AUSTRALIA
PhillipCapitalAustralia
Level37,530CollinsStreet
Melbourne,Victoria3000,Australia
Tel:(61)396298380Fax:(61)396148309
www.phillipcapital.com.au
SRILANKA
AshaPhillipSecuritiesLimited
Level4,MillenniumHouse,46/58NavamMawatha,
Colombo2,SriLanka
Tel:(94)112429100Fax:(94)112429199
www.ashaphillip.net/home.htm
INDIA
PhillipCapital(India)PrivateLimited
No.1,CBlock,2ndFloor,ModernCenter,JacobCircle,K.K.Marg,MahalaxmiMumbai400011
Tel:(9122)23002999Fax:(9122)66679955www.phillipcapital.in
27of28
DisclosuresandDisclaimers
PhillipCapital(India)Pvt.Ltd.hasthreeindependentequityresearchgroups:InstitutionalEquities,InstitutionalEquityDerivativesandPrivateClientGroup.Thisreporthasbeenpreparedby
InstitutionalEquitiesGroup.Theviewsandopinionsexpressedinthisdocumentmayormaynotmatchormaybecontraryattimeswiththeviews,estimates,rating,targetpriceofthe
otherequityresearchgroupsofPhillipCapital(India)Pvt.Ltd.
ThisreportisissuedbyPhillipCapital(India)Pvt.Ltd.whichisregulatedbySEBI.PhillipCapital(India)Pvt.Ltd.isasubsidiaryofPhillip(Mauritius)Pvt.Ltd.Referencesto"PCIPL"inthisreport
shallmeanPhillipCapital(India)Pvt.Ltdunlessotherwisestated.ThisreportispreparedanddistributedbyPCIPLforinformationpurposesonlyandneithertheinformationcontainedherein
nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or
derivatives.TheinformationandopinionscontainedintheReportwereconsideredbyPCIPLtobevalidwhenpublished.ThereportalsocontainsinformationprovidedtoPCIPLbythird
parties.Thesourceofsuchinformationwillusuallybedisclosedinthereport.WhilstPCIPLhastakenallreasonablestepstoensurethatthisinformationiscorrect,PCIPLdoesnotofferany
warrantyastotheaccuracyorcompletenessofsuchinformation.AnypersonplacingrelianceonthereporttoundertaketradingdoessoentirelyathisorherownriskandPCIPLdoesnot
acceptanyliabilityasaresult.SecuritiesandDerivativesmarketsmaybesubjecttorapidandunexpectedpricemovementsandpastperformanceisnotnecessarilyanindicationtofuture
performance.
This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must
undertakeindependentanalysiswiththeirownlegal,taxandfinancialadvisorsandreachtheirownregardingtheappropriatenessofinvestinginanysecuritiesorinvestmentstrategies
discussedorrecommendedinthisreportandshouldunderstandthatstatementsregardingfutureprospectsmaynotberealized.Innocircumstancesitbeusedorconsideredasanofferto
sellorasolicitationofanyoffertobuyorselltheSecuritiesmentionedinit.Theinformationcontainedintheresearchreportsmayhavebeentakenfromtradeandstatisticalservicesand
othersources,whichwebelievearereliable.PhillipCapital(India)Pvt.Ltd.oranyofitsgroup/associate/affiliatecompaniesdonotguaranteethatsuchinformationisaccurateorcomplete
anditshouldnotberelieduponassuch.Anyopinionsexpressedreflectjudgmentsatthisdateandaresubjecttochangewithoutnotice
Important:Thesedisclosuresanddisclaimersmustbereadinconjunctionwiththeresearchreportofwhichitformspart.Receiptanduseoftheresearchreportissubjecttoallaspectsof
thesedisclosuresanddisclaimers.Additionalinformationabouttheissuersandsecuritiesdiscussedinthisresearchreportisavailableonrequest.
Certifications:Theresearchanalyst(s)whopreparedthisresearchreportherebycertifiesthattheviewsexpressedinthisresearchreportaccuratelyreflecttheresearchanalystspersonal
viewsaboutallofthesubjectissuersand/orsecurities,thattheanalysthavenoknownconflictofinterestandnopartoftheresearchanalystscompensationwas,isorwillbe,directlyor
indirectly,relatedtothespecificviewsorrecommendationscontainedinthisresearchreport.TheResearchAnalystcertifiesthathe/sheorhis/herfamilymembersdoesnotownthe
stock(s)coveredinthisresearchreport.
Independence/Conflict:PhillipCapital(India)Pvt.Ltd.hasnothadaninvestmentbankingrelationshipwith,andhasnotreceivedanycompensationforinvestmentbankingservicesfrom,the
subjectissuersinthepasttwelve(12)months,andPhillipCapital(India)Pvt.Ltddoesnotanticipatereceivingorintendtoseekcompensationforinvestmentbankingservicesfromthe
subjectissuersinthenextthree(3)months.PhillipCapital(India)Pvt.Ltdisnotamarketmakerinthesecuritiesmentionedinthisresearchreport,althoughitoritsemployees,directors,or
affiliatesmayholdeitherlongorshortpositionsinsuchsecurities.PhillipCapital(India)Pvt.Ltdmaynotholdmorethan1%ofthesharesofthecompany(ies)coveredinthisreport.
SuitabilityandRisks:Thisresearchreportisforinformationalpurposesonlyandisnottailoredtothespecificinvestmentobjectives,financialsituationorparticularrequirementsofany
individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the
appropriatenessofanysecuritiesreferredtointhisresearchreportbaseduponthelegal,taxandaccountingconsiderationsapplicabletosuchinvestoranditsowninvestmentobjectivesor
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Sources,CompletenessandAccuracy:ThematerialhereinisbaseduponinformationobtainedfromsourcesthatPCIPLandtheresearchanalystbelievetobereliable,butneitherPCIPLnor
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opinionsasofthedateappearingonthismaterialandaresubjecttochangewithoutnotice.Furthermore,PCIPLisundernoobligationtoupdateorkeeptheinformationcurrent.
Copyright:ThecopyrightinthisresearchreportbelongsexclusivelytoPCIPL.Allrightsarereserved.Anyunauthorizeduseordisclosureisprohibited.Noreprintingorreproduction,inwhole
orinpart,ispermittedwithoutthePCIPLspriorconsent,exceptthatarecipientmayreprintitforinternalcirculationonlyandonlyifitisreprintedinitsentirety.
Caution:Riskoflossintradingincanbesubstantial.Youshouldcarefullyconsiderwhethertradingisappropriateforyouinlightofyourexperience,objectives,financialresourcesandother
relevantcircumstances.
ForU.S.personsonly:ThisresearchreportisaproductofPhillipCapital(India)PvtLtd.whichistheemployeroftheresearchanalyst(s)whohaspreparedtheresearchreport.Theresearch
analyst(s)preparingtheresearchreportis/areresidentoutsidetheUnitedStates(U.S.)andarenotassociatedpersonsofanyU.S.regulatedbrokerdealerandthereforetheanalyst(s)is/are
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ThisreportisintendedfordistributionbyPhillipCapital(India)PvtLtd.onlyto"MajorInstitutionalInvestors"asdefinedbyRule15a6(b)(4)oftheU.S.SecuritiesandExchangeAct,1934(the
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asspecifiedabove,thenitshouldnotactuponthisreportandreturnthesametothesender.Further,thisreportmaynotbecopied,duplicatedand/ortransmittedonwardtoanyU.S.
person,whichisnottheMajorInstitutionalInvestor.
In reliance on the exemption from registration provided by Rule 15a6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major
InstitutionalInvestors,PhillipCapital(India)PvtLtd.hasenteredintoanagreementwithaU.S.registeredbrokerdealer,MarcoPoloSecuritiesInc.("MarcoPolo").Transactionsinsecurities
discussedinthisresearchreportshouldbeeffectedthroughMarcoPolooranotherU.S.registeredbrokerdealer.
PhillipCapital(India)Pvt.Ltd.
Registeredoffice:2ndFloor,CBlock,ModernCentre,Mahalaxmi,Mumbai400011
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TitanCompany

We believe Titans performance is set to improve substantially in the coming

Fixedcost absorption delayed due to expansion and poor economic

A robust supply chain and demandforecasting mechanism places the company in a

Capital employed (inventory pricerisk mitigated by hedging) is monitored centrally for

Best sellers SKUs (national,

Main focus area for store

Automated replenishment for the

Guidelines on selling trends

Shortens the inventory cycle by setting up a

IT program- improved visibility of order

Performance of existing and all newly

Gold price $1100

Price fixed for 10kg @1100

Demographicshift will increase market share: We estimate that Titanhas around

Titan Company Limited

RBI Directive:2080 rule of

RBI directive: Gold (metal)

Espirit, Swatch, Fossil,

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