titan industries ltd_initiating coverage_fairwealth securities ltd_10april 2012

7/31/2019 Titan Industries Ltd_Initiating Coverage_Fairwealth Securities Ltd_10April 2012

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airwealth Institutional Research

itan Industries Ltd- Initiating Coverage

rwealth

Securities

Ltd

April

10,

2012

1

Titanic Run to slow down A ril 10, 20

Rating: Sell; CMP: 244; Target: 220; Downside: 10%

Basic Info

Bloomberg Code TTAN IN

Market Cap (` mn.) 216623

Face Value (`) 1

Book Value (`) 11.5

EPS (`) 4.9

Dividend Yield 1.1%

52 week H/L (`) 254/154

Avg. Quarterly. Vol (NSE) 3471579

Listed At BSE,NSE

Equity capital (` Mn) 888

Share Holding Pattern (30 Dec 2011)

Promoter 53.46

FII 13.14

DII 5.92

Others 27.48

Total 100.00

Price Performance %

1M 3M 6M 12M

Absolute 2 39 14 28

Rel. to Nifty 4 28 9 38

year price performance

Hitesh ParekhResearch [email protected] 39244988

Titanic run to slow down: Titan had a golden run over FY09-11with earnings growing at

CAGR due to increasing demand coupled with higher gold price and margin expansion. G

forward we do not expect this golden run to continue at the same trajectory due to volatile

prices, declining volume growth, challenging macro environment and increasing competi

We expect the growth to moderate in the coming years and consider a more pragm

revenue/earnings growth at 25.5%/28.7% CAGR over FY11-14E.

Jewellery Division; Sparkle grows fainter: Jewellery division which contributes ~77

Titans revenues has seen a sparkling growth of 35% CAGR over FY09-11. However the r

upsurge in the gold prices with rising volatility has impacted the demand as was witness

Q3FY12 with volumes showing degrowth of 5%. We expect this segment to grow at

CAGR over FY11-14E as the volatility in gold prices diminishes and the investor senti

improves.

Watches Division: Diverse product mix catering to all market segments

Indias Watch market is estimated to be ~`4-4.2 bn. Titan has 65% market share o

organized Indian watch market. Timex is a distant second to Titan with just 8% market sCompany has segmented the market superbly with very sharp offering for every section

from the `225 Sonata Super Fiber (mass market) to `375000 gold studded Nebula (premi

Company plans to increase its World of Titan stores to 400, Fastback stores to 150 and H

(multi brand outlets) to ~75 over the next two years from current 326, 85 and 21 respective

Precision Engineering Division turns profitable; Eyewear to breakeven: Prec

Engineering is a large and growing market estimated to be ~$32 bn globally. Titans Prec

Engineering division has already turned profitable in Q3FY12. Titan currently has 191 T

Eye+ stores and plans to increase the footprint to 250 stores in the next few years. Eye

market is a very large, competitive and fragmented largely dominated by the unorganized s

(90%). Titan expects the Eyewear business to breakeven and turn profitable by next year.

Accessories business - Transformation into a Total Lifestyle Company: Huge PotentiaThe accessories market in India, which combines men's bag, women's bag, college bags, bwallets and such related articles is valued at about `200bn, of which the bags market alo`40 to 50bn.Titan is aiming to become a youth centric, total lifestyle company with the laof its accessories (belts, wallets and bags) business.

Valuation: We expect Titans revenue and earnings to grow at 25.5% and 28.7% CAGR

FY11-14E due to aggressive expansion plans and increase in the consumer discretionary sp

Company has been cash flow positive over the years with high return ratios. We expect Tit

post 42% ROE and 53% ROCE in FY13E lower than earlier years due to aggressive stor

outs leading to lower asset turns. We Initiate Coverage on Titan with Sell rating a

target price of 220/share based on DCF methodology (assuming WACC of 13%, ta

D/E ratio of 10% and terminal growth rate of 5%). At our DCF price, stock trade

26.2x FY13E earnings. (Risks: Stable Gold prices, higher margins, improving menvironment)

Key Financials FY 10A FY 11A FY 12E FY 13E FY

Revenue ( mn) 47764 66617 89365 109315 13

EBITDA ( mn) 3950 5856 7907 9838 1

EBITDA% 8.3% 8.8% 8.8% 9.0% 9

Adj. PAT 2527 4317 5975 7453

Adj. PAT % 5.3% 6.5% 6.7% 6.8% 7

Adj. EPS( ) 2.8 4.9 6.7 8.4

P/E(x) 85.7 50.2 36.3 29.1

ROE (%) 39.6% 49.3% 46.6% 42.5% 38

70

80

90

100

110

120

130

140

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Titan NIFTY


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Fairwealth Institutional Research

Titan Industries Ltd

rwealthSecuritiesLtd April10,2012 2

Number of consuming households to more

han double to 94mn by 2020 compared to

ust 40mn in 2010

Investment Rationale

Demographic changeIndias liberalization strategy is leading to more migration of people towards the urban aand boosting urban growth leading to a rising middle class, increased savings and investmMckinsey estimates the number of consuming households to more than double to 94mn by compared to just 40mn in 2010. This rising middle class would imply a larger pool of mavailable for discretionary spending, saving and investment.

Relevant consuming households to more than double to 94mn by 2020 from 40 mn in 2

Wealth DistributionAs the interest for newer financial products increases among the individuals with a lostructures products coming into the market, physical assets such as real estate. Equipmentgold still contribute a large chunk (50%) of the household savings.Of the US$256 billion (

billion rupees) in household savings in India in 2008 approximately $7 billion (315 birupees) was known to be held in gold

Household savings distribution


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Gold Demand By RegionIndia continues to be the worlds largest gold market and has expanded considerably sincperiod of liberalization, accounting for 32% of global jewellery and bar and coin deman2010 at 963 tonnes. Gold jewellery represented around 75% of total Indian gold deman2010, the remainder being accounted for by investment and technology. Demand for dropped in 2011 to 932 tonnes due to rising and volatile gold prices.

Gold Demand by region (2010)

Motivation rather than form of purchase- KeyIn India, categories of demand we observe in other markets are less distinct and demanjewellery is tied to the investment qualities of gold. To make an absolute distinction betwinvestment and jewellery demand is to misunderstand Indian attitudes, they are often onethe same. The motivation for a jewellery purchase is inextricably linked to value, wepreservation and growth rather than pure adornment. Motivation, rather than the formpurchase is the key. In the last decade, 75% of gold demand in India has taken the formjewellery.


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Titans stock price has a very high co

elation with the gold prices over a long

erm (since 2000) with an R2 of 0.91.

Volume of gold purchasing will rise by 33%

ver the next decade to reach 1,200 tonnes.

We believe stability in the gold prices with a

radual increase to be the key demand

river for jewellery consumption.

Strong co-relation: Gold & Titan Stock PriceTitans Jewellery business is the key driver to its revenue and profitability, contributing ~77its revenues and 71% of its EBIT in FY11. Titans stock price has a very high co relation the gold prices over a long term (since 2000) with an R2 of 0.91. Volatility in the gold padversely affects the volume offtake. A sharp rise in gold prices results in lower volumeseen in Q3FY12 (-5%) which would consequently impact the profitability. On the other hasharp fall in prices would also impact the profitability due to lower realizations. The

scenario would be gold prices go up steadily with low volatility which would support voluand realization as well.

Co-relation between Gold Price & Titan Stock Price

Source: Bloomberg, Fairwealth Institutional Research

India- Golden Future - Stable gold prices to be the key

CMIE forecasts that the volume of gold purchasing will rise by 33% over the next decad

reach 1,200 tonnes. Demand will be driven by rapid GDP growth, urbanization and w

creation, the emergence of a 64 mn strong middle class, a sustained and potentially ri

savings ratio of 30-40% and a deep cultural affinity for gold. Against this positive backd

provided that the challenges of evolving tastes and preferences and new investment prod

can be met, Indias future is a golden one. In 2010, Indian jewellery demand rose 69% year

year, resulting in a new annual record total of 746 tonnes. However Jewellery demand fe

2011 to 567 tonnes as against a rise of 32% in gold prices primarily due to volatile and ri

gold prices coupled with depreciating rupee. We believe stability in the gold prices w

gradual increase to be the key demand driver for jewellery consumption.India Gold Jewellery Demand (Volumes) and Gold pricing trends

Source: Company, Fairwealth Institutional Research

R = 0.912

50

0

50

100

150

200

250

300

200 400 600 800 1000 1200 1400 1600 1800 2000

TitanStockPrice(Rs)

GoldPrice(US$/oz)

200

400600

800

100

120

140

160

180

20

5080

110

140

170

200

230

260

Dec05

Mar06

Jun06

Sep06

Dec06

Mar07

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Sep11

Dec11

Jewellery Demand(Tonnes)(LHS) Gold Price(US$/oz)(RHS)


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Jewellery Segment

Leader in Indian branded jewellery space

Indias Jewellery market is estimated to be around `1-1.5bn. Organized sector accounts for

10% of this while Titan commands ~45% of the organized branded jewellery space. Compa

has the first mover advantage as it started retailing jewellery way back in 1995 with the laun

of Tanishq, Indias most trusted and fastest growing jewellery brand.

Organized vs. Unorganized Share Titan vs. others in organized market


Tanishq- Titans flagship brand

Titan launched Tanishq in 1995 and is currently India's fastest growing jewellery brand with

premium range of jewellery, studded with diamonds or coloured gems in 18-karat gold, 22-

karat pure gold and platinum jewellery storming a market of over 400000 independent

jewellers. Apart from Tanishq Titan also has Gold Plus, Catering to smaller towns and rura

markets. Zoya the latest launch by Titan focuses on the premium/luxury segment. Company

129 Tanishq stores, 32 Gold plus and 2 Zoya stores.

Tanishq and Gold plus store expansion


Organised

10%

Unorganised90%

Titan

45%

Others

55%

0

20

40

60

80

100

120

140

FY 07A FY 08A FY 09A FY 10A FY 11A 9MFY12

Tanishq Gold plus


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We expect a marginal improvement in

margins and stay in the range of 8.8%-9.3%ver the next few years.

Jewellery Division Sparkle grows fainter

Jewellery division which contributes ~77% to Titans revenues has seen a sparkling growt

35% CAGR over FY09-11. However the recent upsurge in the gold prices with rising volat

has impacted the demand as was witnessed in Q3FY12 with volumes showing degrowth of

We expect this segment to grow at 28% CAGR over FY11-14E as the volatility in gold pr

diminishes and the investor sentiment improves.

Jewellery Revenue to grow at 28.3% CAGR over FY11-14E


Marginal improvement in marginsJewellery segment EBIT margins have increased (150bps) over FY08-11 primarily due toincreasing share of studded jewellery in the product mix. Management plans to increaseshare of studded jewellery to 40% over the next few years from current 27%. Margins improved over the years as the making charges are now linked to the gold prices as againstfixed making charges previously used. As a result of this Titan tends to benefit from increagold prices provided the volumes remain the same or increase. This change has resultehigher operating margins for Titan as against the prior periods and also protects itself from gprice volatility to an extent. We expect a marginal improvement in margins and stay inrange of 8.8%-9.3% over the next few years. We believe margins to improve only marginas gold prices have risen sharply over the last year (31%) and a simultaneous rise indiamond prices (14% YTD).

Diamond Price Index Marginal improvement in EBIT margins

urce: Company, Fairwealth Institutional Research

36.2%

26.7%

43.3% 41.7%

23.2%21.0%

0%

10%

20%

30%

40%

50%

10000

30000

50000

70000

90000

110000

FY 09A FY 10A FY 11A FY 12E FY 13E FY 14E

Revenues(Rsmn)(LHS) Growth(%)(RHS)

100

110

120

130140

150

160

170

180

Sep09

Nov09

Jan10

Mar10

May10

Jul10

Sep10

Nov10

Jan11

Mar11

May11

Jul11

Sep11

Nov11

Jan12

5.8%

7.1%

8.3%8.8% 9.1%

9.3%

0%

1%

2%

3%

4%

5%6%

7%

8%

9%

10%



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Operating ModelTitan uses 3 types of models for its jewellery stores

Company owned (15% of the stores) Management Agent Model (40% of the stores) Franchise owned (45% of the stores)

In the company owned model inventory is on the books of Titan as well as all the cosrunning the outlet is borne by Titan. In the management agent model, inventory is on the bo

of Titan while the agent runs and manages the entire outlet. The agent in turn receivcommission or fee (generally as % of sales).In the franchisee owned model inventory riskwith the franchisee owner which enables the company to make investment with lower capcommitments.

Titan Jewellery Stores operating model


Innovative schemes to boost demandTitan has launched various innovative schemes (Golden Harvest,) promotional activ(discounts, gift vouchers, exhibitions etc.), customer loyalty programs (Anuttara & Anataorder to create as well as spur demand for gold and diamond jewellery.

Golden Harvest Scheme

Golden harvest scheme is the most popular scheme launched by Titan. This scheme received a great response and company currently has 3.5 lac customers under the scheGolden harvest program sales contribute ~15-20% of the jewellery sales.

At present there are two plans under the Golden Harvest Savings Scheme 1)11+1 Plan 2Months Plan. In both the plans, the minimum installment value is `.500 and it can increasany amount as long as it is in multiples of`.500. At the end, with the money which custohas saved he/she can buy 18 Karat diamond studded jewellery or a 22 Karat pure gjewellery from Tanishq.

11+1 PlanUnder this scheme, customers need to invest a fixed amount every month with Tanishq fo

months. The 12th month installment is paid by Tanishq, after which the customer can jewellery at the then prevailing rate from any of the Tanishq shops. To attract customersscheme offers a one-time bonus of 100% on your monthly installment at the end of the month scheme.

18 Months Plan

As per this plan customers can invest monthly for 18 months. However there is more flexibin this plan with respect to the amount to be paid monthly. Customers can change the amoube paid monthly e.g. if the customer starts with `1000 a month, can change it `3000 month or `1500 the month after. Customer can use this amount along with the bonus of 13of monthly installment to buy jewellery from Tanishq.

Company

Owned

15%

Management

Agent

40%

Franchise

owned

45%


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Company plans to open 25-30 large format

tores every year across India

Golden Harvest Program

Scheme Type 11+1 18 month

Customer Pays 3000 300

No of Months 11 1

Total paid 33000 5400

Bonus 3000 390

Total Amount 36000 5790

Time Period after 12 months after 18 month

AdvantageBonus - 100% of monthly

installmentFlexible deposits ever

montSource: Company, Fairwealth Institutional Research

Gold Plus scheme offers the customers yield of ~15-16% which is quite attractive. Titan stands to gain from this facility on three counts a) it acts as a good brand building exercisethe company b) helps in funding its working capital requirements c) locks in the customerfuture purchases.

Titans Gold on lease policy- Hedge against volatile gold prices

Titan does not carry gold inventory on their books and thus the whole gold price correcleading to inventory loss is nothing but hyperbole. Titan works on a lease model till the sadone and merely pays the interest in the interim; any rise in the lease costs however wimpact their margins on gold.In 2008 the cost of gold leasing went up to ~7%; the cost is3.5% presently. Lease period for Titans Gold on lease scheme was extended to 180 days f90 days by RBI in 2007 and since then has not come down for the jewelers. With the extenof the maximum lease period from 90 days to 180 days in late 2007, jewellers are now ablcover inventory turns as low as 2x. However, as Titans stock turn is 2.8x it acts as a nathedge against the gold prices.

Large format stores- To gain market shareTitans Tanishq brand is planning to open large format stores to increase its market shar`1.2bn market. Company plans to open 25-30 large format stores every year across India invest in marketing and design innovation in order to increase the market share from about

at present.Stores in big cities would be spread across 10,000 square feet and in smaller to

an average area would be around 4,000 square feet.

Titan Jewellery store expansion


010203040

5060708090

100

110120130

FY 07A FY 08A FY 09A FY 10A FY 08A FY 09A

NoofStores

Tanishq Goldplus Zoya


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Titan Watches: Redefining time

Indian Timewear IndustryIndian Timewear industry is estimated to be at `4-4.2bn. Going ahead the industry is expeto grow at ~12-15%. Watches in India have seen a gradual transformation from a time keepdevice to a fashion accessory. This evolution has been ushered by many factors suchchanging consumer dynamics, increase in disposable income, growth of organized retail, en

of international brands, etc. However the industry has not been able to achieve the scale or as per its true potential and is growing at a very modest 8-10% with the penetration leveljust 27%. The industry can grow at a much faster rate given the buoyant economy, increaincomes and low penetration base. The market is expected to grow faster rate of 12-15%next few years. A large part of this growth is expected to come from the youth and premium segment of the consumers. The organized players in this sector control 40% of volume of the industry while the unorganized market which consists of smuggled watchcheap imported watches, watches assembled by small unorganized players, watch wholesaand repairers contribute the rest.By value around 60% of the market is controlled by organiplayers. Indian Timewear market can also be segmented into three price bands mainly MMid & Premium.

Indian Watch Market by Volume Indian Watch Market by Value

Market Segmentation by Price

Segment Mass Mid Premium

Price range(`) 10001

Volume (in lakh pieces) 370 86.5 2.1

Value(` Cr) 1700 1600 900

Growth rates 5-7% 8-10% 15-20%


Organised

40%

Unorganise

d

60%

Titan has ~65%market share in theorganised market

Organised

60%

Unorganise

d

40%

1700

1600

900

Value(Rs Cr)

Mass Mid Premium

370

86.5

2.1

Volume (in lakh pieces)

Mass Mid Premium


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rwealthSecuritiesLtd April10,2012

Diverse product mix catering to all market segmentsTitan has 65% market share of the organized Indian watch market. Timex is a distant seconTitan with just 8% market share. Company has segmented the market beautifully with vsharp offering for every section right from the `225 Sonata Super Fiber (mass market`375000 gold studded Nebula (premium).

Titan offers a slew of products that cater to the inherent needs of the customers across diffe

segments in the watches market Titan for the mid-premium market, Raga for womFastrack for youth, Sonata for value-conscious consumers, Zoop for school children, and Xfor connoisseurs of Swiss watches. Some of the most notable brands in the divisions portfare:

Titan Edge - The worlds slimmest watch (at 3.45mm) that epitomizes the philosophy lemore.

Titan Raga - a feminine and opulent accessory for today's affluent woman

Nebula - watches crafted with solid 18k gold and precious stones

Sonata - India's largest selling watch brand to suite the common man's wallet

Xylys - a Swiss-made, impeccably designed watch for the connoisseur and new age achieve

Fastrack watches created to accessories the trendy youth of today

The watch division also boasts of collections such as Automatic, Heritage, Nebula, OrRaga, Zoop and series like Aviator, Octane and WWF.

Titans Brand Positioning



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Wide distribution network: Biggest Competitive advantage supporting

brands

Titan watches are sold through a wide and robust retail, distribution and service network whextend across the country.Titans World of Titan network has grown to 326stores. The Company has launched tflagship stores, in Mumbai Delhi and Pune. The Delhi flagship store also has the distinctio

being the countrys largest watches store.Titans new multi-brand watches retailing business, Helios, witnessed a good year, withstores performing well. Helios has been created with the specific objective of developgood and deserving retail space for the rapidly growing premium watches market in InCompany is confident that it will contribute significantly to the development of this markea manner that is profitable for the Company. Titan has 21 such multi brand outlets acrosscountry.Fastrack, which is sharply focused on young India, continued to speak the language ofcollege-going youth. A new Hip-Hop collection of watches was launched during the year. Fastrack exclusive store network continues to expand, and currently stand at 85 stores.Titan also has strong partnerships with reputed modern departmental stores such as ShoppStop, Central, Lifestyle, Westside, Pantaloons and Reliance Retail, which are emergingattractive new shopping destinations, particularly in larger cities and towns.

Companys customer service network, which offers excellent and affordable service to millof customers, now stand at 829 authorized service points nationwide.Company plans to increase its World of Titan stores to 400, Fastback stores to 150 and He(multi brand outlets) to ~75 over the next two years from current 326, 85 and 21 respectivel

Aggressive Store Expansion


International Operations

The firm has its presence in 27 countries, with the latest being Indonesia with 1600 outlets.overseas market accounts for ~6% of the firm's revenue. Company has presence in sevSouth East Asian and Middle Eastern countries. Titan is also present in far east Asian counlike Malaysia and Vietnam.

207

236

265

291311

326

10 824

47

85

1 1 621

0

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300

350

FY07A FY08A FY09A FY10A FY11A 9MFY12

NoofS

tores

Worldoftitan FastTrack Helios


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Watch Division: Revenues to grow at 17.7% CAGR over FY11-14E

We forecast TILs revenues from the watch segment will grow at 17.7% CAGR to `20622in FY10-14E (vs. 13% CAGR in FY08-11) driven by the steady volume growth (10% CAin FY11-14E) and rising share of watches from the high value premium segment.

Revenues to grow at 17.7% CAGR over FY11-14E

Source: Company , Fairwealth Institutional Research

Titan- countrys largest watchmaker had last year sold 13.5 million units across all its brawith 4 million sales in Titan, 7 million from Sonata and 2 million from Fastrack. AlthoSonata contributes highest in terms of volumes, Titan is the highest contributor in termvalues to the watches segment contributing ~45% of the revenues. Sonata and Fastrcontribute equally to the companys revenues while the rest 5% comes from the luxury high premium brands like Xylys and others.

Watch Division Revenue Break up (FY11) ( Volume Wise) Watch Division Revenue Break up (FY11) ( Value Wise)


8759

9070 10253

12652

1502017518

20622

0

5000

10000

15000

20000

25000

FY 08A FY 09A FY 10A FY 11A FY 12A FY 13E FY 14E

Rsmn 13% CAGR

18% CAGR

Titan

30%

Sonata51%

Fastrack

15%

others

4%

Titan

45%

Sonata25%

Fastrack

25%

others

5%


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With companys plan to increase theumber of Helios stores to more than 50, wexpect margins to remain in the range of4.2% to 14.5% over the next few years.

Margins to remain stable in the range of 14.2%-14.5%Over the past four years the watch division margins have seen a downward movement but hbeen above 14% in all the years. During 9MFY12 EBIT margins have been at 14.5% wQ3FY12 registering very low margins of 12.5% primarily due to the increase in input cost depreciating rupee. Further the management also stated that there is a lot of investment goon in the watch business with Helios and the accessories business. Therefore the margins to be short term decretive in the near term. Company invests about `10 mn to set up 1 He

store. With companys plan to increase the number of Helios stores to more than 50, we expmargins to remain in the range of 14.2% to 14.5% over the next few years.

Titan Watch Division Margin Trend


Operating ModelTitans Watch business operates on the franchisee owned and company owned moCompany currently has 326 World of Titan stores of which 90% are franchisee owned. 80-of the fast track stores are franchisee owned whereas the rest are owned by the compaHowever in case of Helios currently all the 21 stores are company owned. Howemanagement believes that over the years as the store expansion happens most of them wilfranchisee owned. The franchisee model helps Titan in reducing the inventory level whicturn helps in reducing the working capital of Titan. Titan is therefore able to aggressively ostores with lower capital commitments.

15.0%

14.0%

14.6%

14.2%14.3%

14.5%

13.4%

13.6%

13.8%

14.0%

14.2%

14.4%

14.6%

14.8%

15.0%

15.2%

0

500

1000

1500

2000

2500

3000

3500

FY09A FY10A FY11A FY12A FY13E FY14E

EBIT(LHS)(Rsmn) EBIT(RHS)(%)


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Indian Eyewear Market

Market Size `1.5-1.8bn

Market Size 25-35mn units p.a.

Growth rate 15-20%

Penetration25% of those whoneed correction

ReplacementDemand 3-4 years

Other categories:Indian Eyewear MarketIndian Eyewear market provides a huge opportunity as 30% of the population typically necorrection. At present there are 84 mn users which is just 25% of the population which necorrection. The prescription Eyewear market is pegged at `1.5-1.8 bn selling 25-35 mn ueach year. The prescription eyewear market has been growing at ~15-20% per annum anexpected to sustain at this level for next few years. Further there is huge replacement demas customers change their eyewear once in 3to 4 years. Urbanization, literacy, penetratio

TV & computers, poor eye health due to lifestyles/ improper diet, etc are the main demdrivers of this industry as a whole.

Titan Eye- ing Retail expansionTitan currently has 191 Titan Eye+ stores and plans to increase the footprint to 250September and 500 in a couple of years. Eyewear market is a very large, competitive fragmented largely dominated by the unorganized sector (90%).

Titan Eye Plus has redefined the way the organized optical retail market in India operthrough pioneering concepts such as the open touch-feel-browse format, comptransparency in pricing, Style Sections, free insurance on spectacles etc.

Titan Eye Plus has three in house brands Titan, Eye+ and Dash (for children). Titan Estores also sell a host of international brands of frames. In addition to this Titan Eye Plus offers lenses, contact lenses and sunglasses. Titan believes it inherent strengths lie

Retailing, lens manufacturing, Design & marketing while it outsources the other processethe value chain.

Titans focus in the Eyewear Value Chain


Titan EYE Plus Store Details


0

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FY 07A FY 08A FY 09A FY 10A FY 11A 9MFY12

NoofStores


15/25


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The recent announcement to allow Titanmport gold directly rather than routing ithorough the banks or state run agencies

would help in reducing the operating costsf the company. Going forward, we expect

EBIDTA margins to be in the range of

.8-9.1% over the next two years.

Stable MarginsTitans margins have improved over the past two years primarily due to the improvement inmargins of Jewellery segment which is the highest contributor in companys profitabiAlthough Titans Gross margins have declined considerably over the last few years to 29%FY11 from 42% in FY02 as the revenue mix has changed considerably with Jewellery segmshare increasing to 77% from 37% in FY02. EBIDTA Margins have improved in the last years to 8.8% in FY11 from 7.1% in FY09.The recent announcement to allow Titan im

gold directly rather than routing it thorough the banks or state run agencies would helreducing the operating costs of the company. Going forward, we expect EBIDTA margins tin the range of 8.8-9.1% over the next two years.

Revenue mix is key to Titans profitability as there is a wide variation in the margin profilthe various segments. Jewellery which is the highest contributor to Titans revenues mix low margin business and hence it affects the profitability of the company. Watch divisionthe highest margins while the Eyewear segment is yet to turn profitable. But managembelieves once the Eyewear segment turns profitable margins would be the same as inwatches segment. Although Titan is seeing good growth in the newer business and the wdivision we expect Jewellery to be the key revenue driver with contribution in the rang79 81% over the next few years.

Titans jewellery business margins have improved over the last 3 years to 8.3% from 5.8%FY09 as the share of the studded jewellery has increased over these years. Management expthis share to increase further to 40% from 26% in the next few years which augurs well formargins in the longer term. However in the short term we expect margins to remain inrange of ~9% as the volatility in the gold prices and lower volumes will have an adverse efon the margins.

The watch division which has higher margins is also expected to see a pressure on the marand stay in the range of 14.2-14.5% over the next few years. The watch segment saw a faits margins in Q3FY12 as the depreciating rupee resulted in an increase in the key input priFurther the management is in the investment phase for Helios which also has an impact onmargins. Therefore we believe margins to be short term decretive.

Titan EBIDTA & EBIDTA Margin Trend Segment Wise Margin Trend


27453950

5856

7907

9838

11990

7.1%

8.3%8.8% 8.8% 9.0%

9.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1000

3000

5000

7000

9000

11000

13000


EBIDTA(Rsmn)(LHS) EBIDTA Margin(%)(RHS)

-30

-25

-20

-15

-10

-5%

0%

5%

0%

2%

4%

6%

8%

10%

12%

14%

16%


Watches Jewellery Others(RHS)


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Modest Profit growthOverall we expect modest profit growth in Titans profitability at 28.7% CAGR over FY11-(vs. 37% CAGR over FY08-11). A reasonable growth in the top line coupled with stmargins over the next few years would lead to a modest growth in its bottom line over the few years.

PAT & PAT Growth trend EPS & EPS Growth Trend


Aggressive store roll outs to lower Return RatiosTitans return ratios have seen an improvement in the last few years due to better asset retuimprovement in the profitability margins and good cash generation. However we believe

the return ratios would be lower in the next few years as the company has planned aggresstore expansion plans. This would lower the asset turnover thereby preventing an improvemin the return ratios.

Return Ratio Trends


1.7

2.5

4.3

6.0

7.3

8.8

-1.6%

51.2%

70.9%

38.4%

22.7% 20.7%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1

2

3

4

5

6

7

8

9

10


Adjusted PAT(Rsbn)(LHS) Growth(%)(RHS)

1.8 2.8 4.8 6.7 8.3 10.0

5.8%

57.5%

71.9%

38.8%

22.7% 20.7%

0%

10

20

30

40

50

60

70

80

0

2

4

6

8

10

12


EPS(Rs)(LHS) Growth(%)(RHS)

34%40%

49%47%

42%39%

32% 43% 58% 58% 53% 48%0%

10%

20%

30%

40%

50%

60%

70%


Adj. ROE% ROCE%


19/25




Valuation:Going forward, we believe growth, while healthy, will moderate on the very high base of

past 2 years. We expect Titans revenue and earnings to grow at 25.5% and 28.7% CAGR

FY11-14E due to aggressive expansion plans and increase in the consumer discretionary sp

Company has been cash flow positive over the years with high return ratios. We expect Tita

post 42%ROE and 53% ROCE in FY13E lower than the previous years due to aggressive s

roll outs leading to lower asset turns. The possibility for significant positive surprises app

limited. Given the stocks good run-up, +28% and +155% in the last 1 and 2 yrespectively (outperforming the broad market by ~38% and ~157% respectively) ,

Initiate Coverage on Titan with Sell rating and a target price of 220/share based on D

methodology (assuming WACC of 13%, target D/E ratio of 10% and terminal growth rat

5%). At our DCF price, stock trades at 26.2x FY13E earnings.

Year End( mn) FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY2

Sales 89365 109315 131782 158139 189766 225822 266470 311770 361653 415901 478286 5500

Growth 34.1% 22.3% 20.6% 20.0% 20.0% 19.0% 18.0% 17.0% 16.0% 15.0% 15.0% 15.

EBIDTA 7907 9838 11990 14549 17648 21001 25048 29306 34357 39926 46394 53

Growth 35.0% 24.4% 21.9% 21% 21% 19% 19% 17% 17% 16% 16% 1

EBIDTA% 8.8% 9.0% 9.1% 9.2% 9.3% 9.3% 9.4% 9.4% 9.5% 9.6% 9.7% 9.

DEP 448 526 602 1017 949 1129 1332 1559 1808 2080 2391 27

Tax 28.2% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.

FCI -1508 -1522 -1335 -1581 -1518 -1581 -1865 -2182 -2532 -2911 -3348 -3

WCI -1385 -2072 -2376 -1423 -1328 -1355 -1599 -1559 -1808 -2080 -2391 -27

FCFF 2911 3544 4977 7620 9959 12303 14706 17518 20578 23960 27894 320

DF 1.00 0.89 0.78 0.69 0.61 0.54 0.48 0.43 0.38 0.33 0.30 0

PV 2911 3137 3900 5285 6114 6685 7074 7458 7755 7993 8236 83

Total PV 74932

Terminal Growth rate 5%

Terminal Value 110403

Enterprise Value 185334

Equity Value 195606

No of Shares(mn) 888

Value Per share 220

WACC 13.0%

Rm 15%

Rf 8%

Beta 0.79

Cost of Equity 13.5%

urce: Fairwealth Institutional Research

1 Year Forward P/E band

Terminal Growth rate

(WACC)

3.0% 4.0% 5.0%

12.0% 221 237 258

13.0% 193 205 220

14.0% 172 181 192

21x

28x

35x

42x

0

50

100

150

200

250

300

350

400

Mar-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13


20/25




Key Risks

Upside Risks

Stable Gold prices:Gold price volatility has an adverse impact on Titans business as it affects the volume groStable gold prices could lead to an increase in the demand thereby increasing the volumes revenues.

Higher margins:Better than expected revenue mix and higher margins could lead to an increase in profitability of Titan.

Improving macro environment:An improvement in the macro environment could also lead to potential increased spendingthe consumers on discretionary items.

Downside Risks

Regulatory changes and taxation policies:Any adverse policy changes with respect to regulations and taxes like customs duty, exduty could have an impact on Titan.

Increasing competition and continued dominance of unorganized sector:Titans Tanishq and Gold plus now face a lot of competition from the organized players inmarket. Also continued dominance by the unorganized sector which constitutes 90% ofmarket share could hurt Titan.


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Titan Timeline

1984 Conceived1987 Launch of Titan Watches1993 Europe Foray1994 Timex JV1996 Tanishq1998 Sonata Launch2003 Fastrack2005 Precision Engineering(PED)2006 Goldplus2007 Eyewear2008 Zoya2009 Helios2010 Fastrack Accessoriesource: Company, Fairwealth Institutional Research

Company BackgroundTitan Industries is the organization that brought about a paradigm shift in the Indian wmarket when it introduced its futuristic quartz technology, complemented by internatistyling. With India`s two most recognized and loved brands Titan and Tanishq to its crTitan Industries is the fifth largest integrated watch manufacturer in the world. With a licefor premium fashion watches of global brands, Titan Industries repeated its pioneering actbrought international brands into Indian market. Tommy Hilfiger and Hugo Boss, as well as

Swiss made watch Xylys owe their presence in Indian market to Titan Industries. Enteringlargely fragmented Indian jewellery market with no known brands in 1995, Titan Induslaunched Tanishq, Indias most trusted and fastest growing jewellery brand. Gold Plus, the addition, focuses on the preferences of semi-urban and rural India. Completing the jewelportfolio is Zoya, the latest retail chain in the luxury segment. Titan Industries has also madforay into eyewear, launching Fastrack eyewear and sunglasses, as well as prescripeyewear. The organization has leveraged its manufacturing competencies and branched precision engineering products and machine building.

Titan Brand Positioning

Segment Watches Jewellery Eyewear

Luxury Zoya

Premium Xylys Tanishq

Mid Market Titan Tanishq Titan

Zoop Fastrack

Fastrack

Mass Market Sonata Gold Plus Eye+Source: Company, Fairwealth Institutional Research

Titan Revenue Mix

Titan EBIT Mix


Watches

19%

Jewellery

77%

Others

4%

FY11

Watches

16%

Jewellery

80%

Others

4%

FY14E

Watches

32%

Jewellery

71%

Others

3%

FY11

Watches

23%

Jewellery

76%

Others

1%

FY14E


22/25


23/25




Estimated Balance Sheet

mn FY 10A FY 11A FY 12E FY 13E FY

Share Capital 444 444 888 888 Reserves Total 6800 9810 13817 19341 26Net Worth 7244 10254 14705 20229 27Total Debt 728 677 136 136 Net Deferred Tax 48 15 15 15

Total Liabilities 8019 10946 14856 20380 27

Gross Block 6243 6721 8152 9573 10Dep 3617 3891 4390 4916 5Net Block 2626 2831 3762 4656 5Capital WIP 123 194 271 372 Investments 76 91 91 91 Current Assets 18037 34224 43628 52570 63Inventories 13403 19938 27221 33244 39Sundry Debtors 936 1137 1743 2205 2Cash and Bank 1867 10949 12465 14921 18Loans and Advances 1831 2200 2200 2200 2Total Current Liabilities 12843 26394 32897 37310 42

Sundry Creditors 7222 17461 23964 28378 33Short Term Debt 4229 6683 6683 6683 6Others Liabilities 45 49 49 49 Provisions 1347 2201 2201 2201 2Net Current Assets 5194 7831 10731 15260 21

Total Assets 8019 10946 14855 20379 27

Estimated Income Statement

mn FY 10A FY 11A FY 12E FY 13E FY

Net Sales 47764 66617 89365 109315 131Growth 23.0% 39.5% 34.1% 22.3% 20

Gross Profit 13885 19413 22788 28094 34EBIDTA 3950 5856 7907 9838 11Growth 43.9% 48.3% 35.0% 24.4% 21

Depreciation 601 345 448 526 EBIT 3349 5511 7459 9312 11

Growth 43.9% 64.6% 35.3% 24.8% 22

Other Income 119 561 894 1202 1Interest 254 82 31 16 PBT 3213 5990 8322 10498 12

Growth 39.4% 86.4% 38.9% 26.2% 23

Tax 710 1686 2347 3044 3Reported PAT 2503 4304 5975 7453 9

Growth 57.5% 71.9% 38.8% 24.7% 23

Adjusted PAT 2527 4317 5975 7453 9Growth 51.2% 70.9% 38.4% 24.7% 23


24/25




Estimated Cash Flow Statementmn FY 10A FY 11A FY 12E FY 13E FY

PBT & extraordinary items 3213 5990 8322 10498 1Adjustment ForDepreciation 601 345 448 526Interest (Net) 148 -469 31 16Working Cap Changes 780 6059 -1385 -2072 -2Inventories -1376 -6535 -7282 -6023 -

Trade & 0th receivables 117 -200 -606 -462Loans & Advances -191 -215 0 0Trade Payables & Provisions 2230 13008 6503 4413Direct Taxes Paid -1341 -1722 -2347 -3044 -Operating Cash Flow 3419 10250 5070 5924 7Cash Flow From Investing -319 -262 -1508 -1522 -Capex -442 -662 -1508 -1522 -Investments 0 -15 0 0Cash Flow From Financing -1779 -906 -2046 -1946 -2Change in Eq Cap 0 0 444 0Change in reserves 0 0 -444 0Net Borrowings -1000 -54 -541 0Dividend Paid -442 -662 -1524 -1930 -Interest Paid -262 -80 -31 -16

Change in Cash 1320 9082 1516 2456 3Opening Cash 547 1867 10949 12465 14Closing Cash 1867 10949 12465 14921 1

Key RatiosParticulars FY 10A FY 11A FY 12E FY 13E FYProfitabilit ratiosEBITDA% 8.3% 8.8% 8.8% 9.0% 9EBIT% 7.0% 8.3% 8.3% 8.5% 8PAT % 5.2% 6.5% 6.7% 6.8% 7Adj. PAT % 5.3% 6.5% 6.7% 6.8% 7Valuation ratiosEPS (`) 2.8 4.8 6.7 8.4Adj. EPS (`) 2.8 4.9 6.7 8.4

BV (`) 8.2 11.5 16.6 22.8EV (`mn) 80502 158800 204203 201747 19Dividend(`mn) 666 1110 1524 1930DPS (`) 1.5 2.5 1.7 2.2P/E (x) 85.7 50.2 36.3 29.1P/BV (x) 29.9 21.1 14.7 10.7EV/EBITDA(x) 20.4 27.1 25.8 20.5Dividend Yield 0.6% 1.0% 0.7% 0.9%Return RatiosAdj. ROE% 39.6% 49.3% 46.6% 42.5% 38ROCE% 43.3% 58.1% 57.8% 52.9% 47Solvency ratiosDebt/ Equity (x) 0.1 0.1 0.0 0.0Interest Coverage Ratio 13.2 67.1 239.9 571.0 7

Turnover ratiosAsset turnover (x) 6.2 7.0 6.9 6.2Inventory Turnover(days) 135.1 127.1 127.5 134.0 1Debtors (No of days) 7.5 5.6 5.8 6.5Creditor (No of days) 75.4 94.1 112.0 116.0 1DU Pont AnalysisNP margin 5.3% 6.5% 6.7% 6.8% 7Asset Turnover(x) 6.2 7.0 6.9 6.2Financial leverage(x) 1.2 1.1 1.0 1.0ROE (%) 40% 49% 47% 43%


25/25



Disclaimer:

Thispublicationhasbeensolelyprepared forthe informationpurposeanddoesnotconstituteasolicitationtoanypersontobuyorsella

security. While the information contained therein has been obtained from sources believed reliable investors are advised to satisfy

themselvesbeforemakinganyinvestments.FairwealthSecuritiesLtddoesnotbearanyresponsibilityforauthenticationoftheinformation

contained inthereportsandconsequently isnot liableforanydecisiontakenbasedonthesame.FurtherFairwealthResearchreportonly

provides informationupdatesandanalysis.Allopinionsforbuyingandsellingareavailableto investorswhentheyareregisteredclientsof

FairwealthInvestmentadvisoryservices.Asamatterofpractice,Fairwealthrefrainsfrompublishinganyindividualnameswithitsreports.As

perSEBIrequirementsitisstatedthat,FairwealthsecuritiesLtd,and/orindividualsthereofmayhavepositionsinsecuritiesreferredherein

andmay

make

purchases

or

sale

while

this

report

is

in

circulation.

Stock RatingsBUY Thestock'stotalreturnisexpectedtoexceed15%overthenext12months

ACCUMULATE Thestock'stotalreturnisexpectedtobewithin1015%overthenext12months

HOLD Thestock'stotalreturnisexpectedtobewithin010%overthenext12months

SELL Thestock'stotalreturnisexpectedtogivenegativereturnsoverthenext12months

NOT RATED TheAnalyst

has

no

recommendation

on

the

stock

under

review

RESEARCH

Name Designation EmailID ContactNumberSharmilaJoshi HeadEquity [email protected] 09320159211

Prakash Pandey VP Research&PMS [email protected] 09313337742/098670081721

PreetiGupta Sr.ResearchAnalyst Fundamental [email protected] 09867081737

HiteshParekh ResearchAnalyst Fundamental [email protected] 02239244988/9920616329

HemenKapadia TechnicalStrategist [email protected] 09821276177

PervezDanish Sr.TechnicalAnalyst [email protected] 09312873108

INSTITUTIONALDESKName Designation EmailID ContactNumberLokeshhN.Gowda SeniorManager Sales [email protected] 02230720073

RajanBhatia InstitutionalDealer [email protected] 02230720057

FAIRWEALTHSECURITIESLTD.H.O.:PlotNo.651652,UdyogVihar,Phase5,Gurgaon122001(Haryana)

Phone:01243024400,Fax:01243024474

Website:www.Fairwealth.in.Email:[email protected]

FAIRWEALTHINSTITUTIONALDESKUnitNo,12,2ndFloor,Sonawala,ApolloBuilding,MumbaiSamacharMarg,OppBSE,FortMumbaiMaharashtra 400001,

Ph:0223072005668,Fax:02230722787

Delhi:UG3,SomduttChambersII,BhikajiCamaPlace,NewDelhi110066,Ph:01146091118 Chennai:RahabTower,FirstFloor,NewNo:522,OldNo:706

PH Road,Aminjikarai, Chennai600029. Ph04442698796, 42698834, 32218508 Kolkatta:No.1&2, 3rd Floor, TobaccoJouse,Old CourtHouse Street

Kolkatta,WB700001.Ph 033401195000203 Bangalore :ShopNo54,1stfloor,12thMainRoad,27ThCrossRoad,04thBlockJayanagar,BangloreKarnataka560011,Ph08041172604/605 Hyderabad :ShopNo.8,GroundFloor,MeridianPlaza,besides LalBunglow,Green Lands,RoadAmeerpetHyderabad 500016, Ph04040037218. Ahmedabad: 108,H.J.House,Opp IGP Petrol Pump, near Rambagh Police Station,ManiNagar,Ahmedabad

Gujarat380009.Ph 07940304461,62636465.

titan industries ltd_initiating coverage_fairwealth securities ltd_10april 2012

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