Rating Rationale
December 07, 2018 | Mumbai
Titan Company Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.2850 Crore (Enhanced from Rs.1350 Crore)
Long Term Rating CRISIL AA+/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Titan Company Limited (Titan) to 'Positive' from 'Stable', and reaffirmed the 'CRISIL AA+' rating and has reaffirmed its 'CRISIL A1+' on the company's short term bank facilities and commercial paper programme.

The outlook revision reflects improving business profile over the medium term on account of improving business performance in the retail jewelry segment, supported by healthy annual store additions and better diversity in terms of revenues and profitability. 

Titan will continue to benefit from shift of demand in jewelry retail from unorganized to organized segment post demonetization and implementation of Goods and Services Tax (GST) as seen from strong year-on-year revenue growth for eight straight quarters ending September 2018 leading to market share gains. Titan has outpaced most of its large peers in the organised jewelry sector, with its revenues registering a compound annual growth (CAGR) of ~20% during fiscal 2016 to 2018  from Rs 11,278 crores to Rs 16,156 crores. Strong brand image and trust coupled with ability to provide range of designs and robust business model aided Titan's growth. Going forward, CRISIL expects company to register a growth of over 12% CAGR over medium term.

Over last 2 years, Titan has also increased its pace of store additions in jewelry segment from ~10-20 stores per annum to  30-40 stores annually and same trend is expected to be maintained. This coupled with its already strong store network of 267 Tanishq, 25 Mia and 45 Caratlane stores with further augment company's market position in India.

Additionally, Titan's revenue and profitability diversity has been improving aided by significant improvement in profitability of watches segment over fiscal 2018 and H1 fiscal 2019 and strong expected growth from Titan's engineering subsidiary Titan Engineering and Automation Limited (TEAL; 'CRISIL AA-/Stable/CRISIL A1+'). Other ventures like sarees (Taniera) are in pilot stage and yet to achieve scale. CRISIL expects that losses from other ventures will not have significant impact on overall profitability and some ventures will turn also turn profitable over medium term.

The rating continues to reflect Titan's strong financial risk profile marked by healthy cash accruals of over Rs 900 crore, healthy cash and marketable securities of over Rs 620 crore and gearing of less than 0.5 times as of 31st March 2018.

These rating strengths are partially offset by the company's exposure to regulatory risks in the jewellery division and exposure to competition from unorganised players, in the jewellery segment.

Analytical Approach

For arriving at its ratings, CRISIL has consolidated the business and financial risk profiles of Parent - Titan, its 5 subsidiaries, 1 associated company and 1 joint venture, which are strategically important to Titan, and have a significant degree of operational integration with Titan. These companies are - Titan Time Products Limited (subsidiary), Favre Leuba AG , Switzerland (subsidiary), Titan Watch Company Limited, Hong Kong (subsidiary), TEAL (subsidiary), Carat Lane Trading Private Limited (CaratLane) (subsidiary), Green Infra Wind Power Theni Limited (associate company) and Montblanc Retail India Private Limited (joint venture company) respectively.

Further, CRISIL has amortised the goodwill and intangibles arising from the acquisition of 66.59% stake in CaratLane over a period of 5 years

CRISIL has also considered gold on loan as short term debt for fiscals 2017 and 2018 for its analysis.

Key Rating Drivers & Detailed Description
Strength
* Leadership position in its major business segments: jewelry and watches
Titan has is a market leader in the organized jewelry retailing and watches segment. The company's market leadership position is driven by its strong brands, association of trust with the Tata brand, and its pan-India distribution network. CRISIL believes that Titan will leverage its brands to expand and maintain its leadership position over the medium term.

* Healthy operating efficiency
Titan also has healthy operating efficiency reflected in its industry-leading EBITDA margin of 10.2% in fiscal 2018. The company's healthy operating efficiency stems from strong control over operations, outsourcing of jewelry-making to karigar parks, in-house design and expertise in manufacturing processes of watches, efficient working capital management, and prudent hedging policies. CRISIL 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 annual cash accruals and strong credit metrics. As on September 30, 2018, the company had gold on loan and other bank debt liabilities of ~Rs 2600 crore. Liquidity also remains ample, largely in form of unutilised bank lines and sizeable cash surpluses. Also, Titan's expansions are prudently managed through a mix of company-owned, company-managed, and franchisee stores with increasing focus on franchise store going forward. Hence, large-scale retail space additions do not result in heavy capital expenditure (capex). CRISIL believes that Titan's capex will remain between Rs.200 crores and Rs.400 crores per annum over the medium term; this will be largely funded through internal accruals of over Rs.900 crores per annum.

Weakness
* Exposure to regulatory risks in the jewelry division
To some extent, Titan will remain exposed to regulatory risks in the jewelry 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 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 80:20 rule was scrapped. Further, since January 2016, the government has mandated jewelers 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. These regulatory changes had moderated the company's operating performance in the past. However, the operating performance has  further accelerated over fiscal 2017 and fiscal 2018 due to increasing customer shift towards branded players like Titan post the announcement of demonetization in November 2016. CRISIL believes that Titan will remain susceptible to changing regulatory norms.

* Exposure to competition from unorganized players in the jewelry division
Jeweler retailing in India is largely dominated by unorganized players which have a stronghold in their regions. Titan has an overall market share is 5 to 6% in the jewelry segment. As the company expands, it will face competition from these local players. However, CRISIL believes that increasing consumer awareness about branded jewelry and purity of gold, and the trust associated with the Titan brand will enable the company to penetrate new markets over the medium term.
Outlook: Positive

Titan's business risk profile will continue to benefit from its solid market positions in the organized retail jewelry and wristwatches segment, supported by annual store additions, and healthy performance of existing stores. Its strong financial risk profile is also expected to be sustained, supported by healthy annual cash accruals and modest capital spending.

Upside Scenario:
* Improvement in business risk profile, supported by better revenue diversity
* Maintenance of healthy operating profitability and cash generation
* Sustenance of strong financial risk profile

Downside Scenario:
* Significant impact due to regulatory changes, or due to supply related issues impacting Titan leading to deterioration in business risk profile.
* Weakening of capital structure, either due to aggressive debt funded expansion plans or regulatory changes leading to gearing exceeding beyond 1 time on a sustained basis.

Liquidity profile: Healthy
Titan had ample liquidity in the form of cash and marketable securities of over Rs.470 crores as on September 31, 2018. Company mainly relies on gold on loan facilities for its working capital and inventory needs and has average bank limit utilization of below 50% for 12 months ended November 2018. Titan has no term debt repayment obligations and capex plans over medium term of Rs 200-400 crores annually will be funded through internal cash accruals of over Rs 900 crores. Given strong cash accruals and ample liquidity, CRISIL believes that Titan will maintain its healthy liquidity profile over the medium term.

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 jewelry. 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 (around 5% of the turnover) include precision engineering and prescription eye wear. The company has also launched a new brand, Skinn in the perfume segment. The Tata group and TIDCO hold about 25% and 28%, respectively, of Titan's equity shares, with financial institutions, banks, corporate entities, and the public holding the rest. Titan's manufacturing and assembly plants are in Hosur (Tamil Nadu), and in Dehradun, Roorkee, and Pantnagar (all in Uttarakhand).

Key Financial Indicators*
As on/for the period ended March 31 2018 2017
Revenue Rs crore 16,156 13,382
Profit after tax Rs crore 1102 697
PAT margin % 6.8 5.2
Adjusted Debt/Adjusted Networth Times NA NA
Interest coverage Times NA NA
*Company Reported
CRISIL adjusted gearing considering gold on loan as debt is 0.3 times in fiscal 2018 and 0.5 times on fiscal 2017

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs.Crore)		 Rating assigned
with outlook
NA Proposed Cash Credit* NA NA NA 2400 CRISIL AA+/Positive
NA Proposed Letter of Credit** NA NA NA 450 CRISIL A1+
NA Commercial Paper NA NA 7-365 days 500 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 - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+  31-07-18  CRISIL A1+  06-07-17  CRISIL A1+  27-07-16  CRISIL A1+  28-01-15  CRISIL A1+  CRISIL A1+ 
                22-03-16  CRISIL A1+       
Non Convertible Debentures  LT    --    --    --  22-03-16  Withdrawal  28-01-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
Fund-based Bank Facilities  LT/ST  2400.00  CRISIL AA+/Positive  31-07-18  CRISIL AA+/Stable  06-07-17  CRISIL AA+/Stable  27-07-16  CRISIL AA+/Stable  28-01-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
                22-03-16  CRISIL AA+/Stable       
Non Fund-based Bank Facilities  LT/ST  450.00  CRISIL A1+  31-07-18  CRISIL A1+  06-07-17  CRISIL A1+  27-07-16  CRISIL A1+  28-01-15  CRISIL A1+  CRISIL A1+ 
                22-03-16  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Cash Credit Limit* 2400 CRISIL AA+/Positive Proposed Cash Credit Limit* 900 CRISIL AA+/Stable
Proposed Letter of Credit** 450 CRISIL A1+ Proposed Letter of Credit** 450 CRISIL A1+
Total 2850 -- Total 1350 --
*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
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for rating short term debt

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