Management outlined the five key pillars that would help it achieve targeted growth of 2.5x over the next five years: (i) wedding jewellery, (ii) high-value diamond jewellery, (iii) Golden Harvest Scheme, (iv) store addition and (v) market share growth. The company is also investing in loyalty programmes, a weak area. Higher compliance focus under the GST regime should boost growth. There is no change to our forecasts. Valuations at 42.2x FY19E are fair for a business with 20% RoEs, and earnings CAGR is expected at 16%. Watches and Eyewear segments continue to be a bit of drag on overall earnings growth. We maintain Neutral rating with a target price of `525 valued at 41x June-2019e EPS (in line with three-year average multiple). Key pillars of growth The company outlined the five key pillars that would help it achieve the targeted 20% sales CAGR (assuming no gold price escalation or reduction) over the next five years.
Wedding jewellery: The company was growing strongly in adornment jewellery. However, market slowdown due to weak consumer sentiment and regulatory issues in the Golden Harvest Scheme (used to be 30% of sales at peak) necessitated an entry into wedding jewellery. Wedding jewellery (Rs 1.5 t) is a much bigger market than adornment jewellery (Rs 0.5 t). The large hub wedding jewellery stores aim to be the best in the city in terms of variety, display, staff knowledge and customer experience. Inventory in these stores will be high, given the special-occasion nature of the purchases. Post five years, wedding jewellery would be 40% of jewellery sales for the company, as against industry average of 55-60%.
High-value diamond jewellery offers higher customisation. After an increased focus on wedding jewellery and high-value diamond jewellery in recent years, the average ticket size of first-time walk-ins has increased significantly. Golden Harvest Scheme is recovering and accounted for 14% of sales in FY17 (target: 18% in FY18). This used to be 30% of sales at peak, and is now recovering sharply. Store addition particularly in traditionally weaker cities (middle India towns), with region-specific jewellery portfolio. The company plans to open 27 new stores in 19 towns in FY18 as part of this initiative.
Market share growth: Compliance requirements are high under the GST regime, which should benefit organised players like Titan. The industry is likely to see growth coming mainly from large stores, rather than small jewellers. There are many big local jewellers in each city. While long-term family relationship with local jewellers is a hindrance in attracting new customers, Titan aims to take share via initiatives on store addition, portfolio diversification and benefiting from a favourable regulatory regime.
Tanishq brand is weak only in Chennai, partly because buyers there are extremely value conscious and the brand is perceived to be a north Indian one. In the rest of the cities (including other South Indian ones), the brand recall is good. Titan has designed strength and wide assortment coming from a precision engineering background. Southern organised players like Kalyan and Malabar have a large share of customers from the South Indian population in cities outside of this region, which leaves the market wide open for players like Titan. GST regime and challenges On gold purchases, Titan will pay 3% and avail credit, but not charge customers. 100-150 tons of gold is smuggled, which could help unorganised trade thrive.
Weaknesses on which it is working Management acknowledges that loyalty programmes can be used better. This is an area in which the company is reportedly investing a lot. Knowledge of customers can be leveraged better for cross-selling. Financials According to management, RoCE in FY18 will be similar to FY17, even if margins are lower in the quest for growth. The company is looking to increase asset turns to offset margin impact.