Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISILA1+' ratings on the bank facilities of Titan Company Limited (Titan).

 

CRISIL Ratings expects Titan’s top-line to grow by 15-17% in fiscal 2023 driven by expectations of strong growth in jewellery segment, healthy growth in watches segment with revenues reverting to pre-pandemic levels and sustained growth in eyewear segment supported by new store additions. Operating margin is expected to sustain at 10-11% (excluding leases) driven by benefits of operating leverage, favourable product mix and expectations of sustained healthy margins for segments such as eye wear, watches and CaratLane Trading Private Limited (CaratLane; ‘CRISIL AA/Stable’).

 

In fiscal 2022, company is estimated to report revenue growth of over 28-30% driven by low base of last fiscal and strong recovery witnessed in Q2 and Q3 of fiscal 2022 due to festive and wedding purchases. Operating margin is estimated to improve by nearly 400 basis points to around 11% (excluding leases) due to benefits of operating leverage due to better scale, favourable product mix in jewellery segment, one-off gains on diamond inventory and reversal of provisions.

 

The ratings continue to reflect Titan’s leadership position in the 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.

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 organised 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 444 stores in jewellery segment (includes Tanishq, Zoya and Mia), 138 for CaratLane and 843 stores for watches as on March 31, 2022. 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 2022 (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, 2022, the company is estimated to have gold on loan and other bank debt liabilities of over Rs 5900 crore (Rs 4382 crore in fiscal 2021) and liquidity of over Rs 1800 crore. The increase in debt in fiscal 2022 is attributed to higher inventory for festivities and build-up of diamond inventory. Consequently, total outside liabilities /tangible networth (TOL/TNW) ratio is estimated to be at 1 time as on March 31, 2022, in-line with last fiscal. 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.350-400 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% to 10.75% 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.

Liquidity: Superior

Titan had ample liquidity in the form of cash and investments of nearly Rs 1800 crore as on March 31, 2022, and unutilised fund based bank lines of over Rs 1000 crore as of December 31, 2021. The company has no 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. Given the strong cash accruals (estimated at over Rs 1500 crore per annum) 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.

 

ESG profile

The environment, social and governance (ESG) profile of Titan supports its strong credit risk profile.

 

The retail sector has moderate environmental impact, primarily in the form of emissions and water consumption owing to its manufacturing operations. The sector has moderate social impact because of its direct bearing on the health and wellbeing of its workers and customers.

 

The company’s increasing focus on addressing ESG risks supports its ESG profile.

 

Key ESG highlights of Titan:

• The company has focused on energy and emission management by setting up business wise carbon neutral target. Overall, renewables energy constitute 60% of total energy consumption at manufacturing plants.
• In terms of water recycling over 90% of the water used in all three major segments in fiscal 2021 is recycled.
• Titan follows multiple initiatives and policies to promote education, community improvement, community engagement, employee engagement, development and safety and responsible sourcing.
• The governance structure of Titan is characterised by a split chairman and chief executive officer position, extensive financial disclosures, presence of an investor grievance committee and a board comprising six independent directors out of thirteen members.

 

There is growing importance of ESG among investors and lenders. Titan’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

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	Working Capital Facility*	NA	NA	NA	2630	NA	CRISIL AAA/Stable
NA	Proposed Letter of Credit*	NA	NA	NA	220	NA	CRISIL A1+

* Interchangeable with Import letter of credit, foreign letters of credit, standby letters of credit, bank guarantees, CC and WCDL.