Titan Industries Ltd

7/27/2019 Titan Industries Ltd

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ANUSH SHARES & SECURITIES PRIVATE LIMITED 1 | P a g e

Titan Company Limited

(Erstwhile Titan Industries Limited) NSECODE: TITN.NS

Initiating Coverage

Institutional Equity Research7th October 2013

Recommendation: BUY

Target Price: `300

TCL Building asset light specialty retail chains

The gold storm and the poor consumer sentiment slowed

down the pace of value creation of this retail mammoth. We

believe the consumption theme is still intact and disposable

income of Indian middle class is set to rise once the economy

takes a U shaped recovery.

TCL is going to utilize this opportunity to scale up its stores

by adding ~ 200 stores every year across watches and

accessories, jewellery and eyewear segment.

We initiate our coverage on TCL with a buy rating and

explain our investment rationale, summary of which is

provided here below:

Aggression in store expansion to continue in watches andaccessories segment.

Jewellery to gain market share from unorganized sectionand step up studded jewellery share.

Tier 2/3 expansion in jewellery segment to boost aboveaverage growth rates.

Eyewear to continue to grow 25%+ with pricing power. Margins to recover as TCL adjusts to the headwinds of

gold availability, poor consumer sentiment and material

cost inflation in watches category.

Brand extensions to accessories (c. $2 billion market)provide headroom to invest further on brand building.

Entry into new categories under exploration recentlyamended MOA to include new objects of the company.

Valuation and Recommendation

We forecast TCL to deliver CAGR 20% topline growth and CAGR

23% bottom-line growth between F13-16e led by aggressive store

expansion, brand building initiatives and recovery in consumer sentiment

in FY15. We value the company at 28x one year forward earnings and

arrive at target price of`300 providing an upside of 25% at the CMP

of`239.

Hence, we recommend a BUY on the stock

CMP () 239Target Price () 300

Upside / Downside (%) 25

Mkt. Cap. ( millions) 2,12,181

EV ( millions) 1,97,722

52 week H/L () 313.6/200

Equity Capital ( millions) 888

Face value (INR) 1

Promoters

FIIs

FIs & MFsOthers

FY12 FY13 FY14E FY15E

EV/EBITDA 24.0 19.5 18.2 13.2

P/BV 14.5 10.8 8.3 6.4

P/E Ratio 34.9 29.1 26.0 19.6

ROCE (%) 70.1% 60.9% 52.8% 54.1%

RONW (%) 47.7% 41.6% 35.7% 36.7%

FY12 FY13 FY14E FY15E

Sales 88 101 119 146

EBITDA 8 10 11 14

PAT 6 7 8 11

EPS () 6.9 8.2 9.2 12.2

D/E - - - -

24.0%

Valuation Summary

Key financials (` crores)

Recommendation

Stock Details

Shareholding Information

53.1%

20.1%

2.8%

83

93

103

113

123

133

NIFTY TITAN

One year relative price movement


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Initiating Coverage


Recommendation: BUY

Target Price: `300

COMPANY BACKGROUND

Titan Company Limited (TCL) (until recently known as Titan Industries Limited) is a

specialty retailer with retail presence in B2C businesses of watches, jewellery, eyewear and

accessories. The company was originally established as a JV in 1984 between TATA

group and the Tamilnadu Industrial Development Corporation (TIDCO) to manufacture

watches. In its thrust to grow, Jewellery vertical was added in 1996, Precision Engineering in 2005 and Eyewear

in 2007.

In FY13, Jewellery segment contributed 79% of total revenues, followed by Watches (~16%), Eyewear (~3%)

and Precision Engineering B2B (~2%). Jewellery division contributed to 82% of EBIT, followed by Watches

contributing to 18% as Eyewear and Precision Engineering have reached Breakeven levels.

Watches:TCL is the worlds 5th largest watch manufacturer. In 2 decades, TCL has transformed itself from a

single brand Titan watch manufacturer to multi brand retail chain of watches in India and abroad. The company

is the market leader in watches segment in India and has presence in over 209 towns with 968 stores covering

1.3 million sq ft of store area. TCL has international presence in watches segment in 32 countries with 2201

outlets.

Jewellery: This segment operates under 3 retail chain brands viz., Tanishq, Gold Plus and Zoya. As on 30 th June

2013, TCL operates 151 Tanishq stores, 31 Gold Plus stores and 2 Zoya stores. The company focuses in design

and innovative jewellery products with gold and diamond as base metals/stones. The company has uniquely

positioned itself as market leader in organized jewellery market. The industry is highly fragmented and isestimated to be worth approx. $20 bn.

Eyewear: This category is operated under the retail chain brand of Titan Eye+. As on 30 th June 2013, the

company has 229 stores and has broken even on this vertical. The product sold in this retail chain comprises of

frames, lenses, sunglasses, contact lenses, ready readers and accessories; with in-house brands (Titan, Eye+ and

Dash) and many licensed international and luxury brands.

Precision Engineering: This is the B2B business TCL entered in 2005 to de-risk itself from the risks of B2C

business. Albeit, only 2% of revenues is the contribution of this division with low ROCE, it provides the

opportunity to leverage TCL engineering capabilities to foray into USD 32 billion (e. FY13) global market. The

business is capital intensive and hence will be a less preferred growth driver for TCL in the medium term.

TCL has 6851 employees as on 31st march 2013 with 3361 employees engaged in factories and manufacturing

while 3107 are engaged in retail, sales and marketing. TCL is poised to position as a multi-chain specialty retailer,

capitalize the opportunity provided by huge unorganized categories in India and leverage on the rising per capita

income of India.


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Initiating Coverage


Recommendation: BUY

Target Price: `300

PROMOTER &MANAGEMENT ~ TATA GROUP & PROFESSIONAL MANAGEMENT

Hans Verma

Mr. Hans Raj Verma, lAS, is Non-Executive Non-Independent Chairman of the Board - Nominee of TIDCO of Titan Company Ltd., since October 31, 2012. He is the

Chairman and Managing Director of Tamilnadu Industrial Development Corporation Ltd (TIDCO).

Bhaskar Bhat

Mr. Bhaskar Bhat, B.Tech., PGDM has been the Managing Director at Titan Industries Limited, since April 1, 2002 and serves as its Chief Executive Officer. Since 1983, Mr.

Bhat has been associated at the Tata Watch project that later became Titan Watches and is now Titan Industries. He started as a management trainee at Godrej & Boyce

Manufacturing in 1978. Afterspending five years at Godrej, he joined the Tata Watch Project initiated by Tata Press. He has been Chairman at Tata Ceramics Ltd. since March 5,

2012. Heserves as an ExecutiveNon Independent Directorof Titan Industries Limited. Heis a Memberof AdvisoryBoard of Incube Ventures Pvt Ltd. Mr. Bhat is a Director

of Virgin Mobile India Limited. He is a Member of the Governing Council of the T.A.Pai Management Institute, Manipal and the SDM Institute of Management and

Development, Mysore. Mr. Bhat serves as a Director of Titan International Holdings BV; Titan Watches & Jewellery International (Asia Pacific) Pte Ltd; Titan Holdings Ltd;

Titan Properties Ltd and Titan International Marketing Ltd. He has been a Non Independent Non Executive Director at Trent Ltd. since September 27, 2010. He has been

Independent Director at Bosch Ltd since January1, 2013. He has received the Distinguished Alumnus Award in IIT Madras in 2008. Mr. Bhat received a B.Tech. in Mechanical

Engineering from Indian Institute of Technology (IIT), Madras in 1976 and has completed his Post Graduate Diploma in Management from Indian Institute of Management

(IIM), Ahmedabad in 1978.

T. Arun

Mr. T. K. Arun is Non-Executive Non-Independent Director - Nominee of TIDCO for Titan Company Ltd., since July 31, 2012. He also serves as General Manager & Secretary

of Tamilnadu Industrial Development Corporation Ltd (TIDCO).

Noel Tata

Mr. Noel Naval Tata is Non-Executive Non-Independent Director - Nominee of Tata Group forTitan Company Ltd. He has knowledge and experience in sales and marketing

and possesses in retailing business. He holds B.A. (Economics) from University of Sussex and IEP, INSEAD, France.

Tirumalai Balaji

Mr. TirumalaiKum ar Balaji is Non-Executive Independent Director of Titan Company Ltd. He is an Industrialist with business experience. List of PublicCompanies in which

outside Directorships: Lucas TVS Ltd., India Nippon Electricals Ltd., Sundaram Clayton Ltd., Delphi-TVS Diesel Systems Ltd., Lucas Indian Service Ltd., T V Sundaram

Iyengar & Sons Ltd., Apollo Hosp itals Enterpise Ltd., TVS Autom otive Systems Ltd., TVS Investments Ltd., TVS Credit Services Ltd.

inita Bali

Ms. Vinita Bali is Non-Executive Independent Director of Titan Company Ltd. Sheis presentlyChief Executive Officer of Britannia Industries Ltd. Shereceived herBachelors

degree in Economics from Delhi University and MBA at the Jamnalal Bajaj Institute of Management Studies. She pursued postgraduate studies in Business and Economics at

Michigan State University. Ms. Vinita Bali is a qualified manager with national and international experience and had held several positions in Cadbury India and Coca-Cola.

Ishaat Hussain

Mr. Ishaat Hussain, Esq., is Non-Executive Non-Independent Director - Nominee of Tata Group of Tata Group forTitan Company Ltd. Heis a Chartered Accountant. He

has experience in Finance, Strategy & General Management. List of Public Companies in which outside Directorships: Tata Sons Ltd; Tata Steel Ltd; Voltas Ltd Tata Inc.; Tata

Teleservices Ltd; Tata Industries Ltd; Tata AIG General Insurance Co Ltd; Tata AIA LifeInsurance Co Ltd; Tata Consultancy Services Ltd; Tata Sky Ltd; The Bombay Dyeing

& Manufacturing Com pany Ltd; Tata Capital Ltd; Viom Networks Ltd; Go Airlines (India) Ltd; Tata Capital Financial Services Ltd.

C. G. Krishnadas Nair

Dr. C. G. Krishnadas Nair is Non-Executive Independent Director of Titan Company Ltd. He has experience covering academia, R&D and industry Retired as Chairman &

CEO of Hindustan Aeronautical Limited. He holds B.E. (Metallurgy)., M.Sc. Engineering, Ph.D Engineering. List of Public Companies in which outside Directorships are

Brahmos Aerospace; Thiruvananthapuram Ltd; Global Vectra Helicorp Ltd; Karnataka Hybrid Micro-Devices Ltd; Tata Advanced Materials Ltd; Titan Tim eProducts Ltd.

Das Narayandas

Prof. Das Narayandas is Non-Executive Independent Director of Titan Company Ltd. Heis theJames J. Hill Professorof Business Administration at the Harvard Business

School. He is currently the Chair of Harvard Business School Executive Educations Advanced Management Program and co-chair of the Building Client Management

Capabilities in professional service fi rms. His academic credentials include a Bachelor of Technology degree in Engineering from the Indian Institute of Technology, a Post-

Graduate Diploma in Management from the Indian Institute of Management and a Ph.D. in Management from Purdue University, USA.

Hema Ravichandar

Mrs. Hema Ravichandar is Non-Executive Independent Director of Titan Company Ltd., since March 30, 2009. Mrs. Hema Ravichandar is a practicing in thefield of Human

Resource Development and has served as Senior Vice President & Group Head - Human Resources Development of Infosys Technologies Ltd., till July 2005. She holds B.A.

Economics from University of Chennai and Post Graduate Diploma in Management, IIM Ahmedabad.

Ireena Vittal

Mrs. Ireena Vittal is Non-Executive Independent Director of Titan Company Ltd. She is Independent strategic advisor with an indepth and signifi cant knowledge in

agriculture, urban development in India and emerging markets. She holds B.Sc, PGDBM, IIM.


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Initiating Coverage


Recommendation: BUY

Target Price: `300

TCL ~ INVESTMENT RATIONALE

Time to Buy: Combo of high quality management and good businesses do not come cheap and when faced

with external headwinds, the market provides a window of opportunity to pick up such stocks at reasonable

prices.

Riding on the favorable demographics of:

1) Rapid increase in urbanization

2) Rise in number of middle class household

3) Working women population

4) Increase in disposable income

5) Large youth population and6) Changing consumption habits is expected to fuel discretionary spending of Indian middle class.

India is expected to see a shift towards discretionary spending, the share of which is expected to reach ~70% in

2025E from 52% in 2005. TCL is aptly positioned with its product offerings to cater to discretionary spending in

lifestyle segments.

With a strong distribution network (1048 stores in India in over 250 towns) and robust brand portfolio across

discretionary product categories, we believe TCL is suitably placed to make the best of rising aspiration and

disposable income of domestic consumers.

Eyewear Chain ~ 229 to 1200+ stores ~ building a highly profitable consumer franchise

To add 50-60 new store every year. Opportunity exists to reach 1200+ stores Low penetration and huge unorganized market of organized retail eyewear market provides significant

growth opportunity.

Brands, design and innovative marketing across the spectrum of fashion/style to vision correction toprovide repeat buyers for Titan Eye+.

EBIT margins to improve sequentially from c. 0% (FY13) to 6% in FY15 and 10% in FY16.Jewellery Segment ~ environment to improve from hereon.

Market share gain from unorganized market led by unique design and customer engagement initiatives ofTanishq.

Changing consumer preference from traditional jewellery to studded jewellery from trusted retail chains. Creating niche opportunities through brands in work wear (Mia), fashion (Iva) and romance (Solitaires)

segments.

Gold import quantity and financing restrictions of RBI and GOI to have least impact on Tanishq. Rebound in consumer sentiment to help regain 28-32% studded jewellery and margins recovery.


5/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Watches segment ~ Product mix, rising disposable income and range expansion to drive growth. Growth to be backed by store expansion, recovery in consumer sentiment and launch of accessories. Expect EBIT margin expansion to 15% levels with support from accessories segment by FY15. Premiumization to help increase realization growth once consumer sentiment rebounds.

Foray into new categories to propel growth and de-risk from jewellery

Launched categories like fragrance, belts, wallets, helmets etc. to enable growth momentum in World ofTitan stores.

Amendment to Objects clause in Memorandum of Association reflecting board room thinking to enternew categories to propel growth momentum.

Our Recommendation

We build conservative topline estimates and expect TCLs revenues to grow at 20% CAGR to `17935 crore

during FY13-FY16E driven by aggressive expansion plans in the jewellery, watches and eyewear

segment leading to strong growth in volume sales. We forecast margin accretion on the back of rising share of

premium products in the overall product mix and significant turnaround in the eyewear segment leading to

growth of 23% CAGR in bottom-line.

However, we believe the market has factored in most of the negatives related to gold import concerns and

slowdown in consumer sentiment (stock down 23% from 52 week high). We initiate coverage on the stock witha buy rating and a target price of`300 per share. We value the company at 28x one year forward earnings. At

CMP `239, the stock is trading at 26x FY14e EPS and 20x FY15e EPS.

Hence, we recommend a BUY on the stock with a potential upside of 25%.


6/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

TCL~BUILDING ASSET LIGHT SPECIALTY RETAIL CHAINS

Strong expansion plans to capture the favourable demographic changes

We believe TCL is best poised to take advantage of the changing discretionary consumption trends due to its

rapid store expansions. Titan has seen its store grow from 539 (6.85 lak sqft) in FY10 to 1026 (12.06 lak sqft) in

FY13 and with an eye on growth the company expects to expand its geographical footprint across segments. We

hence expect a sharp increase in the wallet share of discretionary household spending and luxury products in the

coming years on a rebound of consumer sentiment. The company has plans to add c. 245 stores (+24%) across

retail formats in FY14.

Watches division to extend its strong brands into accessories

Indian consumers propensity to spend on lifestyle products is likely to witness steady increase in the coming

years on a rebound of consumer sentiment. The accessories market is conservatively estimated to be $ 2 billion.

Company forayed into accessories market through brand extension of Titan (leather belts and wallets) and

Fasttrack (sun glasses, bags, belts and wallets for youth). The products are sold through existing watches retail

channel thereby providing significant store level margin expansion.

Gold availability near term operational pain but not a business threat

It is well known that RBI measures to restrict gold imports have brought down gold imports significantly in

August and September 2013. Our channel checks suggest that recycled gold have increased and the current issue

in the domestic market is not of availability but that of weak consumption demand. We believe, TCL is wellpositioned to ride through this economic challenge as it stands to get preferential status with banks like Nova

Scotia for domestic consumption demand.

Eyewear division the next game changer

Industry study suggests that approx. 30% of population needs vision correction (~ 300 mn) while presently only

84 mn users wear vision glasses (~ 25% of those who need vision correction). It is estimated that average

eyewear change cycle typically takes 36-48 months. We believe enhanced healthcare infrastructure improvement,

deeper penetration of ophthalmic healthcare, rising awareness of eyesight challenges, increased brand building

initiatives coupled with the rising preference towards stylish, designer and branded frames with innovative

functional lenses will accelerate the market growth and provide TCL the opportunity to grow 2x the industrygrowth rate in this segment.

Core watches segment to grow ahead of market through market expansion

With 65% market share and presence across the price tier and consumer need segments, TCL is expected to

drive growth ahead of market through 1) market share gains from unorganised market; 2) targeting urban youth

and women; 3) capture the up-trading potential in watches segment; 4) multi-ownership and 5) increasing

product range collections.


7/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

JEWELLERYSEGMENT ~ KEY PROFIT DRIVER ~ 82% OF EBIT

Large unorganized non-branded market opportunity to deliver LTL growth

TCL has 184 retail stores under Tanishq, Gold plus and Zoya brands as on 30th June 2013. Indian Jewellery

market is estimated to be atleast $ 20 bn (CY12) and is expected to reach $ 35 bn in CY16. The industry is highly

unorganized with 300000+ jewellery stores pan India (Source: 2011 Bain Industry study). It is estimated that semi-

urban and rural markets contribute 40% of the market size. While Tanishq enjoys c. 40% market share in the

branded jewellery segment, it stands to gain preferred place to buy for Indian consumers on account of 1) Trust

on TATA group; 2) Innovative range and design collections; 3) Best in class shopping experience; 4)

Transparency in gold purity and diamond karatage.

Taking Tanishq to many more new towns ~ expansion in Tier 2 / Tier 3.Presently Tanishq is available in 86 towns and Gold Plus in 31 towns. TCL plans to expand geographical

footprint and penetrate further into more towns under Tanishq brand. At the beginning of FY14, TCL had plans

to open 45 jewellery stores (+25%), however we believe that TCL will eventually go ahead with only 25 new

stores in FY14. Gold Plus chain will remain stagnant and restrict its operations within the state of Andhra

Pradesh as TCL is not convinced on the brand positioning and business profitability model in our view.

Beneficiary of rebound in consumer sentiment to drive higher share of studded jewellery sales

It is well known that Indian consumers are amidst the macro headwinds of 1) high dual inflation (WPI & CPI);

2) low GDP resulting in lack of income generation opportunities; 3) declining savings rate; and finally 4) lack of

positive catalyst or outlook for the near term future. This is evident in the LTL growth rates of discretionaryconsumption categories in 2013 and continuing negative outlook on the growth prospects for the next twelve

months. We believe recovery in economic growth with good monsoon and stable government post May 2014

elections will boost consumer confidence and recovery in discretionary consumption favoring TCL to deliver

grow ahead of market.

Strong corporate patronage of TATA group

Titan is part of the TATA group which is considered as reliable and trusted brand for over 3-4 decades. Due To

the prevalence of under-karatage in the unorganized segment, consumers will shift to branded players like

Tanishq. The company has a strong customer focus with loyalty programs like Golden Harvest Scheme, Ananta

and Anuttara.

Design innovations, brands, advertising and aspiration to drive consumer preference to Tanishq

TCL has a competitive edge to offer innovative designs under its umbrella brands for specific target consumers

(Mia for working women; fq for teens). Also, the company is focusing on targeted advertising campaigns with

regional designs to meet the needs of regional jewellery design preferences.


8/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Gold import policy restrictions to have negligible impact on TitanChart 1: Titan Gold requirement ~ c. 20 tons per year

TCL has annual requirement of ~ 20 tonnes of gold to

meet its sale requirements. In addition, approx. 20% of

the gold is received as part of gold exchange program

from its customers. Our industry sources (regional local

jewellery chains) confirm that while the availability of gold

has dried up in the official channel, the unofficial channel

is supporting the availability.

Source: Titan, Anush Research

In Aug/Sep 2013, RBI imposed restrictions on the quantum of gold that can be imported by way of 80:20 rule

(domestic : export ratio) and has subsequently clarified that gold imported by entities in SEZs, EOUs, premier

and star trading houses will be excluded from the rule. According to Table 1 below, India exported c. 130-140

tons of gold in FY11-12 and has remained stable in FY13.

Table 1: Estimated total export of gold is 130-140 tons per year

Source: DGCIS data, Industry reports, Anush Research

As per our industry sources, approx. 50% of this export is done by the excluded category of exporters in the RBI

clarification. This leaves approx. 60-70 tons of exports by entities who are covered under 80:20 rule making theindustry total imports restricted to c. 300 tons per year. In our view, TCL will have the preferential status in the

domestic distribution of 240 tons of gold and hence we do not see this as a business risk.

Gold availability to be supported by recovery in Recycled Gold

With steep import duty hike to 10% and INR depreciation, the domestic market prices have fallen only by

c.10%. Chart 2 below shows the quantum of recycled gold supply over last 5 quarters in Indian market.

Gold Exports^in tons in bn $ in bn $

FY08 679 16.7 3.0 18.0% 122

FY09 743 20.7 4.2 20.3% 151

FY10 851 28.6 4.3 15.0% 128

FY11 970 40.5 6.1 15.1% 146

FY12 1079 56.2 7.0 12.5% 134

FY13 (Anush Estimates) 845 50.1 7.5 15.0% 127

Gold Imports % exportedEst. Export

tonnageFiscal Year

15.48 15.7017.93 19.30

19.69

FY09 FY10 FY11 FY12 FY13e*


9/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Chart 2: Recycle gold supply to witness resurgence and touch 40 tons amidst current tightness in supply

Source: Thomson Reuters GFMS, Anush Research

Our discussion with industry experts suggest that purchase price of gold in exchange program plays a significant

role in the quantum of recycled gold coming into market. Amidst the scarcity created by restricted imports, the

market is likely to witness increase in recycled gold. We estimate recycled gold supply business model to witness

change until RBI eases on import norms. We expect incremental 120 tons (30 tons incremental per quarter) of

supply from recycled gold source taking total supply by way of imports and recycled gold to c. 450 tons.

Studded jewellery share the key metric to watch

Studded jewellery share stood at 16% in JQ 2013, lowest in over 20 quarters. Our industry analysis shows that

studded jewellery segment has an EBIT margin of c. 25% while pure gold jewellery provides 6% EBIT margins

and gold coins (or bars) deliver 2.5%-3% EBIT margins. Chart 3 below depicts the importance of studdedjewellery share in EBIT margins.

Chart 3: Studded Jewellery share has a direct impact on EBIT margins

Source: Anush Research

3034

28

21

10

Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

Recycled Gold supply

7.2

8.9 9.0 8.7

10.1 9.7 9.610.1 10.2

12.5

9.8

11.9

8.8

0%

5%

10%

15%

20%

25%

30%

35%

0

2

4

6

8

10

12

14

Q1FY1

1

Q2FY1

1

Q3FY1

1

Q4FY1

1

Q1FY1

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Q2FY1

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Q3FY1

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Q4FY1

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Q1FY1

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Q1FY1

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Studded share% (RHS) Jewellery EBIT margin % (LHS)


10/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Our profitability analysis in Table 2 below shows that c. 63% of Jewellery EBIT (c. 50% of TCL EBIT) is

derived from 27% of Jewellery topline (c. 21% of TCL topline). While the current consumer demandenvironment does not support good studded jewellery demand, we believe TCL will recover from 16% low

levels to 22% levels and work towards 32% in a better consumer sentiment phase.

Table 2: Studded jewellery contributes to c. 63% and c. 50% of Jewellery EBIT and Company EBIT respectively

Source: TCL, Anush Research

Restricting sale of Gold coins and bars to prop up 80 bps margin expansion artificially

TCL stopped sales of gold coin and bars in its stores effective July 2013, a wise decision to boost corporate

image (supporting CAD pressures of GOI) as well as divert the gold available to meet jewellery demand. Our

segment analysis in Table 2above shows that going forward with pull back of coins and bars sales, TCL will

show an improved business model of 80 bps margin increase in its Jewellery business.

Higher wedding days and Gold price play a vital role in volume growthAnalysis of volume growth, muhurath days (reasonable benchmark for wedding days) and gold price growth

shows as depicted in Chart 4 show that 1) higher wedding days and decline in gold prices has a significant

multiplier effect in volume; 2) continued stable prices (e.g.FY11) in gold provide stable volume opportunity and

3) significant price increase YOY (30%+) proves to have negative correlation on jewellery demand.

Chart 4: Higher wedding days and Gold price decline have a multiplier effect in volume growth


FY 2013Gold

coins/bars

Gold

jewellery

Studded

jewelleryTotal

Business

without

coins/bars

Sales (INR crores) 810 5080 2218 8108 7298

EBIT margins (Anush Estimates) 3% 6% 25% 11% 11.8%EBIT (INR crores) 24.3 304.8 554.5 884 859.3

3% 34% 63%

23

6

1113

16

7

13 14

18

10 1012

21

9

-10

-5

0

5

10

15

20

25

-30%

-20%

-10%

0%

10%

20%

30%

40%50%

60%

70%

80%

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14

Muhurath Days (RHS) Gold Price growth% (LHS) Vol growth% (LHS)


11/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

We conclude from Chart 4 that volume growth remains stable in a smaller band of gold price volatility (+10%-

15%) while a steep correction (say + 25%) will have significant negative correlation to volume demand.

Other Key business strategies in jewellery segment to maintain growth momentum

Introduction of many KVIs, entry products at attractive price points (Diamond jewellery from `9,999)and weights as well as region specific products. (On similar lines of FMCG products at`5, `10 price point and

low fill packs like sachets or mini bottles of 7.5 ml to attract new consumers)

Continued launch of many exciting collection across the category and price spectrum. Investing in segments like work wear (Mia), Fashion (Iva) and Romance (Solitaires). Competition protection program and pre-emptive competition plan to defend consumer franchise from

ongoing threat of competition opening stores in the vicinity of Tanishq.

Direct import license from RBI to import upto 10 tons for TCL requirements will contribute by way ofVAT savings on gold procurement (approx. 20 bps at EBIT margin level).

Continuing push for Golden Harvest Scheme ~ driving on the Indian nature of being conservative andhigh savings.

At lower gold prices, making charges charged by Tanishq brands will come closer to other big jewelers,improving competitive position. (An event proven in April 2013)


12/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

EYEWEAR SEGMENT ~ SET TO BE AMONGST THE LARGEST RETAIL CHAIN

Multiple demand drivers to explode growth opportunity

Indian eyewear industry is estimated to be approx. `1800 crores (CY2012) largely led by discount segment and is

expected to continue to grow at 15% - 20% p.a for the next decade. The industry continues to be highly

unorganised while some regional chains have emerged over last 24 months but none have been successful to be

a national player. The customer lifetime value is very high and repeat purchase is a regular feature from

adolescence to old age. As per industry survey, almost everyone over 40 years of age needs a vision correction.

The key growth drivers for the market to grow at 15-20% are

1) Population growth and rapid urbanization;

2) Literacy about vision correction needs;

3) Penetration of TV and computers;

4) Poor eye health due to lifestyle / improper diet;

5) Fashion conscious youth;

6) Rising disposable income;

7) Uptrading from popular priced to mid-premium eyewear lenses and frames

8) Rise of internet to enhance retailing reach of eyeglasses.

Eyewear a semi discretionary category

It is critical to note that unlike jewellery or watches segment, eyewear is a semi-discretionary category. Amidst

the on-going economic downturn, over 150 Titan Eye+ stores delivered a 15%+ LTL growth. We believe that

the category is almost equivalent to necessity category with a larger replacement cycle (estimated at 36/48

months).

Chart 5: Eyewear delivering strong LTL growth Chart 6: Store additions to help sustain 25%+ growth

Source: TCL, Anush Research Source: TCL, Anush Research

26%

-19%

26%

-1% 1%

19%14%

40%

21%

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Eyewear LTL Gr%

88% 81%

57%

37%

24%13% 13% 9% 10%

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Eyewear New Stores %


13/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Market Range Market Segment Segment averageretail price

High-end Luxury > 230 Euro

Premium (fashion and designer) 130-230 Euro

Mid-range Diffusion 75-130 Euro

Lower-end Mass


14/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Titan Eye+ store expansion opportunity is nearly 5 times its present 229 stores

Chart 8: Titan Eye+ Business opportunity 1200+ stores (5x)

Titan Eye+ has scaled up from 82 stores

in Apr 2010 to 229 stores in Apr 2013 (4

new stores every month). TCL has plans

to open 55 new stores in FY14 and in our

view, Indian eyewear market has a

potential for Titan Eye+ to scale up the

store count from 229 stores to 1200+stores.


Chart 8 above shows comparison with retail chains that have built considerable scale and still expanding. (For

example: Bata adds 50 new stores every year; Apollo pharmacy adds 120 stores every year and Dominos Pizza

opens approx. 40 new stores every year)

229

587 602

10501250

1481 1526

0

200

400

600

800

1000

1200

1400

1600

1800

Titan Eye+ Watch

showrooms

excl. Helios

Dominos

Pizza

Medplus

Pharmacy*

Bata Caf Coffee

Day

Apollo

Pharmacy


15/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

WATCHES ~ RIDING THE ASPIRATION WITH HIGHER DISPOSABLE INCOME

Catalysts for growth in watches category

The catalysts for category growth includes overall economic progress, expanding upper-middle class and middle-

class population, growth in India's young earning population, rising consumerism and the spread of modern

retail formats.

TCL commands 25% market share by volume and 45% by value in the `4700 crores India watch market. Vast

proportion of watch market is below`500/- (65% of market volume and 24% by value) where TIL participates

through its Sonata and Zoop brands. In the organized watch retail segment, TCL holds 65% value market

share.

Realization growth to be led by up-trading and less of pricing power

The industry witnessed c. 4.5% CAGR volume growth between FY10-13 (48 million pieces to 55 million pieces).

With significant fall in consumer sentiment and low economic growth, the volume growth in FY14 is expected

to be flat or negative in India.

The industry price realization per piece moved up by 3% CAGR between FY10-13 while the price realization of

TCL moved up ahead of market at c. 5% CAGR during the same period. The price realization improvement in

the industry has so far been cost inflation led while margins have been range bound.

Chart 9: Watches price increase to be a challenge in FY15


937 930 931

978

1083

1213

1153

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

700

800

900

1000

1100

1200

1300

FY09 FY10 FY11 FY12 FY13 FY14e FY15e

Realisation per watch (LHS) Vol. gr % (RHS)


16/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Over 50% volume of watch market is unorganized, primarily at low end (mass market) dominated by smallplayers assembling watches illegally, smuggled watches and fakes thereby making it a tough task for TCL to

pursue premium pricing strategy without a risk to its volume base. Chart 9 above reflects the stability in avg.

realization per watch despite a good GDP growth during the period FY10-12. We forecast a material cost

inflation led price increase in FY14-15 and less of Premiumization based realization growth.

Watch - perfect discretionary consumption pattern ~ high correlation to consumer sentiment

Watch segment is highly correlated to the consumer sentiment and discretionary consumption cycle. Chart 10

below shows the impact of the ongoing slowdown in the economy on the watches division sales growth. We

expect the situation to improve only in H2FY15 and thereby remain cautious on this segment and growth will be

driven by market share gains in the short term through expansion and product range launches.

Chart 10: Discretionary spend slowdown effect on Watches sales growth and EBIT margins


Stores expansion and low penetration to drive market share gains

TCL has an aggressive plan to add c. 145 stores in watches and accessories segment in FY14. In our view, the

ongoing slowdown will force management to revisit aggressive expansion and slowdown the process of store roll

out. We expect these 145 stores to be up and running by FY15. In the interim, the focus will be on protecting

margins and retaining volumes in base stores with aggressive international expansion in developed markets as

they show signs of growth revival.

It is estimated that only 27-30% of Indians own a watch, as the per capita income crosses a threshold limit, the

incremental disposable income moves towards discretionary categories thereby enhancing the penetration led

category growth.

22% 21%

35%

17%

24%

16%18%

26%

15% 13%11%

1%

11%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

EBIT margin % (LHS) Sales Gr% (RHS)


17/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

Poor consumer sentiment and material import cost inflation- near term growth a challenge

A sluggish economy, poor consumer sentiment and a retail market overrun with products on deep discount will

derail the LTL growth in this segment in FY14 and restrict the overall growth to store expansion and inflation

led price increase.

Full stable of brands to address every segment of the market

Portfolio of brands, address the consumer needs across price points. In addition, we expect launch of the

acquired swiss brand Favre Leuba in FY15 in the luxury category.

Chart 11: Brands across formal and style segments and price range and segment need positioning


Building Numero Uno position in multi brand retail channel in watches segment

Chart 12: TCL value market share in Multi Brand Retail outlets

As per the independent study conducted by Franis

Kanoi Research agency on multi brand outlets market

share in watches segment, TCL has gained over 600 bps

market share in last 36 months (Refer chart 12) and has

retained market leadership in this future segment.

Source: Francis Kanoi Research, Anush Research

Brand Portfolio Brand PositioningFavre Leuba Swiss Premium Brand - Ye t t o be launched globally

Xylys Swiss made Premium Offering

Nebula Crafted 18K gold and precious stone

Titan Flagship b rand

Edge Worlds slimmest watch

Raga Women

Fasttrack College-going youth

Zoop School-going children

Sonata Entry segment mass market

Licensed BrandsHugo Boss, FCUK, Tommy Hilfiger, Movado, Citizen, Fossil,

DKNY, Nina Ricci, Roberto Cavalli, Esprit, Versace, Seiko,Timberland, POLICE

Others Edge, St eel, Orion

43%

45%

47%

49%

FY10 FY11 FY12 FY13


18/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

INCUBATING NEW CATEGORIES AND IMPROVING MARGINS

Tapping the $ 2 billion Indian accessories market opportunity

Though small, the watches brands of Titan and Fasttrack has been extended to accessories space like wallets,

belts, helmets, etc. The accessories market is highly unorganized and is estimated to be of $ 2 billion market size.

Since the distribution channel of these products remains through the flagship watch stores of Titan, we believe

large part of gross contribution will flow through to bottomline. We expect significant improvement in Watches

and Accessories division EBIT margin in the medium term once accessories business achieves a reasonable size.

Amendment of Other Objects clause in MOA to venture into new categories

Recent amendment to the Objects clause of TCL MOA reflects board room intention to enter new categories topropel growth momentum in the future. Some of the categories noted are:

Hearing aid and related accessories Apparel, garments, saris, writing instruments, mobile phones, musical instruments, lifestyle accessories,

etc.

Rendering content through education workshops, conferences, theater, entertainment shows, gadgettoys, DIY kits, activity books, sports products, foods and beverages, etc.

Kitchen appliances, storage shelves, kitchen utensils, chimneys, hobs, furniture and cabinets, etc. Products powered by solar energy.

Premium product mix and aggressive store expansion to drive margin expansion

Focus towards higher studded jewellery share to 32% in Jewellery segment, growth led by premium products

segments like eyewear, mid-premium watches and accessories will structurally improve gross margins of the

business. We estimate eyewear and PED segment to deliver 3.3% and 6% EBIT margin in FY14 and FY15

respectively, primarily led by scale benefits in eyewear division. We forecast TCL EBIT margins to remain

between 10%-11% in FY14-15 and deliver 11%+ from FY16.


19/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

TCL ~ FINANCIAL EFFICIENCY ~ TO REMAIN STABLE

Debt free company with cash reserve of`2000 crores as on 30th June 2013Asset light profitable business model with ROE/ROIC 35%+ Low cost working capital financing model (Gold leasing with Bullion banks like Nova Scotia)

Working capital risk of leased gold inventory ~ sufficient cash and direct import license

In the worst case scenario (unlikely to happen, in our view) of TCL being forced to bring down its gold lease

period to 90 days from 180 days, the company has sufficient armours in the form of gold direct import license

for 50% of its requirement and cash in hand of`2000 crores to manage the inventory availability risk. We do not

believe such a situation to arise in the near future.

Return on Equity to remain range-bound due to store expansion plans

Chart 13: TCL ROEs/R OICs to remain Stable Chart 14: Net Business working capital days to peak in FY14e.

Source: Anush Research Source: Anush Research

37.3

48.3 47.741.6

35.7 35.3 34.4

33.1

49.0 50.1

43.637.5 37.0 35.9

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

ROE (%) ROIC (%)

105112

119133

140 135

120

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Business Working Capital days


20/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

TCL~ KEY RISKS & CONCERNS

Studded Jewellery is the biggest risk; not the gold price

63% of Jewellery EBIT and c. 50% of TCL EBIT comes from Studded jewellery business (22% of revenue).

Any slowdown in new design launches, consumer engagement initiatives or structural change in consumer

perception of premium pricing of studded jewellery in Tanishq will have significant consequence in terms of

Jewellery division profitability.

Prolonged delay in economic recovery from slowdown

India has been witnessing prolonged delay in domestic growth revival. Continued weak economic growth will

raise the curtains on Indian middle class aspirations and dream for premium products. TCLs products fall under

the discretionary category, which has high delta with the growth in disposable income and is highly

dependent on the healthy growth of the economy. A slower than expected recovery in the economy will lead to

lower spending on discretionary items (and more on necessities) leading to reduced volume growth for TCL.

Also, middle class consumers are highly likely to delay upgrading to premium products in the event of a delay in

economic recovery. This will have significant impact on TCLs growth across segments of jewellery and watches.

Sharp correction in gold prices

Indian consumers prefer one way upward movement in gold prices every year. Sharp drops in price prove to be

an opportunistic moment to buy more. However, any sharp fall in gold prices due to global event will have a

significant negative impact on preference to gold beyond a reasonable level.

In addition, the gold held on behalf of customers under Golden Grammage Scheme (1.3 tons of Gold in hand

on behalf of customers) will see a mark to market notional loss.

FDI in single brand and multi brand retail chains

The premium segment of Titan watches could be impacted by an intense competition from a variety of

International brands. Several watch majors such as Tissot, Fossil, Calvin Klein, Giordano, Esprit and Tommy

Hilfiger compete directly with TCL in this category. Any susceptible increase in competition from these and

such other foreign brands can negatively impact revenues and margin in the watches segment.

INR currency fluctuation

50% of material cost in watches segment is exposed to currency risk. Sharp unfavourable movement in exchange

rates hampers the selling price and limit the demand for its products in watches segment.


21/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

0

50

100

150

200

250

300

350

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

PER (x) Band

Stock price PER (24x) PER (26x) PER (28x) PER (30x)

TCL ~ VALUATION

Current market price factors all negatives for 97% of business

Watch and jewellery division contribute 97% of topline and 100% of FY13 bottom-line. In our view, the current

market price factors in all the negatives possible for these 2 divisions viz., 1) demand slowdown across categories

led by poor consumer sentiment; 2) RBIs action on restricting gold imports for domestic demand ; 3) Ministry

of finance action of increasing import duty on gold imports to 10% making unofficial channel attractive ; 4)

lowest EBIT margins in watches division led by INR depreciation and inability to increase consumer prices

under current economic condition ; 5) lowest studded jewellery share of 16% in over last 20 quarters and

jewellery segment margins at 14 quarters low due to fall in gold price on customer inventory (~ 1.3 tons of gold);

6) Decision to stop sale of gold coins/bars, to artificially improve margins by approx. 80 bps.

Deserves 28x P/E multiple (~ 1.2 PEG) for a strong consumer highly profitable franchise

We build conservative estimates and expect TCLs revenues to grow at 20% CAGR to `17935 crore during

FY13-FY16E driven by aggressive expansion plans in the jewellery, watches and eyewear segment

leading to strong growth in volume sales. We forecast margin accretion on the back of rising share of premium

products in the overall product mix and significant turnaround in the eyewear segment leading to growth of 23%

CAGR in bottom-line.

However, we believe the market has factored in the negatives of gold import concerns and slowdown in

consumer sentiment (stock down 23% from 52 week high). We initiate coverage on the stock with a buy rating

and a target price of`300 per share. We value the company at 28x one year forward earnings. At CMP `239, the

stock is trading at 26x FY14e EPS and 20x FY15e EPS

Hence, we recommend a BUY on the stock with a potential upside of 25%.

Chart 15: PE Ratio band chart 24x-30x (Titan Company Limited)



22/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

TCLFINANCIAL STATEMENT SUMMARY

TITAN COMPANY LIMITED FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Sales (Rs bn) 14.4 20.9 30.0 38.3 46.8 65.3 88.5 101.2 118.8 145.8

EBIT after RD (Rs bn) 1.5 2.0 2.4 2.9 4.0 6.2 8.4 10.2 10.9 14.5

PAT (Rs bn) 1.0 1.1 1.4 1.6 2.5 4.3 6.0 7.2 8.1 10.9

EPS (Rs) (excluding excep) 1.2 1.4 1.5 2.0 2.9 4.9 6.9 8.2 9.2 12.2

Enterprive value (Rsbn) 214.9 214.1 213.7 213.3 210.9 201.6 202.4 199.6 197.7 190.4

Book value (Rs) 2.3 3.8 5.0 6.3 8.2 11.7 16.5 22.2 28.7 37.3

Growth (YoY %)

Sales 31.4 45.2 43.3 27.9 22.0 39.7 35.4 14.4 17.4 22.7

EBIT 28.7 29.9 20.1 22.1 36.3 55.6 35.7 21.2 6.4 32.8

PAT 54.0 12.1 22.5 20.0 53.3 72.4 38.9 20.5 12.4 33.2

EPS 53.9 14.6 11.9 28.0 45.4 71.1 39.4 19.9 11.7 33.2

Valautions

PER 198.4 173.1 154.8 120.9 83.2 48.6 34.9 29.1 26.0 19.6

P/ CFPS 173.4 145.3 114.3 95.5 69.5 45.0 32.5 27.2 26.0 19.6

Price to Book 102.8 62.9 47.6 38.0 29.0 20.5 14.5 10.8 8.3 6.4

Debt (Net) /Equity 1.4 0.6 0.3 0.2 -0.2 -1.0 -0.7 -0.6 -0.6 -0.7

EV / Sales 14.9 10.2 7.1 5.6 4.5 3.1 2.3 2.0 1.7 1.3

EV / EBITDA 139.5 107.0 88.9 72.7 52.7 32.4 24.0 19.5 18.2 13.2

Dividend Yield (%) 0.1 0.1 0.2 0.2 0.3 0.5 0.7 0.9 1.0 1.3

Return ratios

ROE (%) 50.0 37.1 31.9 30.5 37.3 48.3 47.7 41.6 35.7 36.7

ROCE (%) pre-tax 26.2 31.4 32.0 38.3 44.3 68.2 70.1 60.9 52.8 54.1

ROIC (%) 21.9 22.9 25.7 27.1 33.1 49.0 50.1 43.6 37.5 38.4

Operating metrics

EBIT margin (%) 9.3 8.3 6.9 6.6 7.3 9.0 9.0 9.6 9.2 9.9

PBT margin (%) 7.8 7.1 6.3 6.2 6.9 9.2 9.5 9.9 9.7 10.5

PAT margin (%) 6.9 5.3 4.6 4.3 5.4 6.6 6.8 7.2 6.9 7.4


23/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

TCL ~ RETAIL BRANDS

WATCHES & ACCESSORIES JEWELLERY EYEWEAR

PRECISION ENGINEERING


24/24




Initiating Coverage


Recommendation: BUY

Target Price: `300

RATING RATIONALE

We endeavour to provide objective opinions and recommendations. Anush Shares & Securities Private Limited

assigns ratings to its stocks according to their notional target price vs. current market price and then classifies

them as Buy, Hold and Reduce.

BUY Stock is likely to provide a return of 20%+ in a 12 month period

HOLD Stock is likely to provide a return between 10% and 20% in a 12 month period

REDUCE Stock is likely to provide a return of less than 10% in a 12 month period

The performance horizon is 12 months period unless specified and the notional target price is defined as theanalysts' valuation for a stock.

ANALYST CERTIFICATION

HARI BASKAR, Research Analyst, is primarily responsible for the content of this report, in whole or in part,

and certifies that with respect to each security or issuer that the analyst has covered in this report: (1) all of the

views expressed accurately reflect his or her personal views about those securities or issuers and were prepared

in an independent manner, including with respect to Anush Shares & Securities Private Limited, and (2) no part

of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations orviews expressed by that research analyst in the research report.

DISCLAIMER

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or

redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.

This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report

is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or

solicitation would be illegal. It is for the general information of clients ofAnush Shares and Securities Private Limited. It does not

constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs ofindividual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable

though its accuracy or completeness cannot be guaranteed. Neither Anush Shares and Securities Private Limited nor any person

connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own

investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or

down. Past performance is not a guide for future performance. Opinions expressed are our current opinions as of the date appearing

on this material only. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may

be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that may be

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