Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities and non convertible debentures of Titan Company Ltd (Titan).

 

The ratings continue to reflect the leadership position of Titan in the Jewellery and Watch segments, healthy operating efficiency, and strong financial risk profile, including robust liquidity. These strengths are partially offset by exposure to regulatory risks in the Jewellery division and highly competitive intensity in the sector.

 

Titan’s consolidated operating income grew by 26% in fiscal 2024 on the back of strong growth in Jewellery and the ‘Watches and Wearables’ segment. While growth in the Jewellery segment came at the back of strong same store sales growth, growing contribution from new store additions and partly due to steep increase in gold prices, growth in the Watches and Wearables segment too saw a healthy increase driven by growth in the Analog watches sub-segment and rising traction in the Wearables sub-segment. The growth momentum has continued this fiscal with Revenue increasing to Rs 13,266 crore in Q1 FY2025, up 12% YoY. While the inclement weather conditions during the summers, general elections and lower wedding days impacted retail walk-ins, the growth metrics in Watches & Wearables and EyeCare remained healthy. Titan is expected to sustain its healthy operating performance, supported by a strong market position across its product segments. However, following the customs duty cut on gold undertaken in July’24, as per management there is expected to be a one-time impact on profitability between Rs 500 crores to Rs 550 crores. That said, the Company is expected to see continued benefits from growth in buyers flowing from reduced custom duties, operating leverage, favourable product mix and healthy contribution from the subsidiaries.

 

Additionally in fiscal 2024, Titan’s leverage ratio such as net total outside liabilities/tangible net worth, moderated to 2.45 times as on March 31, 2024, owing to increase in long term borrowings during the year in the form of NCDs worth Rs 2,579 crores and term loan of Rs 898 crores (utilised to fund the acquisition of additional stake in Caratlane Trading Private Limited for a total consideration of Rs. 4,621 crores). However, with expectations of healthy cash flow from operations and limited incremental borrowing requirements, this metric is expected to improve going forward. CaratLane has become a wholly owned subsidiary of Titan w.e.f July 18, 2024.

Analytical Approach

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.

 

Gold on loan has been considered as short-term debt for the analysis. With adoption of Ind AS 116 with effect from April 1, 2019, lease liabilities are being treated as debt while related adjustments are made in depreciation and amortisation and interest cost components.

 

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 major business segments: Titan is the market leader in the organised Jewellery retailing and watches segments, driven by its strong brands, healthy store additions, association of trust with the Tata brand, and a pan-India distribution network. The Company had a strong store network in both Jewellery and watch segments with 699 stores in the Jewellery segment (Tanishq, Zoya and Mia), 275 CaratLane stores and 1,137 stores for watches as on June 30, 2024. Planned retail expansion and pipeline of new product launches, including in the smart wearables sub-segment, are likely to continue to support business growth over the medium term.

 

• Healthy operating efficiency: Healthy operating efficiency is reflected in industry-leading operating margin of 10-12% over fiscals 2018 to 2024 (fiscal 2021, being an exception due to disruptions caused by the Covid-19 pandemic). The robust 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. However, operating margin may see an impact this fiscal given the one-time impact in P&L between Rs 500 crores -to Rs 550 crores following the customs duty cut on gold undertaken in July’24. That said, Robust operating efficiency will enable the Company to maintain strong operating profitability over the medium term.

 

• Strong financial risk profile: The financial risk profile remains strong on the back of continued healthy earnings from operations, translating into a conservative capital structure and comfortable debt protection metrics. While the debt metrics recorded some moderation, with likely increase of TOL/TNW to 2.45 times (vs 1.29 times as on March 31, 2023) and adjusted gearing to 1.73 times (vs 0.81 times as on March 31, 2023) as on March 31, 2024 due to addition of long-term borrowings used for funding the acquisition of  27.92% stake in CaratLane, the same is expected to improve to comfortable levels in the coming fiscals, supported by healthy cash accruals. Interest coverage continues to remain strong at over 8 times. Furthermore, 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.

 

Weaknesses:

• Exposure to regulatory risks in the Jewellery division: Titan remains exposed to regulatory risks in the Jewellery division. This sector has 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 restarted 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 lakh. The government has also introduced the sovereign gold bond scheme, to shift consumer preferences away from physical gold. Total custom duty on gold was lowered from 15% to 6% in the latest union budget in July’24. Some of these regulatory changes have moderated operating performance in the past. CRISIL Ratings believes that Titan will remain susceptible to changing regulatory norms.

 

• Intense competition in the 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 Titan expands into newer geographies and cities, it will face severe competition from these local players. However, 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 3,200 crore as on March 31, 2024, and average utilization for last 12 months ending July 31, 2024, was at 54%. The Company 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. The strong cash accrual (estimated at over Rs 3,000 crores per annum) will be more than sufficient to support repayment obligation in the near term. Titan is expected to maintain ample liquidity over the medium term.

 

Environment, social, and governance (ESG) profile

The ESG profile of Titan supports its already strong credit risk profile.

 

Key ESG highlights

• Titan’s Scope 1 and 2 emissions and energy consumption intensity reduced by ~20% on-year to 0.56 tCO2E per crore of revenue and 4.45 GJ per crore of revenue, respectively, in fiscal 2024.
• The share of renewable energy in its overall energy mix stood at ~30% in fiscal 2024, which was marginally higher than last fiscal.
• Attrition rate for permanent employees stood at ~8% in fiscal 2024, which was marginally better than last fiscal (~9%). Also, gender diversity for permanent employees improved to 25% in fiscal 2024 (compared to 21% in the last fiscal).
• Its governance structure is characterized by 50% of its board being independent directors, presence of two-women directors, presence of board-level sustainability committee, dedicated investor grievance redressal committee, and extensive financial disclosures.

Outlook: Stable

The business risk profile of Titan 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 eyecare divisions. The financial risk profile will remain supported by steady cash generation, well-phased, expansion plans, and prudent working capital management.

Rating Sensitivity factors

Downward factors:

• Significant impact due to regulatory changes or supply-related issues impacting Titan, leading to deterioration in the business risk profile
• Sustained reduction in the operating profit margin to below 8%, significantly impacting cash generation
• Material weakening of credit metrics, due to aggressive debt-funded expansion plans or acquisitions

About the Company

Titan, a joint venture between the Tata Group and the Tamilnadu Industrial Development Corporation (TIDCO), commenced its operations in 1987 under the name Titan Watches Limited. In 1994, Titan diversified into Jewellery (Tanishq) and subsequently into EyeCare. Titan’s brand portfolio includes Titan, Sonata, Fastrack, Raga, Xylys, and Nebula in Analog watches; and Tanishq, Mia, CaratLane and Zoya in Jewellery. Its other business activities include precision engineering, prescription eye wear, accessories, fragrances and ethnic wear. Over the last three decades, Titan has expanded into underpenetrated markets and created lifestyle brands across different product categories including fragrances (SKINN), accessories and Indian dress wear (Taneira) and thoughtfully designed Women Bags (IRTH). Titan is widely known for transforming the watch and jewellery industry in India and for shaping India's retail market by pioneering experiential retail. . .. The Tata group holds about 25% and TIDCO about 27% of equity shares, with foreign institutional investors, financial institutions, banks, corporate entities, and the public holding the rest. The manufacturing and assembly plants of Titan are in Hosur and Koyampuththur (Tamil Nadu), and in Dehradun, Roorkee, and Pantnagar (all in Uttarakhand) and Sikkim.

 

CaratLane became a wholly owned subsidiary of Titan w.e.f July 18, 2024.

Any other information: Not Applicable