Analysis Report: Titan Company Ltd. (BUY; Estimated Price: Rs. 450)

Introduction of Company

Tata Company Limited, established in the year 1984, is a joint venture between TATA Group and Tamil Nadu Industrial Development Corporation (TIDCO). It is the world’s fifth largest watch manufacturer. The company is divided in four main divisions- watches, jewellery, eyewear and precision engineering; in which jewellery accounts for its major chunk of revenue i.e. 79%. It has recently entered into the business of fragrances and accessories. Titan has four subsidiaries as on 31^st March 2015, namely Titan Time Products Ltd., Favre Leuba AG, Titan Watch Company Limited and Titan Engineering and Automation Limited. The company has a culture of innovation and they carry it through Innovation Bazaar, Interweave, Tata Innoverse, Innovation Centre and Titan Innovation Hub. Titan is also selected as Best Employer for "National Award for the Empowerment of Persons with Disabilities - 2014" by Government of India.

Shareholding Pattern

Cat Code	Category of Shareholder	Number of Shareholders	Total number of shares	Number of shares held in dematerialized form	Total shareholding as a percentage of total number of shares
A	SHAREHOLDING OF PROMOTER AND PROMOTER GROUP	15	471007920	471007920	53.05
B	Public Shareholding
1.	INSTITUTIONS
A	MUTUAL FUNDS/UTI	77	15757583	15712383	1.77
B	Financial institutions/Banks	24	553453	524273	.06
C	Central/state govt.	2	715203	715203	.08
D	Insurance Companies	26	12142472	12142472	1.37
E	Foreign institutional investors	189	178380623	178350623	20.09
F	Foreign Portfolio Investments Corp.	38	12514120	2514120	1.41
2.	NON- INSTITUTIONS
A	Corporate Bodies (Indian/foreign/Overseas)	1590	12881698	12797078	1.45
B	Individuals(Resident/ NRI/ Foreign National)
(i)	Individual shareholders holding Nominal share Capital up to Rs.1 lakh	114100	92698420	71770523	10.45
(ii)	Individual shareholders holding Nominal share Capital above Rs.1 lakh	55	90761272	89601872	10.22
C	Any other-Clr-Mem
	OCB	1	9000	9000	.00
	Trust	18	364396	364396	.04
	Total Public Share Holding (B)	116120	416778240	394501943	46.95
	TOTAL(A+B)	116135	887786160	865509863	100.00

Business Description

C. V. Sankar is the Chairman of Titan since 16^th June 2014 and Director of the company since 1^st November 2013. He is an I.A.S. officer and serves as Principal Secretary of Industries Department for Government of Tamil Nadu.

Bhaskar Bhatt, ‘the man behind Titan’s success’ according to Forbes, is the Managing Director of the company. He bought back the company from jaws of death in 2002 through a restructuring exercise. He believes in expansion of the company despite economic headwinds. Company had 7558 employees on rolls and about 6473 contract at the end of the year 2014-15.

Details of Products/Services

Titan has four business divisions whose description is as follows:

	JEWELLERY	WATCHES & ACCESSORIES	EYEWEAR	PRECISION ENGINEERING
Brands	Titan Goldplus Zoya	Titan Fastrack Sonata Xylys Nebula Skinn (Fragrances)	Titan Eye+	B2B business catering to aerospace, automotive, oil & gas, engineering, hydraulics, solar and medical instruments.
Availability	It is available in exclusive stores-- Tanishq: 179 Goldplus: 33 Zoya: 2	Watches: 9000 multi brand dealer outlets across 2500 towns 419 World of Titan stores 161 Fastrack Stores 42 multi brand helios store Fragrances: 800 MBOs	Exclusive stores: 358 (in a total of 128 towns)	PECSA : 750 customers MBA: 75 customers
New Launch	Work wear collection Mia, Heritage Collection based on Indian Architecture	Raga Garden of Eden, Titan Regalia Armour Collection, Titan Ceramics Collection, Sonata’s Sona Sitara	Collection of Frames: Enigma (for her) and Adreno (for him); Titan Ozone Lens

Manufacturing/Service Process Description

Titan has state of the art equipment and technology which includes a world-class design studio for watches and accessories. The Watch Division has invested 8.5 crores rupees in upgrading the gold refining infrastructure with state-of –the-art equipment. With an installed capacity of 45 tonnes / year, the gold loss has come down by more than 80% in the process. In the eyewear division Nano-cleaning method has been adopted in this year. This technology enables the cleaning of lenses without holding it physically. By this process the scratch related rejection of lenses during manufacturing has been reduced to 0.2%.

Manufacturing Capacity

For the jewellery business, the manufacturing unit located at Hosur (Tamil Nadu) of 1,35,000 square feet is equipped with the latest and up-to-date technology and tools. Apart from that there are three assembly units in Dehradun and Pantnagar (Uttarakhand) in India. For the eyewear division in particular a new Stainless Steel Case manufacturing plant at Kallapalayam, Coimbatore has commenced commercial production on 3rd March 2015. The plant is expected to reach production of 1 million units in the next three years.

Industry Analysis

Titan Company is present in different industries as per its business divisions and hence the industry analysis for these industries is as follows:

Jewellery

The jewellery sector in India is growing and is gaining importance as an international sourcing destination for high quality designer jewellery. Global companies such as Walmart and JC Penney procure jewellery from India. This sector is full of small players with modern retail players having only 4% to 6% share. Some of the major brands in the Indian jewellery segment are Gili, Tanishq, Carbon, Oyzterbay and Trendsmith. The Gold Value Chain in India is:

Source: A.T. Kearney Analysis

Watches and Accessories

India’s watch market is estimated at INR 5,300 crores with the high-end and luxury time pieces accounting for about 20% of sales. Figures show that about 60,000 pieces of Swiss luxury watches are sold in India every year. The luxury watch market is growing by 20% every year. Titan controls 45 per cent of the Rs 5,300-crore Indian watch market and sells 16 million pieces a year. Titan manufactures watches covering all the segments of Indian market.

Under Accessories the entire range of French Perfumes is kept cost effective like the newly launched ‘Sheer’ and ‘Verge’ perfumes are priced under INR 2000 which makes Titan very competitive in the fragrances category.

Eyewear

The eyewear industry in India, as per estimates, has grown at a CAGR of 16% over the last five years. In 2014-15, there was a slow-down in the category. The network expansion of national players was not as aggressive as in the past while some regional players continued to expand.

Precision Engineering

The current size of the sector is INR 200 crore with the growth potential of INR 5,000 crore. Titan invests about INR 15-20 crores every year in this segment. Currently Titan is making only components in this division and plans to start assembly.

Market Analysis

The Indian gems and jewellery industry had a size of Rs. 251000 crores (US $40.45 billion) in 2013 as per a FICCI report and is expected to grow at a CAGR of 15.95 per cent over the period 2014-2019. The cumulative foreign direct investment (FDI) inflows in diamond and gold ornaments in the period April 2000-December 2014 were US$ 476 million, according to Department of Industrial Policy and Promotion (DIPP). So, the market for jewellery is huge and despite certain impediments Titan is expanding in this segment. If we look at all the four divisions of Titan it is globally present in 32 countries; it has a strong presence in Vietnam, Singapore, Malaysia and Thailand in the Far East, Saudi Arabia, UAE, Qatar, and Oman in the Middle East, and Bangladesh, Sri Lanka and Nepal closer to India. In precision engineering the sub division for Titan Automation has enabled to export machines to 8 countries such as USA, Germany, Romania, UK, China, Argentina, Czech Republic, Portugal etc.

Financial Analysis

Titan Ltd. has zero long term debt as can be seen in the balance sheet. The total assets had consistently been growing until 2014-15 where there was a drop in total assets to Rs. 5868.29 crores as compared to Rs. 6111.39 crores in 2013-14. This was due to returning of advances from customers meant for sale of jewellery products. Advances from customers stood at Rs.68.08 crores at the end of 2014-15 as compared to Rs. 1298.64 crores at the end of 2013-14. This massive difference was due to regulatory changes and termination of the consumer friendly Golden Harvest Scheme. On the balance sheet, this effect is reflected in reduction of cash on the assets side and other current liabilities on the liabilities side.

Consolidated Balance Sheet for Last 5 Years

(Rs in crores)	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15
EQUITY AND LIABILITIES
Share capital	44.39	88.78	88.78	88.78	88.78
Reserves and surplus	991.23	1372.14	1881.07	2433.95	2995.09
Long Term Borrowings	9.45	5.89	0.00	0.00	0.00
Other long term liabilities	47.64	59.33	65.10	74.61	90.79
Short-term borrowings	0.50	0.00	0.00	806.84	99.79
Trade payables	1526.19	1891.01	2097.99	859.44	1939.63
Other current liabilities	1139.10	1292.76	1750.33	1847.77	654.21
Total	3758.49	4709.91	5883.27	6111.39	5868.29
ASSETS
Net Tangible fixed assets	274.92	363.05	446.62	600.50	688.88
Net Intangible fixed assets	13.50	20.87	17.28	13.73	10.23
Other non-current assets	140.83	158.96	238.27	263.96	321.75
Inventories	1998.12	2882.02	3680.33	3869.39	4049.30
Trade receivables	117.63	165.19	165.83	154.13	189.73
Cash and cash equivalents	1109.88	967.09	1139.04	892.67	213.81
Other current assets	103.61	152.72	195.89	317.01	394.59
Total	3758.49	4709.91	5883.27	6111.39	5868.29

The company’s revenue has been increasing at a steady rate. Revenue in the year 2014-15 was Rs. 11913.41 crores as compared to Rs. 10927.39 crores the previous year. Profit stood at Rs.816.26 crores in 2014-15 which is 11% higher than the previous year.

Consolidated Profit & Loss Statement for Last 5 Years

(Rs in crores)	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15
Revenue
Revenue from operations (net)	6533.14	8848.43	10123.29	10927.39	11913.41
Other Income	56.80	94.47	100.89	120.22	70.75
Total Revenue	6589.93	8942.90	10224.18	11047.61	11984.16
Expenses
Total Operating expense	5917.07	8013.07	9110.80	9883.06	10765.01
EBITDA	672.86	929.83	1113.37	1164.55	1219.15
Depreciation and amortization expense	35.11	45.62	56.23	67.55	89.57
EBIT	637.75	884.21	1057.14	1097.00	1129.58
Finance costs	34.54	43.73	50.65	87.13	80.69
Profit before tax (PBT)	603.21	840.48	1006.50	1009.87	1048.89
Total Tax	170.08	238.98	281.56	275.12	232.64
Profit before share of profit of associate	433.14	601.50	724.93	734.75	816.25
Share of profit of associate	-0.01	-0.14	0.44	0.19	0.01
Profit for the year	433.12	601.36	725.37	734.94	816.26

Growth has stagnated a little in the latest two quarters as can be seen in the quarterly statement. This again is due to the effect of the Gold Harvest Scheme. Even though the scheme has started again, the trust of the people has been shattered to a significant extent. The management expects the scheme to start bearing fruits in the next quarter. Looking segment wise, the jewellery segment contributes around 75% to Titan’s total revenue. Revenue from this segment fell by 32.35% in the latest quarter. It was Rs. 1981.73 crores in Quarter-II FY2015-16 as compared to Rs. 2929.38 crores in corresponding quarter of FY2014-15.

Standalone Quarterly Statement for Last 5 Quarters

(Rs in Crores)	Jun-14	Sep-14	Dec-14	Mar-15	Jun-15
Income from operations
Net sales / Income from operations ( Net of excise duty)	2853.66	3564.67	2898.28	2474.43	2686.71
Other operating income	37.78	28.40	24.23	21.76	21.88
Total income from operations (Net)	2891.44	3593.07	2922.51	2496.19	2708.59
Expenses
Cost of materials consumed	1810.45	2461.52	1933.17	1628.85	1365.97
Purchase of stock-in-trade	307.95	293.97	326.96	195.06	297.71
Changes in inventories of finished goods, work-in-progress and stock-in-trade	40.84	-44.20	-96.15	-104.81	264.02
Employee benefits expense	146.19	163.93	154.32	161.21	175.61
Advertising	99.25	105.83	96.75	80.30	128.84
Depreciation and amortisation expense	24.34	19.87	23.20	19.98	22.82
Other expenses	212.38	278.96	231.65	265.47	253.72
Total expenses	2641.40	3279.88	2669.90	2246.06	2508.69
Profit from operations before other income and finance costs	250.04	313.19	252.61	250.13	199.90
Other income	25.40	17.80	11.52	15.86	15.54
Profit before finance costs	275.44	330.99	264.13	265.99	215.44
Finance costs	34.97	10.88	21.08	13.73	11.83
Profit before taxes	240.47	320.11	243.05	252.26	203.61
Current tax	66.13	79.62	52.44	42.81	53.00
Deferred tax	-2.93	0.51	-0.12	-5.64	-0.45
Profit after taxes	177.27	239.98	190.73	215.09	151.06

Jewellery segment which contributes 79% of the company’s revenue has shown negative growth in the last two quarters. We believe this decline to persist in the upcoming two quarters as well. We forecast the watch segment to grow at around 8%. Other segments of Titan Ltd. including precision engineering and the eyewear segment look very promising. Keeping all this in mind, we value the company at Rs. 450 which is a little higher than the current market price Rs. 348.60, as on 4^th November, 2015.

Consolidated Projected Balance Sheet for Next 5 Years

(Rs in crores)	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Terminal
EQUITY AND LIABILITIES
Share capital	88.78	88.78	88.78	88.78	88.78	88.78
Reserves and surplus	3797.54	4632.59	5512.80	6460.92	7480.57	8539.79
Long Term Liabilities	90.79	90.79	90.79	90.79	90.79	90.79
Trade payables	1407.50	1461.98	1551.20	1679.46	1816.92	1907.76
Other current liabilities	654.21	654.21	654.21	654.21	654.21	654.21
Total	6038.82	6928.35	7897.78	8974.16	10131.27	11281.33
ASSETS
Net Tangible fixed assets	772.31	870.49	985.32	1118.99	1274.08	1453.57
Net Intangible fixed assets	5.09	0.05	-4.92	-9.83	-14.70	-19.54
Other non-current assets	321.75	321.75	321.75	321.75	321.75	321.75
Inventories	3981.87	4136.00	4388.40	4751.26	5140.13	5397.14
Trade receivables	172.91	179.60	190.56	206.32	223.20	234.36
Cash and cash equivalents	390.30	1025.87	1622.08	2191.08	2792.21	3499.45
Other current assets	394.59	394.59	394.59	394.59	394.59	394.59
Total	6038.82	6928.35	7897.78	8974.16	10131.27	11281.33

Consolidated Projected Profit & Loss Statement for Next 5 Years

(Rs in crores)	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Terminal
Revenue
Revenue from operations (net)	11981.19	12444.94	13204.42	14296.24	15466.32	16239.64
Other Income	0.00	0.00	0.00	0.00	0.00	0.00
Total Revenue	11981.19	12444.94	13204.42	14296.24	15466.32	16239.64
Expenses
Total Operating expense	10826.25	11245.30	11931.57	12918.14	13975.44	14674.21
EBITDA	1154.93	1199.64	1272.85	1378.09	1490.89	1565.43
Depreciation and amortization expense	103.13	115.48	130.06	147.14	167.07	190.24
EBIT	1051.80	1084.15	1142.79	1230.95	1323.82	1375.19
Finance costs	9.98	0.00	0.00	0.00	0.00	0.00
Profit before tax (PBT)	1041.83	1084.15	1142.79	1230.95	1323.82	1375.19
Total Tax	239.38	249.10	262.57	282.83	304.17	315.97
Profit before share of profit of associate	802.45	835.05	880.21	948.12	1019.65	1059.22
Share of profit of associate	0.00	0.00	0.00	0.00	0.00	0.00
Profit for the year	802.45	835.05	880.21	948.12	1019.65	1059.22

 

 

Price Performance

About the Author

This report has been prepared by Mridul and Sanyam Mittal. They are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.