26 June 2013

Update |Sector: Retail

Titan Industries

CMP: INR228

TP: INR 240

BUY

Amendment in Objects clause points towards imminent new

category entry; Leveraging distribution network; Broad basing

product portfolio; BUY

Titan is proposing to amend the Objects Clause of the Memorandum of Association

(MoA) of the Company and to change the name of company from “Titan Industries

Ltd” to “Titan Company Ltd”. Our takeaways on the objects clause changes are:

-

It has added various new segments/categories under the list of businesses to be

carried by the company. This is an exhaustive list and includes host of varied

segments such as retailing of apparels, garments, saree, helmets, fragrances to

even service oriented businesses like educational workshops, conferences,

theatre and entertainment shows etc.

-

Prima facie, it appears to be an attempt to diversify the risks arising from

jewellery business, which has been facing multiple headwinds off‐late.

-

Titan’s management has been indicating about the plans to expand into various

lifestyle categories and exploit the trust and brand equity of Titan for some‐time

now. To that extent, it does not come as a surprise to us. What is surprising,

however, is the list of possible business diversification opportunities it

enumerates in the notice to amend objects clause of MoA.

-

Also, post the numerous regulatory changes in Jewellery business, this shift

seems to have been expedited, in our view. Currently, Jewellery contributes

80%, 82% and 49% of sales, EBIT and capital employed of Titan respectively.

-

Titan’s guiding principle to enter new category is premised on size of category,

presence of un‐organized segment and a potential to create differentiation

through innovation as well as brand building. Titan’s successful foray into

Eyewear provides a good precedent for this. Titan can leverage its existing

distribution network of Watches and Eyewear stores to retail some of the allied

lifestyle categories.

-

Post discussion with management, we believe fragrances and helmets will be

the immediate targets. The company has not given specific category or timelines

for these launches. Titan has registered a new trademark “Skinn” via application

dated 8

th

Jan 2013.

-

We note that APNT has recently announced acquisition of 51% in Sleek Group,

to diversify into Modular Kitchen space, four months after changing its Object

Clause of MoA in Oct’12.

-

As per Euromonitor, fragrances in India is an INR8.5bn category as on CY12 and

is expected to reach INR12.5bn size, a CAGR of 13.7%.

-

Valuation & view: We believe that Titan’s imminent entry into new lifestyle

category highlights the management’s attempt at diversifying risks from

Jewellery business. However, such initiatives will have long gestation period in

our view and given the dominance of Jewellery in Titan’s P&L, it will be a while

before any new business becomes relevant to Titan’s core investment thesis.

For example despite 40% plus CAGR since FY08‐13, Eyewear contributes <3% of

Titan’s revenues. We maintain our BUY rating on Titan with a TP of INR240.

Amendment to Objects Clause of MoA

Titan has proposed amendment to its Objects Clause of the Memorandum of

Association of the Company to include new business segments under its operation

1

Titan Industries

and also a change in company’s name from Titan Industries Ltd to Titan Company

Ltd. Following are the new list of businesses it proposes to include under its objects

clause:

-

“To design, manufacture, sell, market, retail and deal as distributor and

wholesaler, of all types of Apparels, Garments, Sarees, Bags, Belts, Caps,

Helmets, Headwear, Wallets, Fragrances, Perfumes, Writing Instruments, Mobile

Phones and related services and other personal convenience articles, devices and

musical instruments, entertaining apparatus, sound equipments, lifestyle

accessories and render after sale services and service incidental thereto.

-

To design, develop and render content through educational workshops,

conferences, theatre and entertainment shows through any media including via

the internet, design, manufacture, market, sell, retail and deal as distributor,

wholesaler and retailer of gadgets, entertainment products, toys, do it yourself

kits, activity books, sports products, food and beverages and further engage in

any segment of value addition either forward or backward in development,

distribution and retail of such content.

-

To design, manufacture, sell, market, retail and deal as distributor, wholesaler,

retailer of products used in kitchen including appliances, storage shelves, kitchen

utensils, chimneys, hobs, furniture and cabinets and render after sale services

and services incidental thereto.

-

To design, manufacture, sell, market, retail and deal as distributor, wholesaler

and retailer of products powered by solar energy including solar panels, solar

powered home lighting systems, solar batteries, solar fans, solar torches, solar

lights, solar lantern chargers, solar mobile, solar cookers, solar garden, solar cool

caps, solar water heaters, solar signs, solar inverters, solar powered UPS, solar

generators and render after sale services and services incidental thereto.”

According to Titan, “Company has adequate resources for undertaking new business

activities and in view of new technologies and economic development, it is in the

interest of the Company and its Shareholders that the activities of the Company be

diversified. The alteration of the main objects clause of the MoA as set out in the

resolution is to facilitate enlarging the Company’s scope of operations as well as

diversification of activities. The proposed amendment will enable the Company to

carry on its business efficiently and under the existing circumstances conveniently

and advantageously combined with the present activities of the Company”

Our takeaways

-

Prima facie, it appears as an attempt to diversify the risks arising from Jewellery

business, which has been facing multiple headwinds off‐late.

-

Currently, Jewellery contributes 80%, 82% and 49% of sales, EBIT and capital

employed of Titan.

-

Government and RBI has been targeting to reduce Gold consumption and hence

imports in India in order to bring Current Account Deficit under control.

-

As such they have taken host of initiatives/actions viz. raising of import duties,

ban of gold imports under consignment route, ban of any form of credit for

imports of gold for domestic consumption etc.

-

This coupled with falling gold prices have emerged as near term headwind for

Titan’s jewellery business.

Titan’s management has been indicating about the plans to expand into various

lifestyle categories and exploit the trust and brand equity of Titan for some‐time

now. To that extent, it does not come as a surprise to us. What is surprising

however is the list of possible business diversification opportunities it

enumerates in the notice to amend objects clause of MoA.

26 June 2013

2

Titan Industries

Salience of Jewellery increased in Titan’s sales

EBIT contribution break‐up

Fragrance category is expected to post 14% CAGR over CY12‐15

Capital employed break‐up by segments

Factors determining new category entry for Titan

-

As per management, size of the category, salience of un‐organized segment

within the category and scope for differentiation are the key pillars on which

Titan’s new category entry resides.

-

Titan’s entry into a new category is premised upon its ability to create a niche in

the segment by offering differentiated proposition. It aims to exploit the brand

equity and trust associated with the Tata brand to make inroads into a segment

dominated by unorganized trade.

-

Secondly, it can leverage the retail distribution network of its watches and

eyewear businesses.

-

Titan’s eyewear business provides ample vindication of the same. When it

entered the category in 2004‐05, the category was essentially a fragmented one

with few branded competitors. Since then it expanded into prescription

eyewear segment in FY07.

New categories not shared; Fragrances, helmets are the probables

-

While the management has not yet shared specific plans of new category entry,

timelines, investments etc, we believe Fragrances and Helmets are probable

candidates for the diversification.

-

As per Euromonitor, fragrances is an INR8.5b category, expected to touch

INR12.5b by CY15, a CAGR of 14%. This is a highly fragmented category in India.

We note that Titan has registered a new trademark “Skinn” via application

dated 8

th

Jan 2013.

26 June 2013

3

Titan Industries

How has eyewear business performed?

-

Titan entered the eyewear segment in 2004‐05 and then expanded presence in

prescription eyewear segment in FY07.

-

Eyewear segment has done well for Titan – 40%+ sales CAGR since FY08. We

estimate its turnover at ~INR2.45bn for FY13.

-

It stopped disclosing Eyewear sales data post FY12. Eyewear data is clubbed

under others with Precision Engineering division.

While still under red, we note that EBIT margins of the “Others” segment has

consistently improved from (25.6%) in FY10 to (0.8%) in FY13

Titan’s eyewear revenues have grown at 40%+ CAGR

…and profitability has improved too

Valuation & view: New category entry may not tilt the P&L composition in the

medium term either ways; Retain BUY

-

We believe Titan’s imminent entry into new lifestyle category highlights the

management’s attempt at diversifying risks from Jewellery business.

-

However, such initiatives will have long gestation period in our view and given

the dominance of Jewellery in Titan’s P&L, it will be a while before any new

business becomes relevant to Titan’s core investment thesis.

-

For example despite 40% plus CAGR since FY08‐13, Eyewear contributes <3% of

Titan’s revenues.

-

We don’t expect new segment entry to materially change the P&L composition

of Titan in the medium term. Also, given its track record, we don’t expect Titan

to enter multiple categories at one go.

-

We maintain our BUY rating on Titan with a TP of INR240 (23x FY15). Sharp

downside in gold prices constitute key risk to our rating.

26 June 2013

4

Titan Industries

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Titan Industries

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