BSE Sensex S&P CNX 25,804 7,844 17 December 2015 Update Sector: Retail Titan Company CMP: INR354 TP: INR360 (+2%) Neutral PAN mandatory for transactions above INR200,000 Moderate impact on demand; near-term outperformance capped Stock Info Bloomberg TTAN IN Equity Shares (m) 887.8 52-Week Range (INR) 448/303 1, 6, 12 Rel. Per (%) -2/4/3 M.Cap. (INR b)/(usd b) 314.3/4.7 Avg Val (INR m) 393 Free float (%) 47.0 Financial Snapshot (INR b) Y/E Mar 2015 2016E 2017E Sales 119.0 117.3 133.3 EBITDA 11.5 10.5 12.5 Adj. PAT 8.2 7.7 9.2 Adj. EPS (INR) 9.3 8.6 10.4 EPS Gr. (%) 11.1-6.8 20.2 BV/Sh.(INR) 34.8 40.5 47.8 RoE (%) 26.6 21.3 21.7 RoCE (%) 38.0 28.7 29.1 P/E (x) 38.2 41.0 34.1 P/BV (x) 10.2 8.7 7.4 Shareholding pattern (%) Sep-15 Jun-15 Sep-14 Promoter 53.1 53.1 53.1 DII 4.2 3.3 3.1 FII 21.1 21.5 21.5 Others 21.7 22.2 22.4 Notes: FII includes depository receipts Stock Performance (1-year) 500 440 380 320 260 Dec-14 Mar-15 Titan Company Sensex - Rebased Jun-15 Sep-15 Dec-15 Revision of PAN card threshold to INR200,000/transaction: The Ministry of Finance has amended the rules regarding quoting of PAN card details and made it mandatory to quote PAN for every product/service transaction (including jeweler and bullion) exceeding INR200,000 irrespective of the mode of payment. The new rule will be effective from January 1, 2016. Earlier, PAN card limit per transaction was INR500,000 for jewelry purchase and INR200,000 for bullion. Cash sales of individual products ranging from INR200,000 to INR500,000/transaction to be impacted: We note that sales above INR 500,000/transaction will not be impacted as the organized players are already comply with PAN requirement. Based on our brief interactions with the management of jewelry companies, ~30-40% of sales (cash + credit) are realized through transactions above INR200,000. For Titan, cash transactions ranging from INR200,000 to INR500,000 have accounted for less than 10% of the jewelry division s revenue in the recent past as per press release. Also, transactions through credit cards (~50% for Titan), cheques, gift vouchers, etc. would not get impacted. Titan has alluded that there would be minimal impact on sales related to the Golden Harvest Scheme as the average ticket size for such transactions is well below the INR200,000 threshold. Navigating the choppy waters GST could be a dampener: We note that there is uncertainty for Titan with respect to GST implementation. The CEA has recommended a GST rate of 2-6% for precious metals. Currently, jewelry attracts no excise duty and 1% VAT rate. However, if CEA recommendations are accepted, Titan could be adversely impacted. Additionally, it could also impede sales from exchange of old gold jewelry. Valuation and view: From a long-term perspective (if the amended rules regarding PAN are implemented effectively), the new rules could reduce Titan s competitive disadvantage v/s regional and unbranded players. However, we believe the change in regulation could impact near-term demand for Titan and its near-term performance will be impacted by the trinity of weak demand, deflationary gold price and absence of operating leverage. This does impair the near-term earnings visibility of Titan. We maintain our Neutral rating with a target price of INR360 (30x Dec FY17 EPS). Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404 Manish Poddar (Manish.Poddar@MotilalOswal.com); +91 22 3027 8029 / Vishal Punmiya (Vishal.Punmiya@MotilalOswal.com) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/institutional-equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Exhibit 1: Revised PAN card requirement guidelines Mandatory Quoting of PAN (Rule 114B) Nature of Transaction Existing Requirement New Requirement Purchase of jewellery/ bullion Purchases or sales of goods or services Exhibit 2: Transaction detail for Jewellery companies Average Ticket Size (INR) Payment of INR 500,000 or more at any one time or against a bill Deleted and merged with next item in the table No Requirement Purchase/sale of any goods or services exceeding INR 200,000 per transaction Source: PIB; http://pib.nic.in/newsite/printrelease.aspx?relid=133304 Sales above INR 200,000 (as % of Total) Credit Card Transaction (as % of Total) Titan 65,000 25-30 50 PC Jewellers 100,000 35-40 15-20 TBZ 95,000 50 20 Source: Company, MOSL Exhibit 3: Titan P/E (x) PE (x) Peak(x) Avg(x) 60 Median(x) Min(x) 49.2 45 30 27.6 28.0 15 12.1 0 Dec-05 Mar-07 Jun-08 Sep-09 Dec-10 Mar-12 Jun-13 Sep-14 37.9 Dec-15 Exhibit 4: Titan P/E premium vs. Sensex 180 120 60 0-60 Dec-05 Mar-07 Titan Company PE Relative to Sensex PE (%) LPA (%) Jun-08 Sep-09 Dec-10 69.5 Mar-12 Jun-13 Sep-14 143.6 Dec-15 Source: Bloomberg, Company, MOSL Source: Bloomberg, Company, MOSL Exhibit 5: Valuation Matrix of coverage universe Company Reco Price Mkt Cap EPS Growth YoY (%) P/E (x) EV/EBITDA (x) ROE (%) Div. (%) (INR) (USD M) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY15 Consumer Asian Paints Neutral 875 12,633 15.8 22.2 16.5 59.0 48.3 41.5 40.1 33.0 27.9 32.4 0.8 Britannia Buy 2,903 5,216 45.1 52.0 19.8 60.6 39.9 33.3 43.8 27.6 22.5 56.4 0.6 Colgate Neutral 996 4,073 13.9 8.6 16.6 48.4 44.6 38.3 32.3 28.2 24.0 81.6 1.3 Dabur* Neutral 275 7,268 15.7 18.0 17.1 45.3 38.4 32.8 36.4 30.5 25.8 35.5 0.8 Emami* Buy 1,000 3,414 20.7 24.0 26.9 46.7 37.7 29.7 41.8 31.0 24.9 44.9 0.7 Godrej Consumer Neutral 1,296 6,633 22.0 27.1 23.8 48.6 38.2 30.9 34.8 29.2 24.1 21.4 0.5 GSK Consumer Buy 6,628 4,193-13.5 19.4 16.6 47.8 40.0 34.3 32.9 28.8 24.2 29.7 0.7 Hind. Unilever Neutral 864 28,124 6.4 7.9 8.8 49.4 45.8 42.1 35.5 31.9 29.0 108.1 1.7 ITC Neutral 320 38,640 8.5 7.4 10.6 26.7 24.9 22.5 17.8 16.7 15.0 33.7 2.0 Jyothy Labs Buy 302 823 44.5 22.7-5.2 44.4 36.2 38.2 36.4 29.5 24.9 16.3 1.3 Marico* Neutral 452 4,384 18.1 20.6 19.5 50.8 42.2 35.3 33.9 27.8 23.2 36.0 0.6 Nestle Neutral 5,870 8,514 6.8-23.0 19.4 45.1 58.5 49.0 26.9 34.0 29.0 48.2 1.1 Page Industries Buy 13,171 2,210 27.5 19.7 29.6 74.9 62.6 48.3 46.5 38.2 30.4 50.7 0.5 Pidilite Inds. Neutral 544 4,192 9.3 23.8 14.9 53.6 43.3 37.7 35.3 26.0 22.6 23.7 0.0 Radico Khaitan Buy 113 225-10.4 12.6 30.6 19.8 17.6 13.5 13.1 11.7 9.5 8.6 0.8 United Spirits Buy 2,988 6,533 Loss LP 79.6-1913.4 96.3 53.6 70.5 45.0 31.6-1.2 0.0 Retail Jubilant Foodworks Buy 1,462 1,439-6.2 4.5 69.7 86.3 82.6 48.7 37.1 32.9 21.6 17.2 0.2 Shopper's Stop Neutral 388 479 7.9 25.7 42.2 79.4 63.1 44.4 17.7 15.5 13.2 5.3 0.2 Titan Company Neutral 354 4,727 11.1-6.8 20.2 38.2 41.0 34.1 27.1 29.3 24.4 26.6 0.8 Note: For Nestle FY15E means CY14 Source: Company, MOSL 17 December 2015 2
Financials and valuations Income Statement FY12 FY13 FY14 (INR Million) Net Sales 65,209 88,384 101,127 109,158 119,032 117,309 133,272 Change (%) 39.5 35.5 14.4 7.9 9.0-1.4 13.6 Total Expenditure 59,352 80,054 91,011 98,673 107,498 106,783 120,774 EBITDA 5,857 8,329 10,116 10,484 11,534 10,526 12,498 Change (%) 53.5 42.2 21.4 3.6 10.0-8.7 18.7 Margin (%) 9.0 9.4 10.0 9.6 9.7 9.0 9.4 Depreciation 345 449 545 656 874 945 1,081 Int. and Fin. Charges 82 437 506 871 807 523 600 Other Income - Recurring 561 941 1,008 1,202 706 902 1,159 Deferred Revenue Expenditure 0 0 0 0 0 0 0 Profit before Taxes 5,991 8,385 10,072 10,159 10,559 9,960 11,976 Change (%) 80.5 40.0 20.1 0.9 3.9-5.7 20.2 Margin (%) 9.2 9.5 10.0 9.3 8.9 8.5 9.0 Tax 1,718 2,389 2,854 2,761 2,410 2,222 2,672 Deferred Tax 32 53 43 13 82 69 83 Tax Rate (%) 28.1 27.9 27.9 27.0 22.0 23.0 23.0 Profit after Taxes 4,305 6,048 7,262 7,411 8,231 7,670 9,222 Change (%) 64.6 40.5 20.1 2.1 11.1-6.8 20.2 Margin (%) 6.6 6.8 7.2 6.8 6.9 6.5 6.9 Extraordinary income -32-47 0 0 0 0 0 Reported PAT 4,273 6,002 7,262 7,411 8,231 7,670 9,222 Balance Sheet (INR Million) Share Capital 444 888 888 888 888 888 888 Reserves 9,810 13,611 18,761 24,352 30,032 35,076 41,531 Net Worth 10,254 14,499 19,649 25,240 30,920 35,963 42,419 Loans 677 59 60 8,063 998 1,998 2,998 Deferred Tax 15-38 -80-93 -197-265 -348 Capital Employed 10,946 14,520 19,629 33,209 31,721 37,696 45,068 Gross Block 6,089 7,271 8,480 10,399 11,902 13,977 16,052 Less: Accum. Depn. 3,393 3,693 4,078 4,495 5,103 6,048 7,129 Net Fixed Assets 2,696 3,578 4,402 5,903 6,799 7,929 8,923 Intangibles 135 110 84 59 34 34 34 Capital WIP 194 249 417 329 549 549 549 Investments 91 160 185 230 290 290 290 Curr. Assets, L&A 33,800 42,802 53,579 54,456 50,854 55,346 65,302 Inventory 19,938 28,787 36,779 38,672 40,474 40,430 44,388 Account Receivables 1,137 1,631 1,638 1,520 1,874 1,839 2,052 Cash and Bank Balance 10,965 9,605 11,365 8,925 2,138 7,227 12,346 Others 1,760 2,779 3,797 5,338 6,368 5,851 6,516 Curr. Liab. and Prov. 25,969 32,378 39,039 27,768 26,804 26,453 30,030 Current Liabilities 24,184 29,435 35,478 23,938 22,483 22,153 25,077 Provisions 1,786 2,942 3,561 3,830 4,322 4,300 4,953 Net Current Assets 7,830 10,424 14,541 26,688 24,050 28,893 35,272 Application of Funds 10,946 14,520 19,629 33,209 31,721 37,696 45,068 E: MOSL Estimates 0 0 0 0 17 December 2015 3
Financials and valuations Ratios -863-1,140-5,229 Basic (INR) EPS 4.8 6.8 8.2 8.3 9.3 8.6 10.4 Cash EPS 5.2 7.3 8.8 9.1 10.3 9.7 11.6 BV/Share 11.5 16.3 22.1 28.4 34.8 40.5 47.8 DPS 1.5 2.0 2.5 2.4 2.8 2.6 3.1 Payout % 30.2 30.1 30.0 28.6 30.0 30.0 30.0 Valuation (x) P/E 52.0 43.3 42.4 38.2 41.0 34.1 Cash P/E 48.7 40.3 39.0 34.5 36.5 30.5 EV/Sales 3.4 3.0 2.9 2.6 2.6 2.3 EV/EBITDA 36.6 29.9 29.9 27.1 29.3 24.4 P/BV 21.7 16.0 12.5 10.2 8.7 7.4 Dividend Yield (%) 0.6 0.7 0.7 0.8 0.7 0.9 Return Ratios (%) RoE 49.2 48.9 42.5 29.4 26.6 21.3 21.7 RoCE 63.0 63.7 56.1 43.8 38.0 28.7 29.1 Working Capital Ratios Debtor (Days) 6 7 6 5 6 6 6 Asset Turnover (x) 6.0 6.1 5.2 3.3 3.8 3.1 3.0 Leverage Ratio Debt/Equity (x) 0.1 0.0 0.0 0.3 0.0 0.1 0.1 Cash Flow Statement (INR Million) OP/(loss) before Tax 5,991 8,385 10,072 10,159 10,559 9,960 11,976 Int./Div. Received -561-941 -1,008-1,202-706 -902-1,159 Deferred Revenue Exp. 0 0 0 0 0 0 0 Depreciation & Amort. 345 449 545 656 874 945 1,081 Interest Paid 82 437 506 871 807 523 600 Direct Taxes Paid 1,718 2,389 2,854 2,761 2,410 2,222 2,672 Incr in WC -6,461 3,953 2,357 14,588 4,149-245 1,260 CF from Operations 10,600 1,987 4,906-6,864 4,975 8,549 8,566 Extraordinary Income -32-47 0 0 0 0 0 Incr in FA 524 1,212 1,352 1,806 1,698 2,075 2,075 Free Cash Flow 10,044 729 3,554-8,670 3,276 6,474 6,491 Investments 15 69 25 44 61 0 0 CF from Invest. -571-1,328-1,376-1,850-1,759-2,075-2,075 Issue of Shares 0 444 0 0 0 0 0 Incr in Debt -51-618 1 8,002-7,065 1,000 1,000 Dividend Paid 776 1,290 1,806 2,181 2,116 2,469 2,301 Others 104 556-35 -453 822-84 72 CF from Fin. Activity -931-2,020-1,769 6,274-10,003-1,385-1,373 Incr/Decr of Cash 9,098-1,360 1,760-2,440-6,787 5,089 5,119 Add: Opening Balance 1,867 10,965 9,605 11,365 8,925 2,138 7,227 Closing Balance 10,965 9,605 11,366 8,925 2,138 7,227 12,346 E: MOSL Estimates 17 December 2015 4
N O T E S 17 December 2015 5
Disclosures This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not Titan Company constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors on investments in such business. The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research professionals are paid on the profitability of MOSt which may include earnings from investment banking and other business. MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest. MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. Most and it s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Most and it s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412 There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues Disclosure of Interest Statement TITAN Analyst ownership of the stock No Served as an officer, director or employee No A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Kadambari Balachandran Email : kadambari.balachandran@motilaloswal.com Contact : (+65) 68189233 / 65249115 Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931 Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 17 December 2015 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com 6