Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities of Titan Company Limited (Titan).

 

CRISIL Ratings expects Titan’s top-line to grow by 7-10% in fiscal 2022, while operating margin is expected to improve to 9-10% (adjusted for leases), driven by expectation of a healthy product mix in the jewellery segment, stronger performance in the watch segment and continued benefits of cost optimisation measures implemented by the company in the last fiscal.  In the first quarter of fiscal 2022, Titan reported strong revenue growth of 117% (excluding sales from bullion), on account of lower base. The growth in the quarter was driven by a 107% growth in jewellery segment (excluding bullion), 280% growth in watches segment and 117% growth in eyewear segment. For the jewellery and watches segment, over 90% of the stores were operational as on June 30, 2021.

 

In fiscal 2021, company reported revenue growth of over 3%, largely attributed to disruptions caused by covid-19 pandemic. Operating margin is estimated to have contracted to 6.7% (adjusted for leases) from 10.7% in fiscal 2020, on the back of higher sales of lower value added jewellery in line with the market demand, and losses in the watch segment due to high operating leverage.

 

The ratings continue to reflect Titan’s leadership position in jewellery and watches segment, healthy operating efficiency and a strong financial risk profile with robust liquidity. These strengths are partially offset by the company’s exposure to regulatory risks in the jewellery division and high competitive intensity in the sector, as well as moderating performance of its watches division.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Titan and its subsidiaries, which are strategically important to Titan, and have a significant degree of operational integration.

 

Furthermore, CRISIL Ratings has amortised the goodwill and intangibles arising from the acquisition of 66.59% stake (current stake is 72.3%) in CaratLane Trading Private Limited (CaratLane; ‘CRISIL AA/Stable’) over a period of five years starting fiscal 2017. CRISIL Ratings has also considered gold on loan as short term debt for its analysis.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in its major business segments: jewellery and watches:

Titan is the market leader in the organized jewellery retailing and watches segments. The company’s market leadership in these segments is driven by its strong brands, healthy store additions, association of trust with the Tata brand, and its pan-India distribution network. Titan has a strong store network in jewellery and watch segments with 353 Tanishq, 4 Zoya, 40 Mia, 117 CaratLane, 511 World of Titan, 168 Fastrack and 103 Helios stores as on March 31, 2021. CRISIL Ratings believes that Titan will leverage its brands to expand and maintain its leadership position over the medium term.

 

• Healthy operating efficiency

Titan has healthy operating efficiency reflected in its industry-leading operating margins of over 10-11% over fiscals 2018 to 2020 (fiscal 2021, being an exception due to disruptions caused by the pandemic). The company’s healthy operating efficiency stems from strong control over operations, outsourcing of jewellery-making to karigar parks, in-house design and expertise in manufacturing processes of watches, efficient working capital management, and prudent hedging policies. CRISIL Ratings believes that Titan’s robust operating efficiency will enable it to maintain its strong operating profitability over the medium term.

 

• Strong financial risk profile

Titan's financial risk profile is marked by healthy gearing and ample liquidity. As on March 31, 2021, the company had gold on loan and other bank debt liabilities of Rs.4375 crore (Rs 2,318 crore in fiscal 2020), while net debt stood at over Rs 1000 crore. The increase in debt in fiscal 2021 was attributed to sale of bullion received from its exchange schemes and subsequently availing gold on loan resulting in both higher debt and liquidity. This has resulted in higher total outside liabilities /tangible networth (TOL/TNW) ratio of 1 time as on March 31, 2021, compared to 0.9 time as on March 31, 2020. This ratio is expected to remain at comfortable levels over the medium term. Furthermore, Titan's expansions are prudently managed through a mix of company-owned, company-managed (inventory owned by company and franchisee operated), and franchisee stores with increasing focus on franchise stores going forward. Hence, large-scale retail space additions do not result in heavy capital expenditure (capex). CRISIL Ratings believes that Titan's capex will remain between Rs.280-350 crore per annum, over the medium term; this will be largely funded through internal accruals.

 

Weaknesses:

• Exposure to regulatory risks in the jewellery division

Titan remains exposed to regulatory risks in the jewellery division. This sector had seen heightened regulatory action in the past. For instance, during fiscal 2014, to curb the import of gold, the government introduced the 80:20 rule, discontinued gold on lease scheme and modified the gold deposit scheme. Subsequently, in fiscal 2015, the gold on loan scheme was re-started and the 80:20 rule was scrapped. Furthermore, since January 2016, the government has mandated jewellers to collect PAN card for all purchases beyond Rs.2 lakhs. The government has also introduced the sovereign gold bond scheme, to shift consumer preferences away from physical gold. Import duty on gold was increased 2.5% in fiscal 2020 and later reduced by over 2% (net of Agriculture Infrastructure and Development Cess of 2.5% and Social Welfare surcharge of 0.75%) in fiscal 2021. Some of these regulatory changes had moderated the company's operating performance in the past. CRISIL Ratings believes that Titan will remain susceptible to changing regulatory norms.

 

• High competitive intensity in jewellery segment

Titan is exposed to intense competition in the jewellery retailing segment. Jewellery retailing in India is largely dominated by unorganised players which have a stronghold in their regions. Besides, organised players have also been expanding rapidly in select regions, posing stiff competition. As the company expands into newer geographies and cities, it will face severe competition from these local players. However, CRISIL Ratings believes that increasing consumer awareness about branded jewellery and purity of gold, implementation of hallmarking since June 2021 and the trust associated with the Titan brand will enable the company to penetrate new markets over the medium term.

 

• Moderating performance of watches division

Traditionally, demand in the watches segment is directly linked to consumer spending. The performance of the watch segment (7% of revenues in fiscal 2021) moderated in fiscal 2021 on account of discretionary nature of products and large losses in the first quarter, as the segment has high operating leverage. The division also had a large share of stores at malls, most of which were closed in the first quarter of fiscal 2021. Performance was impacted in the first quarter of fiscal 2022 as well, due to second wave which resulted in store closures; albeit revenue registered good growth at Rs.285 crore in the first quarter of fiscal 2022 compared with Rs.75 crores in the corresponding quarter of fiscal 2021, as most stores remained open for major part of April and towards the end of June. While CRISIL Ratings expects Titan’s watches division to register good growth in fiscal 2022, profitability is also expected to recover. That said, a possible third covid wave may impact consumer spending in the latter half of fiscal 2022, and hence performance of the division.

Liquidity: Superior

Titan had ample liquidity in the form of cash and investments of over Rs 3300 crore as on March 31, 2021. The company has negligible long term debt on its balance sheet and relies mainly on gold on loan facilities for funding needs. It alternates between using gold on loan or working capital bank limits, depending on the cost of funds and gold price movements. Besides, funds raised under its Golden Harvest Scheme also help fund working capital needs. Bank line utilisation was negligible at under 1% during the 12 months through May 2021. Given the strong cash accruals (estimated at over Rs 950 crore) and ample liquidity, CRISIL Ratings believes that Titan will maintain its ample liquidity over the medium term.

Outlook: Stable

CRISIL Ratings believes Titan's business risk profile will continue to be supported by its dominant position in the organised jewellery segment, strong distribution network, steady demand prospects, and healthy operating capabilities. The company is also expected to sustain its leadership position in the watches and eye-care division. Besides, Titan is expected to maintain its strong financial risk profile, supported by steady cash generation, well phased spaced out expansion plans, and prudent working capital management practices.

Rating Sensitivity factors

Downward factors:

• Significant impact due to regulatory changes or supply related issues impacting Titan, leading to deterioration in business risk profile
• Sustained reduction in operating profit margin, significantly impacting cash generation
• Material weakening of credit metrics, for instance TOL/TNW exceeding 2.3-2.5 times, due to aggressive debt funded expansion plans or acquisitions.

About the Company

Titan was incorporated in 1984 as a joint venture between the Tata group and Tamil Nadu Industrial Development Corporation Ltd (TIDCO). Titan is the market leader in both its core segments, watches, and branded jewellery. Titan's brand portfolio includes Titan, Sonata, Fastrack, Raga, Xylys, Favre Leuba and Nebula for watches; and Tanishq, Mia, Carat Lane and Zoya for jewellery. Its other business activities include precision engineering, prescription eye wear, accessories, fragrances and ethnic wear. The company has also launched a new brand, Skinn in the perfume segment in 2013. The Tata group and TIDCO hold about 25% and 28%, respectively, of Titan's equity shares, with Foreign Institutional Investors, financial institutions, banks, corporate entities, and the public holding the rest. Titan's manufacturing and assembly plants are in Hosur and Coimbatore (Tamil Nadu), and in Dehradun, Roorkee, and Pantnagar (all in Uttarakhand) and Sikkim.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Revenue	Rs crore	21,644	21,052
Profit after tax	Rs crore	974	1,493
PAT margin	%	4.5	7.1
Adjusted Debt/Adjusted Networth*	Times	0.8	0.5
Interest coverage	Times	9.4	15.8

Reported financials

*CRISIL Ratings has adjusted gearing by considering gold on loan as debt

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. crore)	Complexity Level	Rating assigned with outlook
NA	Proposed Cash Credit Limit*	NA	NA	NA	2400	NA	CRISIL AAA/Stable
NA	Proposed Letter of Credit**	NA	NA	NA	450	NA	CRISIL A1+

*One way interchangeability to Import letter of credit, foreign letters of credit and Standby letters of credit to the extent of sanctioned limit
**Interchangeable with standby letter of credit and bank guarantees

Annexure – List of entities consolidated

Name of entities	Extent of consolidation	Rationale for consolidation
CaratLane Trading Private Limited	72.31%	Strategically important and have significant degree of operational integration.
StudioC (100% Subsidiary of Caratlane Trading Private Limited)	Full	Strategically important and have significant degree of operational integration.
Titan Engineering & Automation Limited	Full	Strategically important and have significant degree of operational integration.
Titan Holdings International FZCO	Full	Strategically important and have significant degree of operational integration.
Titan Global Retail LLC (Subsidiary of Titan Holdings International FZCO)	Full	Strategically important and have significant degree of operational integration.
Favre Leuba A G, Switzerland	Full	Strategically important and have significant degree of operational integration.
Titan Watch Group Limited, Hong Kong (100% Subsidiary of Favre Leuba A G)	Full	Strategically important and have significant degree of operational integration.
Titan Commodity Trading Limited	Full	Strategically important and have significant degree of operational integration.
Green Infra Wind Power Theni Limited	26.79%	Strategically important and have significant degree of operational integration.
TCL North America Inc	Full	Strategically important and have significant degree of operational integration
TEAL USA Inc	Full	Strategically important and have significant degree of operational integration