20 April 2012 - PhillipCapitalbackoffice.phillipcapital.in/Backoffice/Research... · “Performance stands out like a ton of diamonds. Non‐performance can always be explained away.”—Harold

Please refer to Disclosures and Disclaimers at the end of the Research Report.

Titan Company One gram = huge leverage

RETAIL: Initiating Coverage 28 February 2014

PhillipCapital (India) Pvt. Ltd.

“Performance stands out like a ton of diamonds. Non‐performance can always be explained away.”—Harold Geneen, former President, ITT Corporation

We believe Titan’s performance is set to improve substantially in the coming quarters based on the following factors: 1), as more store space enters its maturity phase, it will translate to better sales density and more operating leverage, 2,) it has other operating levers such as adding more L1 stores or asking L2 stores to share inventory risk or pruning their commissions, 3), its state‐of‐the‐art unique supply chain management system gives its balance sheet the flexibility to adjust to various scenarios of consumer behavior, 4), competitive intensity is not as high as perceived, moreover in terms of number of stores and reach, Titan is way ahead of its organized competition, and 5), it is trading below its historical PE average. • A 1 gram/sq. ft. improvement will propel topline by 20%: Even if sales were to

improve by a gram (which translates to 5% growth per sq. ft. including making charges and share of studded jewelry and assuming steady gold prices), for every LTL sq. ft., we estimate topline growth will grow 20%. We believe that as 0.36 mn sq. ft. of space enter maturity phase in FY15/16, even a slight revival of consumer sentiments will propel growth and profitability. (see pg 2)

• Multiple operating levers: Titan’s large retail network expansion over FY12‐14 resulted in higher rentals and employee costs. Moreover, sales/sq. ft. fell as new stores were added and on poor consumer sentiment. In fact, average sales/sq. ft. is at its lowest since FY10. Therefore, fixed costs remain under‐absorbed and are a margin lever. Titan also has other operating levers in the form of its L2 (management agent) stores. Given current restrictions on ‘gold‐on‐lease’ and the high RoEs that L2 stores make, it could look at adding more L1 (own) stores to capture this RoE. (see pg 4)

• Competitive intensity is more noise than reality: Our city/region‐wise analysis revealed that while competition is real it's not direct. Fall in demand has been more a macro‐economic than due to competition. (see pg 9)

• Supply chain is a distinct strength in adversity: Titan has continuously invested in its supply chain processes and systems and an understanding of its working only reposes our faith in the efficient running of its complex business. With gold‐on‐lease no longer available, Titan is better poised than competition to manage its inventory (with changing gold prices tight control becomes critical) — for which it deserves a premium valuation. (see pg 5)

• Restoration of gold‐on‐lease is an upside risk: If importing gold‐on‐lease is allowed again, Titan will revert to negative working capital mode resulting in its net cash on the books nearly doubling (in FY16 by Rs 16.95bn to Rs 35bn).

Valuation: We estimate robust earnings growth of 25% in FY15‐16 on the back of operating leverage from new store maturity, marginal pickup in consumer sentiments, and steady improvement in share of studded jewelry. We see earnings growth at 25% in FY16 based on strong brand franchise and proven management capability. The stock currently trades at 19x FY16 earnings and we assign a 25x PE (historical average) to its FY16 earnings growth to arrive at our target price of Rs 301.

BUY TTAN IN | CMP RS 243

TARGET RS 301 (+24%) Company Data

O/S SHARES (MN) : 888MARKET CAP (RSBN) : 215MARKET CAP (USDBN) : 3.552 ‐ WK HI/LO (RS) : 302 / 200LIQUIDITY 3M (USDMN) : 5.4FACE VALUE (RS) : 1

Share Holding Pattern, %

PROMOTERS : 53.1FII / NRI : 21.6FI / MF : 2.0NON PROMOTER CORP. HOLDINGS : 1.6PUBLIC & OTHERS : 21.8

Price Performance, % 1mth 3mth 1yr

ABS 11.2 6.5 ‐3.6REL TO BSE 12.6 5.3 ‐11.4

Price Vs. Sensex (Rebased values)

0

100

200

300

400

Apr‐10 Apr‐11 Apr‐12 Apr‐13

Titan BSE Sensex Source: Bloomberg, Phillip Capital Research

Other Key Ratios

Rs mn FY14E FY15E FY16E

Net Sales 111,593 124,509 146,522EBIDTA 10,601 12,077 15,092Net Profit 7,461 8,545 10,694EPS, Rs 8.4 9.6 12.0 PER, x 27.7 24.2 19.3 EV/EBIDTA, x 18.4 17.0 13.4 P/BV, x 8.1 6.5 5.2 ROE, % 33.1 29.8 29.7 Source: PhillipCapital India Research Est. Abhishek Ranganathan (+ 9122 6667 9952) [email protected] Neha Garg (+ 9122 6667 9996) [email protected]

28 February 2014 / INDIA EQUITY RESEARCH / TITAN INDUSTRIES INITIATING

Operating leverage from store maturity, sales density With a large amount of store space added (355,000 sq. ft.) since FY12, its new square footage touches 51% in FY14 after which it will start tapering. As more mature space gets added, it will translate to better sales density and more operating leverage. More mature store space offers higher operating leverage Titan’s revenue per sq. ft. over FY13 and FY14 has been impacted by two factors — new space addition and a slowdown in demand (grammage de‐growth over FY12‐14 was 2% due to poor consumer sentiments). In fact, LTL sales sq. ft. is at its lowest in last 4 years. Sales: Rs/sq. ft. tapered down with the new store addition

0

150000

300000

450000

600000

750000

900000

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

120,000

140,000

160,000

180,000Area (sqft) Sales (Rs/sqft) (rhs)

Source: Company, PhillipCapital India Research

Titan nearly doubled its space to 697,000 sq. ft. between FY12 and FY14 — this has resulted in its new store (< 3 years old) square footage increasing to 51% in FY14 from 28% in FY12. We expect this number to be 42% in FY15 and 33% in FY16 as new space added over FY12‐14 (355,000 sq. ft.) also enters its optimum operating phase.

More mature store space will lead to higher sales per square feet

New stores to the total area under operation Particulars FY11 FY12 FY13 FY14 FY15E FY16E

Total jewelry area (sq ft) 342,000 461,000 602,000 697,000 797,000 897,000Area which is less than 3 years old (sq ft) 180,500 128,500 270,600 355,000 336,000 295,000% new stores over total area 53% 28% 45% 51% 42% 33%

Source: Company, PhillipCapital India Research Estimates; area in square feet

Rising LTL space will drive the sales density (sales per sq. ft.) of its entire store portfolio. The sensitivity of sales per sq. ft. (also a function of like‐to‐like sales) is very high and as the mature store area reaches 67% of the store portfolio in FY16, even a marginal improvement (5%) in the sales per sq. ft. (5% = an additional gram per sq. ft. including making charges and share of studded jewelry) would improve the top line by 20%. Consequently we expect the overall sales per/sq. ft. to improve as the stores enter a more mature phase of operation. Therefore we expect a revenue growth of 12% in FY15 and 19% in FY16 in the jewelry division.

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Sensitivity: Change in the sales/sq. ft. to jewelry topline Change in PSF LTL growth FY16 Jewelry Sales (Rs Mn) Revenue growth (FY16)

‐5% 108,961 9%‐3% 110,851 11%‐1% 112,741 13%0% 113,686 14%1% 114,631 14%3% 116,521 16%5% 118,789 19%7% 120,301 20%

Source: PhillipCapital India Research

Fixed‐cost absorption delayed due to expansion and poor economic conditions Over the years the company has invested in strengthening its retail sales and marketing division. Consequently, key overhead line items such as employee costs and rentals have increased. As stores mature these costs will get better absorbed. Increase in employee expenses due to increased strength in retail and marketing

69% 60% 54% 51% 49%

21% 26% 32% 38% 44% 45%

64%

10% 10% 8% 8%6% 6%

0%

20%

40%

60%

80%

100%

120%

FY08 FY09 FY10 FY11 FY12 FY13

0.5

0.6

0.6

0.7

0.7

0.8

0.8

Factories Retail, Sales and marketingSupport functions Avg Employee Cost (Rs mn /p.a.) (rhs)


Rentals have increased due to space additions

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1,000

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1,400

1,600

FY08 FY09 FY10 FY11 FY12 FY13

0

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700000Area (sq ft) (rhs) Rentals (Rs mn)

L1: Store operated and owned by the company, inventory on the books of the company, opex borne by the company L2: Store operated and owned by the management agent, inventory on the books of the company, opex borne by the management agent L3: Store operated and owned by the franchisee, inventory on the books of the franchisee, opex borne by the franchisee


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Other operating levers Could capture L2 ROEs on its own books, pass on risk, or reduce commissions With the gold‐on‐lease model no longer available, Titan would be better off adding L1 (own) stores rather than adding the L2 stores (management agent). As the company has to carry inventory risk on its books (be it L1 or L2), it could look at incrementally adding more L1s and capture the RoEs in its own books. L2 franchisees have enjoyed substantial RoIs (since they had to deal with only capex and opex, while inventory was managed by the company). Now that the gold‐on‐lease model is no longer available, Titan may have to consider reducing franchisee commissions or pass on some of the inventory risk to them. Both moves are structural levers it could implement if warranted. Operational parameters for L2 stores Particulars Rs mn

Revenue 350Commission 21Opex (including notional rent) 10.5EBITDA 10.5Capex 15Area Sq. ft. 3000RoI 70%Sales Rs psf 116,667 Capex Rs psf 5000


Ability to tweak making charges Our analysis suggests that the company would be in a position to make up for loss of profits in a scenario where volume growth lags gold price correction by tweaking making charges —Titan’s effective systems and backend will facilitate this quickly and smoothly. Importantly, while it will benefit the company quite a bit, the cost to its consumer increases only marginally. Nonlinear behavior of volumes and prices; ability to tweak making charges Change in Gold Price

Particulars Assumptions 0% ‐10% ‐20%

Gold Price Rs/gram 3,000 2,700 2,400Grams sold gm 10.0 11.3 13.1Making Charges charged to consumer (blended) 23% 690 621 552Total making charges 6,900 7,032 7,205Actual Making charges Rs/gm (has a variable component here assumed to be fixed) 100 1,000 1,132 1,305Gross Profit 5,900 5,900 5,900Change in Volume to maintain profits 13.2% 30.5% Impact when making charges change Making charges % after hike (100 bps) 1% 23% 24% 24%Making charges Rs/gm after hike 690 648 576Grams sold gm 10.0 10.9 12.5Gross Profit on revised making charges 5,900 5,900 5,900Change in Volume to maintain profits 8.5% 15.3%Total Cost to Consumer 36,900 37,608 38,533Cost to consumer after revised making charges 36,900 37,914 38,846Incremental cost (%) to consumer 0.81% 0.81%


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Excellent supply chain management A robust supply chain and demand‐forecasting mechanism places the company in a position to tap new categories and design products according to consumers’ needs and demands. Consequently, we draw confidence in Titan’s ability to grow its revenues even in challenging macro environments We believe that Titan’s supply chain management is one of its most understated and under‐researched strengths. The company’s robust, scientific, and very fluid supply chain system gives its balance sheet the flexibility to adjust to various scenarios of consumer behavior; this allows it to effectively manage the quantum (very important under slowing economic conditions) as well as the type of merchandise it needs to stock. Consequently, in the event of worsening economic conditions, impact on margins is limited. Capital employed (inventory price‐risk mitigated by hedging) is monitored centrally for all of its 162 Tanishq stores and 33 GoldPlus stores across the country, including the franchisee ones — this centralized control adds to balance‐sheet flexibility. Moreover, the system is built scientifically to draw consumers through demand forecasting. The new initiatives of low‐cost diamond jewelry and Mia jewelry for working women could be a result of this forecasting. This leads us to believe that Titan’s return ratios are at risk only to the extent of margins (impacted by the slowdown in consumer spending). Movement in gold consumption and average gold price

0

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FY09 FY10 FY11 FY12 FY13 FY14E

10,000

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20,000

25,000

30,000

35,000Gold (Kg) Average Gold Price


Supply chain: reducing lead time, inventory, and diamond bagging Reducing the lead time for coming out with new jewelry designs Demand forecasting and understanding buying patterns helps the company to plan its merchandise and also do assortment planning — this is crucial in a jewelry business, which has long lead times (it takes about eight months for a jewelry collection to be designed). The long lead times increase the pressure to get the design equation right. Titan has set up a process, which enables it to segment its jewelry SKUs in multiple categories – • High sales velocity; low share of sales (e.g. rings) • Low sales velocity; low share of sales (e.g. occasion driven) • High sales velocity; high share of sales (e.g. neckwear; light weight) • Low sales velocity; high share of sales (e.g. neckwear; studded)

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Consequently, the company is able to ensure that it has a perpetual (high sales velocity) inventory at its stores throughout and customize the low‐sales velocity requirement according to the store location, thus ensuring availability and customer requirements at optimum working capital levels. Titan’s supply‐chain demand forecasting team streamlines gold inventory management Managing over 20,000 kgs of gold annually is a challenge, given the risks associated with physical gold and pilferage. Emphasis on systems and monitoring daily store level inventory and replenishing it has resulted in a strong and robust supply chain, which has improved inventory turns, thus optimizing working capital. This improvement has been aided by the soft side of the supply chain — demand forecasting — where a centralized team assesses the performance of stock‐keeping units (SKUs) at the store level and is therefore able to forecast demand. (See Exhibit B) Diamond bagging: Quality control from inception eliminates error and builds consumer trust Titan further fine‐tunes its supply chain with initiatives such as diamond bagging, which is a process that takes place in the jewelry industry after the precious stones are grouped on the basis of their size, clarity, and colour. The company moved from a manual diamond‐bagging system to an automated diamond‐bagging machine as the former was prone to human error, thus ensuring that customers get the diamond that they are paying for (given that the diamond market is opaque and involves very high trust quotient). Titan's automated bagging process uses robots and sensors — through a custom‐made software these are connected to the supply‐chain requirements of boutiques, which are routed through an ERP system. The diamonds are picked, weighed and bagged automatically for fixing on the jewelry. The move also meant that the company was able to redeploy employees who would otherwise have been involved in the manual bagging process.

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Exhibit A: assortment planning and the demand forecasting process initiated

Neckwear A Neckwear BRings B

Rings A Wedding

High

Low

High LowSales velocity

% o

f sal

es

by v

alue

• Automated replenishment for the entire category

• Limited role played by store associates

• No focus on individual SKUs• Assortment selection based on

category inventory norms, recommended product attribute mix, and available inventory at the factory

• Guidelines on selling trends provided based on analysis of stores with similar demographics

• Store associates decide on SKUs to include in assortment

• Order quantities set by store associates to meet the category level inventory norms.

The Issue:• Jewelry as a category has very wide offering. However, catering to different customer profiles through small/medium sized stores makes planning a

complex process• The earlier model: Each store placed its own order, subject to guidelines on total inventory drawn up by the supply chain team at the HO• Shortcomings of earlier model: Focus of store associates was on sales target leaving little time for scientific ordering process

The Solution: The supply chain team had the best access to sales (selling patterns, variants at various levels) and inventory data from all stores. This combined with store specific knowledge of the store associates resulted in more refined process

• Main focus area for store associates

• Assortment is designed to ensure high degree of variety

• Best sellers SKUs (national, regional store) on auto -replenishment

• Total category inventory and product attribute mix by store is specified for the rest of the SKUs.

• Store staff modify order quantities for the non best –selling SKUs, while adhering to these specifications

Neckwear A Neckwear BRings B

Rings A Wedding

High

Low

High LowSales velocity

% o

f sal

es

by v

alue

• Automated replenishment for the entire category

• Limited role played by store associates

• No focus on individual SKUs• Assortment selection based on

category inventory norms, recommended product attribute mix, and available inventory at the factory

• Guidelines on selling trends provided based on analysis of stores with similar demographics

• Store associates decide on SKUs to include in assortment

• Order quantities set by store associates to meet the category level inventory norms.

The Issue:• Jewelry as a category has very wide offering. However, catering to different customer profiles through small/medium sized stores makes planning a

complex process• The earlier model: Each store placed its own order, subject to guidelines on total inventory drawn up by the supply chain team at the HO• Shortcomings of earlier model: Focus of store associates was on sales target leaving little time for scientific ordering process

The Solution: The supply chain team had the best access to sales (selling patterns, variants at various levels) and inventory data from all stores. This combined with store specific knowledge of the store associates resulted in more refined process

• Main focus area for store associates

• Assortment is designed to ensure high degree of variety

• Best sellers SKUs (national, regional store) on auto -replenishment

• Total category inventory and product attribute mix by store is specified for the rest of the SKUs.

• Store staff modify order quantities for the non best –selling SKUs, while adhering to these specifications

Source: Assortment Planning: Review of Literature and Industry Practice‐ 2006

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Exhibit B: supply chain changes initiated

BEFORE

Gold Suppliers

Order Processing

Diamond Suppliers

In house facility

Hosur Bangalore

FGS

Kolkata

Carry Forward Agents

L-1 Company Boutiques

L-2 Management Agents

L-3 Franchisees Boutiques

RM SuppliersManufacturing

IndentProduction plan

Issues: High Inventory levels for finished goods- lack of ownership of finished goods inventory, irregular indenting of material andimproper category or assortment planning led to high lead-time for order fulfillment.

Gold Suppliers

Order Processing

Diamond Suppliers

In house facility

Hosur Bangalore

FGS

Kolkata





RM SuppliersManufacturing


Issues: High Inventory levels for finished goods- lack of ownership of finished goods inventory, irregular indenting of material andimproper category or assortment planning led to high lead-time for order fulfillment.

AFTER

Gold Suppliers

SCM

Diamond Suppliers

Karigar / MEADOW*

Hosur Bangalore

FGS

Kolkata





RM Suppliers Manufacturing


In house facility

Vendors

GIT controlStock control

Shortens the inventory cycle by setting up a centralized supply chain system and complete visibility

of stock and sale across the chain

Boutique stocks were scanned on a regular basis and the sold variants were replenished every week in order to prevent stock out. Once the factory stock level fell below a threshold, production indent was generated.

IT program- improved visibility of order status, visibility of sales of each store, track effectiveness of promotions and

marketing programs status

Outsourcing introduced to cater to regional designs

Performance of existing and all newly launched designs monitored and non-moving designs were rationalized on a regular basis

Gold Suppliers

SCM

Diamond Suppliers

Karigar / MEADOW*

Hosur Bangalore

FGS

Kolkata





RM Suppliers Manufacturing


In house facility

Vendors

GIT controlStock control

Shortens the inventory cycle by setting up a centralized supply chain system and complete visibility

of stock and sale across the chain

Boutique stocks were scanned on a regular basis and the sold variants were replenished every week in order to prevent stock out. Once the factory stock level fell below a threshold, production indent was generated.

IT program- improved visibility of order status, visibility of sales of each store, track effectiveness of promotions and

marketing programs status

Outsourcing introduced to cater to regional designs

Performance of existing and all newly launched designs monitored and non-moving designs were rationalized on a regular basis

Source: Corporate turnaround through effective supply chain management

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Competitive intensity not as high as perceived Titan faces competition from both organized and unorganized players. If regional and national players are included, organized retailers form approximately 16‐18% of the jewelry retail market. However, as can be seen in the tables below, in terms of number of stores, Titan is way ahead of competition in North, West and East India. While competitive intensity is highest in South India, it has been like that for many years — regional players have been present there for generations. In North and East India Tanishq continues to enjoy significant reach over competition, followed by the West. Tanishq’s stores are well distributed across non metros and across India. Nearly 60% of these stores are in non‐metros. While competition put together has more than 75% stores in non‐metros, they are primarily in South India. To counter competition’s heavy presence in South India, which is mainly a gold jewelry market, Titan has 33 GoldPlus stores exclusively in south India (this is in addition to Tanishq stores).

Store expansion of jewelry retailers in India No. of stores

Players Type 2005 2010 2013 9MFY14 Planned for future growth

Tanishq National 84 148 150 162 Plans to add 100000 sq. ft. annually Reliance National 0 24 51 54 NA Joyalukkas National 6 22 42 46 Pan‐India expansion plan for FY15 Rajesh Exports National 0 32 82 82 Plans to open 500 SHUBH jewelry showrooms by 2015 TBZ Regional 2 14 27 27 Plans to open 43 stores from 2013 to 2015; pan‐India expansion plans P.C. Chandra Regional 10 18 24 24 Double presence with pan‐India expansion in 2 years Kirtilals Regional 3 7 10 10 Focus on retail space expansion instead of increase in store numbers


Competitive intensity for Titan geography wise Zone‐wise Titan* Malabar Kalyan Joyalukkas TBZ PC Jeweller

North 50 2 2 2 2 32South 35 65 41 38 4 3West 36 4 8 5 18 4East 18 1 0 1 3 2Total stores 139 72 51 46 27 41

Competitive intensity skewed towards non metros (largely South India) Zone‐wise Titan Malabar Kalyan Joyalukkas TBZ PC Jeweller

Metros 56 13 7 10 12 17Non‐Metros 83 59 44 36 15 24


* Information limited to 139 stores of the 162 stores

Studded jewelry share: Titan’s share of studded jewelry will improve only gradually as its stores establish their presence in new cities, given that gold jewelry is a likely to drive initial sales. Diamonds account for 15% of the total Indian jewelry market. Nowadays, consumers prefer low‐priced diamond jewelry that is cheaper than pure‐gold jewelry and is also available with guaranteed buy‐back schemes and certification. The gross margin earned on diamond jewelry is around 40%‐45% as compared to 8%‐10% in gold jewelry. Thus, the product‐mix plays an important role for determining the profitability of the jeweler. Organized retailers are adopting various marketing strategies to achieve a higher share of diamond jewelry in their sales to earn higher gross margins.

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Titan’s increase of studded share over period of time

0%

5%

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25%

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40%

Q1FY12

Q2FY12

Q3FY12

Q4FY12

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Restoring gold‐on‐Lease RBI discontinued gold‐on‐lease from June 2013 — consequently Titan has had to carry inventory on its books against upfront payment, turning its once negative working capital business into a positive one. The result has been a net debt balance sheet, and profits have been impacted due to interest costs. In case gold‐on‐lease is allowed again, there will be a positive impact on earnings as interest costs are eliminated and other income increases — we estimate that if RBI reverses its decision, earning impact could be 15% in FY15 and 30% in FY16. How gold on lease works Gold on lease brings in working capital efficiencies and reduces inventory risk. The company used to procure most of its gold requirements under the gold‐lease scheme, which gave it the following benefits: • The contracts were usually for six months, wherein the company paid for gold at the

end of six months. Thus, it freed up working capital even on procurement of a high‐value product such as gold.

• The cost of funding, i.e., gold lease is lower than the conventional working capital loans.

• Gold was just a pass‐through in its books as it booked the gold cost only after booking sales. Therefore, its exposure to inventory risks emanating from changes in gold prices was very limited – only to the extent of the physical inventory it held, which used to be around 15% of total inventory.

Working of gold on lease scheme

Bank Jewellers Consumer

Gold price $1000100kg (6mths)

1 Jan 2013

Gold price $110010kg

31 Mar 2013

Price fixed for 10kg @1100 but paid on 30 Jun 2013


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Brand equity and reach Titan is the market leader in the watches and organized jewelry retailing business and has an edge over its competitors because of the following strengths: • Demographic shift will increase market share: We estimate that Titan has around

5% market share of the Indian jewelry market (where 78% of the market constitutes unorganized players). As the customer profile shifts towards the younger population and mobility increases, consumers will gradually break the bonds with the traditional family jeweler, resulting in a shift towards branded jewelry.

• Purity and caratage: Jewelry in India has been plagued with issues of trust with respect to weights and purity. Tanishq is one of the few jewelry brands that enjoys the trust of its consumers and was one of the first jewelers to provide certification for the purity of gold used in its products. The trust has been built over the years by positioning itself as a retailer with a strong emphasis on proper cartage and charging net weight of gold used in the product (the price of stones is added separately).

• Distribution reach: Favorable for changing product mix o Watches: Titan enjoys a very strong and deep distribution network for its

watches with over 373 exclusive World of Titan stores and presence in over 11,000 dealers in 2,500 towns. Its distribution network, coupled with over 750 service centers for its watches, gives it a strong platform to push and promote newer high‐value products as customers uptrade.

Watch distribution network

• 11,000 dealers• 2500 towns

• 373 showrooms (9 added in 2013-14)• 144towns –384k Sft

• 151 stores / kiosks (11 added in 2013-14)• 74 towns – 86k Sft

• 50 stores (4 added in 2013-14)• 22 towns – 68k Sft

• 751 outlets• 268 towns

• 2164 outlets• 31 countries

Retail All India

World of Titan

Fastrack

Helios

Service Centres

International


o Jewelry: Titan is by far the largest jewelry retailer in India with over 162 Tanishq

(including two Zoya) outlets and 33 GoldPlus stores. Tanishq, its driving format, is present across the country. Titan has a strong presence in the north (49 stores), which is traditionally a strong market for diamond jewelry. Most of its 33 GoldPlus stores are located in the South, where there is a preference for pure gold jewelry. Its dispersion of stores and choice of formats, in our view, are tuned to the regional tastes and preferences.

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Titan’s geographic concentration

East, 13%

West, 26%

North, 36%

South, 26%


Titan’s division‐wise revenue and operating profit mix

Revenue Mix (9MFY14)

Watches15.8%

Jewellery79.7%

Others4.5%

EBIT Mix (9MFY14)

Watches17.9%

Jewellery82.0%

Others0.1%


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Valuation We expect the company to operate at EBITDA margins of 9.7% and 10.3% in FY15 and FY16, respectively, aided by operating leverage from new store additions, after factoring for increased customer acquisition costs in a slowing economy and improvement in the share of studded jewelry. We believe that its earnings growth will be 25% in FY16 and that the downside to RoEs is limited given that regulatory restrictions with respect to gold‐on‐lease are already in force. We believe that Titan’s supply chain strength is already helping it to cope with these restrictions better than most other players. Titan, with a large 22% market share of the organized jewelry retail space and a network of over 162 stores (FY14) present in over 90 towns offers an immense long‐term opportunity as consumers migrate towards branded jewelry. It is also a leader in its watches segment — Titan has over 11,000 dealers in 2,500 towns, in addition to its presence through exclusive World of Titan Stores (373), and over 751 service outlets covering 268 towns. The stock has historically traded at an average 26x one‐year forward PE ratio. We expect earnings growth of 25% over FY16 and given its strong brand franchise and proven management capability, we assign a target multiple of 25x to our FY16 earnings, arriving at our target price of Rs 301. We reiterate that the risks to RoE are limited to the income statement (due to more promotions/discounts to acquire consumers) as there is clarity on the company’s leverage status after regulatory restrictions. Relaxation in regulatory restrictions is an added upside to our estimates. In any case, backed by its robust and dynamic supply chain, it can adapt quickly to any market environment. We initiate coverage on Titan with a BUY rating and target price of Rs 301. P/E Band Chart

10x

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Apr‐05 Apr‐06 Apr‐07 Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14

Rs


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Key risks Correction in gold prices (without a similar increase in volumes)—A threat to margins As the company is hedged on gold (through MCX and now international markets), the source of its profits is making charges, which is a function of the gold price. A fall in gold price would naturally result in lower making charges. This could be offset by higher sales volume (lower gold prices may lead to more consumption). However, if there is no change in volumes, for every 5% correction in gold prices, earnings would decrease 4%. New Companies Act could affect its Golden Harvest Scheme impacting working capital and other income Titan’s ‘Golden Harvest’ is a scheme where a consumer pays in equal installments for 11 months after which Tanishq will pay (notionally) the 12th Installment at the end of the term. While it effectively offers an 8.13% discount (customer acquisition cost), the margin foregone is offset by interest earned on the advances received (reflected in other income) and up trading (50%) by customers on completion. The draft Companies Act guidelines prescribe that public companies cannot accept deposits from the public that are repayable after six months or more. If the act comes into force, it could potentially impact cash collection from this scheme and thereby impact the other income. Rising competition in watches and jewelry Watches: Competition is likely to increase with new players and lifestyle retailers extending their brands in the segment. Citizen’s Q&Q brand is likely to be a major competitor in smaller cities and compete against entry‐level Titan brands. Rapid roll‐out of stores and a wide distribution network by competitors can erode Titan’s market share, especially with multiple watch ownership. Jewelry: Regional jewelers enjoy loyalty from customers as they offer designs that cater to the customers’ regional tastes and preferences. Expansion by some of these regional players (such as Malabar Gold, Kalyan Jewellers) will increase competition for Tanishq and GoldPlus and could affect Titan’s growth rate. Customer pan card details/tax collected at source The Government of India has levied a 1% ‘Tax Collected at Source’ on jewelry transactions of Rs 500,000 and above, when payment is made in cash. In addition to this, the jeweler is also required to take down the PAN card details of the consumer. If the minimum transaction level for disclosing PAN is lowered further, it could impact jewelry sales as customers would be reluctant to share the details. Rupee‐dollar volatility impacts profitability of the watch division The watch division imports components for manufacturing of watches and changes in the selling price come through with a lag. Also, price hikes in certain categories could meet with consumer resistance.

– 15 of 28 –


About the company Titan’s diversification akin to that of Bvlgari Titan has extended its business beyond watches and jewelry to accessories, eyewear, and perfumes, among other luxury goods. While this extension may be seen as taking away from core business, we disagree. A good case in point is Bvlgari, which made a name for itself with jewelry and is today a well‐diversified luxury brand that sells several product lines including watches, fragrances, and accessories. In India, Titan’s potential to leverage on its brand and brand extensions (in a market that is still largely unorganized) is tremendous. Titan has been engaged in the manufacture and marketing of quartz watches since 1987 and is India’s leading watch manufacturer. Its divisions include watches, jewelry, prescription eyewear, precision engineering, accessories and licensed products, and international marketing operations.

Organizational chart

J e w e lr yW a tc he s

T i tan C o m p an y L im ited

P r e s c r ip tion E ye w e a r

K e y B ra n d s• T ita n , • S o n a ta• Fa s tra c k• T ita n Zo o p• X y lu s

L ic e n se B ra n d s• To m m y H il f ig e r • H u g o B o s s • F re n c h C o n n e c tio n

Re ta i l N e tw o rk• W o rld o f T i ta n (3 7 3 )• Fa s tra c k & K io s ks

(1 5 1 )• H e l io s (5 0 )• T ita n O n e (8 3 )• T ita n w a tch c a re

c e n tre (7 5 1 )• In te rn a tio n a l (2 ,1 6 4

o u tle ts a c ro ss 3 1 co u n tr ie s )

K e y B ra n d s• Ta n ish q (1 6 0 )• G o ld p lu s (3 3 )• Zo ya (2 )

K e y B ra n d s• T ita n E ye P lu s (2 7 0 )

B u s in e ss U n its• P re c is io n E n g in e e rin g

C o m p o n e n ts & S u b -A ss e m b lies (P E C S A )

• M a c h in e B u i ld in g & A u to m a tio n S o lu tio n s

• To o l in g S o lu tio n s • E le c tro n ic s u b -a ss e m b lies

P r e c is ion E ng ine e r ingAc c e s s or ie s

K e y B ra n d s• Fa s tra ck (1 5 1 )• T ita n


Watches The company is the largest watchmaker in the country and the world’s fifth‐largest. It has manufacturing facilities at Hosur and Goa, and assembly plants at Roorkie, Pantanagar and Dehradun. It commands over 65% market share in the organised watch market. The watch business contributed 16% to Titan’s revenues and 18% to its overall EBIT in 9MFY14. Brands (owned and licensed) Owned: Titan, Sonata, Fastrack, Nebula, Xylus Licensed: Three international brands — Tommy Hilfiger, Timberland and fcuk

– 16 of 28 –


Distribution network The company sells its watches through a multi‐tiered distribution structure that includes World of Titan showrooms (exclusive Titan outlets), Helios, redistribution stockists (a channel to penetrate smaller dealers in small towns), traditional outlets, non‐traditional outlets and institutions.

World of TitanInstitutions

Titan Company Limited

Re Distribution StockistDirect Dealers

Institutions Customers Indirect Dealers

CUSTOMERS


Watches: Revenue and EBITDA

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Watches EBIT Margins (RHS)


– 17 of 28 –


Watches: Return on capital employed

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Capital Employed EBIT ROCE (rhs)


Jewelry Titan has established India’s largest branded jewelry manufacturing facilities at Hosur and Dehradun with an area of 135,000 sq. ft. and has the first‐mover advantage as it is the only jeweler with a national presence in the highly fragmented jewellery market in India. Key formats and distribution network The company has stuck to its overall strategy of offering various products for specific price points and target audiences. As a part of its long‐term strategy, the company operates through three major brands in this division, namely: • Tanishq: Tanishq has 22% market share in the branded jewelry market. Over the

years, the company has enhanced its brand image by following ethical practices like certification of purity of material, reselling policies and continued expansion. It has built a strong distribution network with over 160 stores across 90 cities.

• GoldPlus: GoldPlus was launched in 2005 to cater to the opportunity available in the semi‐urban and rural markets. This brand is still in the pilot stage with a current presence in 33 towns spread across 6 states — 35% of India’s jewellery demand comes from the southern region and GoldPlus is the largest jewellery retail chain in Tamil Nadu.

• Zoya: The company launched “Zoya” in 2009, intended to be a chain of luxury boutiques. At present, the company has two stores located at Mumbai and Delhi.

The jewellery business contributed ~80% to Titan’s revenues and 82% to its overall EBIT in 9MFY14. The company’s initiatives of corelating making charges with the gold prices has resulted in improving the operating margins (EBIT) from 5.3% in FY08 to 10.1% in FY13.

– 18 of 28 –


Jewellery: Revenue and EBITDA

0%

2%

4%

6%

8%

10%

12%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000


Revenue EBIT Margins (RHS)


Jewellery: Return on capital employed

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000


0%

20%

40%

60%

80%

100%

120%Capital Employed EBIT ROCE (rhs)


Eyewear Business Started its prescription eyewear business in March 2007 by launching a chain of opticals stores under the brand name “Titan Eye+”. As on 9MFY14 there are 270 Titan Eye+ outlets across 98 towns. Eyewear Biz: Sales growth and LTL growth

‐40%

‐20%

0%

20%

40%

60%

80%

100%

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13

Sales Growth LTL Growth


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– 20 of 28 –


Precision engineering business Titan initiated its precision engineering business in 2002, with a view to capture the large and growing market (Rs 1,350bn: Source: Company) for precision components and sub‐assemblies. Its clients include both domestic and international clients like Eaton (US), Hamilton Sundstrand (US), Microtechnica (Italy), Pratt & Witney (US), Ford (UK), Bosch (India), Timken (India).

Automation Solutions

Automotive

Aerospace

Medical

• Precision components

• Dash board instruments

• Sub systems

Market Size Rs 1,350bn

Domestic & International

Market


Domestic Market Only

TSMG Study

Automation Solutions

Automotive

Aerospace

Medical

• Precision components

• Dash board instruments

• Sub systems


Domestic & International

Market


Domestic Market Only

TSMG Study


Industry Dynamics Indian jewelry market The domestic jewelry market in India is currently estimated at ~US$ 40bn. There is also a large non‐jewelry domestic market — primarily gold bars and coins — which is estimated to be ~US$ 17bn. (Source A.T. Kearney, India Jewellery Review 2013). According to the report, the domestic jewelry market is likely to double in the next five years. India is the largest consumer of gold worldwide and within components of jewelry making (including gold, diamond and precious stones), gold forms 80%. The domestic jewelry market is largely fragmented and dominated by the unorganized players — however, the contribution of organized retail has increased from below 5% to 18% over the last decade (Source: ICRA). Organized retailers preferred over unorganized • Increasing significance of Hallmark and Certification: Earlier, the purchase of

jewelry in India was largely based on trust with family jewelers catering to consumers. But, over a period, with the increase in customer awareness, organized retailers are gaining preference by providing certificates for the assurance of quality and authenticity of the jewelry purchased.

• Consumer preference towards more branded jewelry: In India, gold jewelry is always regarded as an investment, but lately there is change in the mindset of buyers and now the focus is more on trendy, affordable and light‐weight jewelry. The share of branded jewelry is still 5‐7% in the total market, but with the increase in urbanization it is expected to grow robustly.

• Aggressive marketing efforts: Organized retailers are undertaking various marketing initiatives towards building their products’ brand strength, leading to higher growth. For instance, Tanishq had initiated an annual marketing promotion leading to a growth in the range of 30‐ 40% in its diamond business.

Value proposition for customers among different players

Value Proposition Designer jeweler

Top‐end Family Jeweler

Leading Family Jeweler

International Brands

Regional Jeweler

National Chain

Local and independent store designer

Diamond brands

Trust High High High Highest High Highest Neutral High Range Low High Highest Neutral High Neutral Highest Neutral Price Competitiveness Low Neutral High Low High Neutral Highest Low Design Highest Highest Low Highest High High Low High Quality High High Neutral High Neutral High Low High Brand Image Highest Highest Neutral Highest Highest Highest Neutral Highest Location Low High Low Low Neutral Neutral High High Services High Highest Highest Low High High Highest Low

Source: AT Kearny India Jewellery Review 2013, PhillipCapital India

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Market share Geographical percentage

Regional chains, 17%

National chains, 5%

Local and independent stores, 78%

North, 20%

East, 15%

West, 30%

South, 35%

Source: AT Kearny India Jewellery Review 2013, PhillipCapital India Research

Demand drivers for the jewelry market in India • Weddings and festive occasions: According to Care, a substantial proportion (70%)

of the demand for gold and diamond jewelry in India comes from occasions like weddings (estimated 10mn marriages a year), for festivals, and as gifts.

• Demographic advantage and high disposable income: India is one of the youngest countries in the world with an average age of around 25 years. An increase in the younger population, increased urbanization (composition of urban population is expected to increase to 40% by 2020, currently at 29%) and the higher percentage of working women will give rise to an increase in overall discretionary spend. This drives the demand for gold and diamond jewelry.

• High penetration of the organized retailers: The organized players are resorting to aggressive store expansions, enhancing customer access and expanding geographical reach. This is also likely to trigger the demand for jewelry in near future.

• Increasing women workforce: With the increase in working women population and resulting higher earning capacity, the demand for jewelry will also escalate.

India jewelry demand (tonnes) and gold price (US$/oz.)

‐

200

400

600

800

1,000

1,200

1,400

1,600

1,800

‐

100

200

300

400

500

600

700

Dec

‐92

Dec

‐93

Dec

‐94

Dec

‐95

Dec

‐96

Dec

‐97

Dec

‐98

Dec

‐99

Dec

‐00

Dec

‐01

Dec

‐02

Dec

‐03

Dec

‐04

Dec

‐05

Dec

‐06

Dec

‐07

Dec

‐08

Dec

‐09

Dec

‐10

Dec

‐11

Dec

‐12

Dec

‐13

Tonnes (LHS) US$/oz (RHS)

Source: World Gold Council, PhillipCapital India Research

In 2010, demand for gold jewelry was at its historic peak (since 1992) as Indian consumers expected that the gold price was likely to continue to rise — this led to an

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increase in demand. Indian jewelry demand almost doubled in 2010 with a 69% rise in volumes and more than 20% rise in the (US$/oz.) price. Surging demand for diamond studded jewelry Diamonds account for 15% of the total Indian jewelry market. Nowadays, consumers prefer low‐priced diamond jewelry that is cheaper than pure gold jewelry and is also available with guaranteed buy‐back schemes and certification. The gross margin earned on diamond jewelry is around 40%‐45% as compared to 8%‐10% in gold jewelry. Thus, the product mix plays an important role for determining the profitability of the jeweler. Organized retailers are adopting various marketing strategies to achieve a higher share of diamond jewelry in their sales to earn higher gross margins.

Key regulations across jewelry value chain Current regulations Details Comments

Import Duty Customs duty of 10% for gold in August 2013 as compared to 2% in January 2012

High import duty aimed to reduce gold imports–May provide incentive to unofficial channels with 5‐10% difference in gold price; unofficial imports of around 100 tons in 2012

RBI Directive:20‐80 rule of export‐import of gold

Import agencies to ensure minimum one‐fifth of each lot of gold import is made available for export (non‐SEZs or EOUs, and so on)

Requirement for 20% export will constrain the gold imports through official channels

RBI directive: Gold deposit scheme

Gold deposit scheme: Banks can provide gold deposit schemes of maturity between 6 months and 7 years

Change of minimum maturity period for gold deposit scheme from 3 years to 6 months has made the scheme more attractive

Sourcing and trading

Sourcing gold for ETF Gold ETFs: Can source gold only from RBI refinery or London Bullion Metals Association (LBMA) certified refiners

Sourcing of gold from LBMA adds to the import burden of the country since banks cannot buy domestic recycled gold

Design Design registration rule Jewelry designs can be registered to give owner protection against piracy

Policy framework exists; need wider acceptance; Issues: enforcement difficulties, low awareness

Manufacturing SEZ or EOU rules SEZs and EOUs to promote exports–Duty‐free inputs for manufacturing–Minimum 3% value addition requirement for units in SEZs; 15% import duty on jewelry compared to 10% on raw gold

Formation of SEZs and EOUs and minimum value addition norm has promoted jewelry exports ;Higher customs duty on jewelry import protects domestic manufacturers from imports

RBI directive: Gold (metal) loan

Gold (metal) loans currently unavailable to domestic manufacturers

Limits financing options for jewelry manufacturers; Higher working capital requirements and gold price risk

Retailing KYC norm (under Anti‐money Laundering Act)

Gold and precious stone purchases over INR 50,000 proposed to come under know‐your‐customer norm (as against INR 0.5 mn done on TDS purpose)

Significant gold transactions done in cash and hence provide easy source of hoarding; the new regulation would make this difficult; Implementation may only be feasible in long term, given current infrastructure

Consumer Hallmarking Gold hallmarking (BIS) recently made mandatory but limited implementation so far

Limited implementation, particularly in the unorganized sector, exposes customers to risks related to quality or under‐caratage

Conflict free diamonds No import or export of rough diamonds is permitted unless accompanied by Kimberley Process Certificate

Protects customers and ensures use of conflict‐free diamonds

Source: AT Kearny India Jewellery Review 2013, PhillipCapital India Research

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Indian watch market The Indian watch industry is estimated at Rs 47bn with a volume of 55mn units and is expected to grow annually at 10‐15%. The watch industry in India is under penetrated — 27%, lowest in the world and only 3.5% of the population owns multiple watches. The sale of watches per 1,000 individuals in India is 40 as compared to 120 globally. This untapped industry offers huge potential for the growth of organized players as the market is largely dominated by unorganized players (60% in terms of volume and 40% in terms of value). The Indian market is price‐sensitive and price forms the basis of purchase decisions. The industry is split into three categories:‐ • Mass: Comprises of watches below Rs 1,000 — 65% of total market volume and 24%

in value. These customers are highly price‐sensitive and change watches frequently. • Mid‐Premium: Between Rs1,000‐5,000. Prefer all‐occasion watches, price‐sensitive. • Premium: Above Rs 5,000. Around 77% watches from imported brands and 23% are

local. Target customers are market savvy and prefer branded and designer watches. With the entry of Swiss watch brands, the demand for premium and luxury categories has been robust.

Titan positioned brands at different price points

Fashion/Sporty

Formal / Classic

Rs 250 1000 2000 4000 5000 10000 30000+

Price

Fastrack

Zoop

Sonata HMT

Maxima

Tag HeuerHugo Boss

C Dior

Espirit, Swatch, Fossil, iordano, DKNY, Carrera, FCUK, Tommy Hilfiger

XYLYS

Tissot

Nebula

Raymond Weil Omega, Rado,

Longines

CitizenTitan

Timex

Fashion/Sporty

Formal / Classic

Rs 250 1000 2000 4000 5000 10000 30000+

Price

Fastrack

Zoop

Sonata HMT

Maxima

Tag HeuerHugo Boss

C Dior

Espirit, Swatch, Fossil, iordano, DKNY, Carrera, FCUK, Tommy Hilfiger

XYLYS

Tissot

Nebula

Raymond Weil Omega, Rado,

Longines

CitizenTitan

Timex

Source: Company

– 24 of 28 –


Factors driving the growth of the industry • Demand for multiple‐ownership watches: In India, people owned one or two

watches, whereas in US and Europe, individuals possess around 6‐7 watches. This concept of owning multiple watches is fast catching up in India as watches are now considered a lifestyle accessory rather than a time‐keeping device.

• Accelerated growth from the luxury segment: The segment is seeing strong demand, led by higher growth in HNI population, more brand‐conscious consumers and an increase in luxury retail.

• Upgrading from the mass segment to mid‐premium segment: The mass segment provides huge scope for these consumers to upgrade to the mid‐premium segment. The rise in disposable income and consumer preference for quality and style will lead to consumers upgrading.

• Multi‐channel retailing: The industry is witnessing the concept of specialty retailing to reach out to the target customers through multiple retail channels like own stores, multi‐branded outlets and national chain stores. This allows organized players to focus on each segment of customers and their diversifying product offerings.

Eye wear market The Indian prescription eyewear market is estimated at around Rs 21bn. The eyewear market is highly fragmented — with organized retail commanding less than 5%. The industry is expected to grow at a sustainable 15‐20%, mainly driven by poor eye health, low penetration of contact lens, rise in organized retail and increased consumer awareness. Product category Spectacles 80% Sunglasses 18% Contact lenses 2%

According to Titan, 30% of the Indian population needs vision correction, which may be corrected by surgery, laser therapy, spectacles or contact lenses. However, only 25% have their vision corrected, of which 94% wear spectacles and on an average change their glasses/frames once in 3 to 4 years, 6% wear contact lenses and 2.5% wear both. Therefore, the industry offers huge potential for organized retailers to make their mark. To tap this opportunity organized players are taking on various initiatives that will lead to higher sales growth. Add‐on services: Organized players are providing eye testing facilities from trained optometrists and lens consultants to attract customers. Other key differentiators are style consultants, zero‐error prescription, free eye testing, scratch‐resistant lenses, and lens accuracy certificates. Diversifying product portfolio: Players in the market are offering diversified products like frames, sunglasses, contact lenses, lens‐cleaning solutions and other accessories to attract different consumer segments. Entry of luxury eyewear portfolio: With the entry of international brands, there is a shift in consumer preference from form‐and‐function to form‐and‐fashion. For instance, sunglasses are now used more as a fashion accessory rather than a protective device.

– 25 of 28 –

– 26 of 28 –


Financials

Income Statement Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Net sales 101,233 111,593 124,509 146,522Growth, % 14 10 12 18Total income 101,233 111,593 124,509 146,522Raw material expenses ‐75,134 ‐82,579 ‐92,137 ‐108,133Employee expenses ‐4,898 ‐5,580 ‐6,225 ‐7,180Other Operating expenses ‐11,076 ‐12,833 ‐14,070 ‐16,117EBITDA (Core) 10,125 10,601 12,077 15,092Growth, % 21.2 4.7 13.9 25.0 Margin, % 10.0 9.5 9.7 10.3 Depreciation ‐562 ‐580 ‐636 ‐692EBIT 9,563 10,021 11,441 14,399Growth, % 21.1 4.8 14.2 25.9 Margin, % 9.4 9.0 9.2 9.8 Interest paid ‐506 ‐941 ‐1,146 ‐1,206Other Non‐Operating Income 1,009 1,282 1,573 1,660Pre‐tax profit 10,060 10,362 11,868 14,853Tax provided ‐2,816 ‐2,901 ‐3,323 ‐4,159Profit after tax 7,245 7,461 8,545 10,694Others (Minorities, Associates) 0 0 0 0Net Profit 7,245 7,461 8,545 10,694Growth, % 20.5 3.0 14.5 25.2 Net Profit (adjusted) 7,245 7,461 8,545 10,694Unadj. shares (m) 888 888 888 888Wtd avg shares (m) 888 888 888 888

Balance Sheet Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Cash & bank 11,390 22,489 14,464 16,957Debtors 1,658 1,834 2,047 2,409Inventory 36,803 36,199 40,389 47,401Loans & advances 3,817 3,571 3,735 4,396Total current assets 53,669 64,093 60,635 71,162Investments 29 29 29 29Gross fixed assets 9,363 10,363 11,363 12,363Less: Depreciation ‐4,724 ‐5,305 ‐5,941 ‐6,634Add: Capital WIP 418 418 418 418Net fixed assets 5,057 5,476 5,840 6,148Total assets 58,833 69,677 66,582 77,417 Current liabilities 39,073 33,203 21,562 25,206Total current liabilities 39,073 33,203 21,562 25,206Non‐current liabilities 61 11,061 13,061 12,061Total liabilities 39,134 44,263 34,623 37,267Paid‐up capital 888 888 888 888Reserves & surplus 18,811 24,526 31,071 39,263Shareholders’ equity 19,699 25,413 31,959 40,151Total equity & liabilities 58,833 69,677 66,582 77,417

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY13 FY14E FY15E FY16E

Pre‐tax profit 10,060 10,362 11,868 14,853Depreciation 562 580 636 692Chg in working capital ‐2,301 ‐5,197 ‐16,207 ‐4,391Total tax paid ‐2,859 ‐2,901 ‐3,323 ‐4,159Cash flow from operating activities 5,463 2,845 ‐7,026 6,996Capital expenditure ‐1,514 ‐1,000 ‐1,000 ‐1,000Chg in investments ‐5 0 0 0Cash flow from investing activities ‐1,523 ‐1,000 ‐1,000 ‐1,000Free cash flow 3,939 1,845 ‐8,026 5,996Debt raised/(repaid) ‐52 11,000 2,000 ‐1,000Dividend (incl. tax) ‐2,181 ‐1,746 ‐2,000 ‐2,503Cash flow from financing activities ‐2,233 9,254 0 ‐3,503Net chg in cash 1,706 11,099 ‐8,025 2,494

Valuation Ratios & Per Share Data FY13 FY14E FY15E FY16E

Per Share data EPS (INR) 8.2 8.4 9.6 12.0 Growth, % 20.5 3.0 14.5 25.2 Book NAV/share (INR) 22.2 28.6 36.0 45.2 FDEPS (INR) 8.2 8.4 9.6 12.0 CEPS (INR) 8.8 9.1 10.3 12.8 CFPS (INR) 5.0 1.8 (9.7) 6.0 DPS (INR) 2.1 1.7 1.9 2.4 Return ratios Return on assets (%) 14.6 13.1 14.2 16.5 Return on equity (%) 42.2 33.1 29.8 29.7 Return on capital employed (%) 44.9 29.9 23.8 24.5 Turnover ratios Asset turnover (x) 15.3 10.1 5.6 4.5 Sales/Total assets (x) 1.9 1.7 1.8 2.0 Sales/Net FA (x) 22.1 21.2 22.0 24.4 Working capital/Sales (x) 0.0 0.1 0.2 0.2 Receivable days 6.0 6.0 6.0 6.0 Working capital days 11.6 27.5 72.1 72.2 Liquidity ratios Current ratio (x) 1.4 1.9 2.8 2.8 Quick ratio (x) 0.4 0.8 0.9 0.9 Interest cover (x) 18.9 10.7 10.0 11.9 Dividend cover (x) 3.9 5.0 5.0 5.0 Total debt/Equity (%) 0.3 43.5 40.9 30.0 Net debt/Equity (%) (57.5) (45.0) (4.4) (12.2)Valuation PER (x) 28.6 27.7 24.2 19.3 PEG (x) ‐ y‐o‐y growth 1.4 9.3 1.7 0.8 Price/Book (x) 10.5 8.1 6.5 5.2 Yield (%) 0.9 0.7 0.8 1.0EV/Net sales (x) 1.9 1.8 1.7 1.4EV/EBITDA (x) 19.3 18.4 17.0 13.4EV/EBIT (x) 20.4 19.5 18.0 14.0


Management (91 22) 2300 2999(91 22) 6667 9735

Research Engineering, Capital Goods Pharma

Deepak Jain (9122) 6667 9758 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Aditya Bahety (9122) 6667 9986

Retail, Real EstateInfrastructure & IT Services Abhishek Ranganathan, CFA (9122) 6667 9952

Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Neha Garg (9122) 6667 9996Sachit Motwani, CFA, FRM (9122) 6667 9953 Varun Vijayan (9122) 6667 9992

TechnicalsMetals Subodh Gupta (9122) 6667 9762

Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Dhawal Doshi (9122) 6667 9769Vivekanand Subbaraman (9122) 6667 9766 Dharmesh Shah (9122) 6667 9974 Database ManagerManish Pushkar (9122) 6667 9764 Vishal Randive (9122) 6667 9944

Oil&Gas, Agri InputsCement Gauri Anand (9122) 6667 9943 Sr. Manager – Equities SupportVaibhav Agarwal (9122) 6667 9967 Deepak Pareek (9122) 6667 9950 Rosie Ferns (9122) 6667 9971

Anjali Verma (9122) 6667 9969

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Sales Trader ExecutionAshvin Patil (9122) 6667 9991 Dilesh Doshi (9122) 6667 9747 Mayur Shah (9122) 6667 9945Shubhangi Agrawal (9122) 6667 9964 Suniil Pandit (9122) 6667 9745Kishor Binwal (9122) 6667 9989Sidharth Agrawal (9122) 6667 9934Dipesh Sohani (9122) 6667 9756

Economics

Consumer, Media, Telecom

Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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http://www.phillip.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/home.htm

http://www.phillipcapital.in/

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Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence/Conflict: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its employees, directors, or affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd may not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities andExchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. PhillipCapital (India) Pvt. Ltd. Registered office: 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai – 400011

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20 April 2012 - PhillipCapitalbackoffice.phillipcapital.in/Backoffice/Research... · “Performance stands out like a ton of diamonds. Non‐performance can always be explained away.”—Harold