Rating Rationale
July 03, 2020 | Mumbai
Titan Company Limited
Ratings Reaffirmed; CP Withdrawn 
 
Rating Action
Total Bank Loan Facilities Rated Rs.2850 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Commercial Paper CRISIL A1+ (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/Stable/CRISILA1+'ratings on the bank facilities of Titan Company Limited (Titan) and has withdrawn its rating on the commercial paper on receipt of request from the company. The withdrawal of rating is in line with CRISIL's withdrawal policy.
 
CRISIL expects Titan's operating performance to moderate in fiscal 2021 due to impact of covid-19 pandemic with normalcy returning in the fourth quarter. Operating income is expected to de-grow while operating margins are expected to contract in fiscal 2021; on account of store shut downs and drop in sales as a result of lower footfalls. However, sales recovery by the first week of June (for the stores that were opened for 4 weeks) has been encouraging for the jewellery segment with average daily sales recovery of 80% (pre-covid level) for Tanishq. Recovery for other segments namely watches and eyewear has been subdued with average daily sales recovery of 44-46% upto first week of  June 2020. Furthermore, Titan has opened nearly 1400 of its 1800 stores by early June 2020.
 
Company's adequate liquidity, as indicated by largely unutilised bank limit of over Rs 2100 crore, will help mitigate any impact on cash flows in the near term.
 
In fiscal 2020, company reported revenue growth of over 6% against a revenue growth of 22% in fiscal 2019, largely on the back of surge in gold prices witnessed during the fiscal and further exacerbated by store closures towards the end of March 2020. However operating margins were stronger by nearly 140 basis points driven by higher share of studded jewellery, lower discounts, cost efficiency measures and higher making charges due to surge in gold prices.
 
The ratings continue to reflect Titan's leadership position in jewellery and watches business, healthy operating efficiency and a strong financial risk profile with expected healthy cash accruals, gearing and total outside liabilities to tangible networth (TOL/TNW) of less than 0.5 times and 1 time respectively over the medium term. These strengths are partially offset by the company's exposure to regulatory risks in the jewellery division and exposure to competition from other organised and unorganised players, in the jewellery segment.

Analytical Approach

For arriving at its ratings, CRISIL 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 with Titan.
 
Furthermore, CRISIL has amortised the goodwill and intangibles arising from the acquisition of 66.59% stake (current stake is 72.3%) in Carat Lane Trading Private Limited (CaratLane; 'CRISIL AA-/Stable') over a period of five years starting fiscal 2017. CRISIL 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 327 Tanishq, 4 Zoya, 38 Mia, 92 CaratLane, 499 World of Titan, 183 Fastrack and 92 Helios stores as on March 31, 2020. CRISIL 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 12% in fiscal 2020. 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 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, 2020, the company had gold on loan and other bank debt liabilities of Rs.2307 crore. Also, 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 believes that Titan's capex will remain between Rs.300-400 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 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 by 2.5% in fiscal 2020. Some of these regulatory changes had moderated the company's operating performance in the past. CRISIL believes that Titan will remain susceptible to changing regulatory norms.
 
* Exposure to competition from unorganized players in the jewellery division
Titan is exposed to intense competition in the jewellery retailing segment. Jewellery retailing in India is largely dominated by unorganized players which have a stronghold in their regions. As the company expands, it will face severe competition from these local players. However, CRISIL believes that increasing consumer awareness about branded jewellery and purity of gold, 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 marketable securities as on June 2020. The company mainly relies on gold on loan facilities for funding needs and therefore has low average bank limit utilization of 9% for 6 months ended May 2020. Given strong cash accruals and ample liquidity, CRISIL believes that Titan will maintain its healthy liquidity profile over the medium term.

Outlook: Stable

CRISIL believes that Titan will continue to improve its strong market position in the jewellery and wristwatches segments, driven by strong revenue growth and healthy operating margins, and will sustain its strong financial risk profile with low gearing and strong debt protection metrics, over the medium term.

Rating Sensitivity factors
Downward factors:
* Significant impact due to regulatory changes, higher than expected impact of covid-19, and supply related issues impacting Titan, leading to deterioration in business risk profile
* Sustained reduction in operating profit margin to below 8% 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 2020 2019
Revenue Rs crore 19,779 19,779
Profit after tax Rs crore 1,493 1,389
PAT margin % 7.1 7.0
Adjusted Debt/Adjusted Networth Times 0.53** 0.39
Interest coverage Times 15.8** 41.3
*Company Reported
**Impacted by adoption of IndAS116 accounting in fiscal 2020
CRISIL adjusted gearing considering gold on loan as debt

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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* NA NA NA 2400 NA CRISIL AAA/Stable
NA Proposed Letter of Credit** NA NA NA 450 NA CRISIL A1+
NA Commercial Paper NA NA 7-365 days 500 Simple Withdrawn
*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
Carat Lane 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 TimeProducts Limited (till 18 June 2018) Full Strategically important and have significant degree of operational integration.
Titan Watch Company Limited, Hong Kong
(100% subsidiary of Favre Leuba A G)		 Full Strategically important and have significant degree of operational integration.
Montblanc India Retail Private Limited Full Strategically important and have significant degree of operational integration.
Green Infra Wind Power Theni Limited Full Strategically important and have significant degree of operational integration.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  Withdrawn      31-12-19  CRISIL A1+  07-12-18  CRISIL A1+  06-07-17  CRISIL A1+  CRISIL A1+ 
                31-07-18  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  2400.00  CRISIL AAA/Stable      31-12-19  CRISIL AAA/Stable  07-12-18  CRISIL AA+/Positive  06-07-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
                31-07-18  CRISIL AA+/Stable       
Non Fund-based Bank Facilities  LT/ST  450.00  CRISIL A1+      31-12-19  CRISIL A1+  07-12-18  CRISIL A1+  06-07-17  CRISIL A1+  CRISIL A1+ 
                31-07-18  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 AAA/Stable Proposed Cash Credit Limit* 2400 CRISIL AAA/Stable
Proposed Letter of Credit** 450 CRISIL A1+ Proposed Letter of Credit** 450 CRISIL A1+
Total 2850 -- Total 2850 --
*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 Consolidation
CRISILs Criteria for rating short term debt

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