Indian Gems & Jewellery

SECTOR REPORT

21 JUN 2018

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

In the (Gold)ilocks zone

What’s VISIBLE to investors?

 Durable growth, anchored to wedding demand

 A huge trust deficit in unorganised retail POS

 Pro-organised regulatory push, incl. demonet + GST

 Tightening credit lines for jewellers

What’s LESS visible?

We visited players across the Indian jewellery value chain

in six cities to validate the ‘visible’ and to discover some of

the ‘not so visible’ moving parts. Our findings:

1. India’s jewellery story is mostly about the SUPERPACK

(17 organized jewellery chains that will grab ~42%

share in the next five years). The SUPERPACK has

significant diversity – in current operations as well as

growth strategies.

2. Battle for market share will be played in North an

d

We

st India, away from the largest market (South).

Only one SUPERPACK player is choosing to opt out.

3. Our India visit suggests jewellery may have some legs

(~6% CAGR built over FY18-23E). However, as

a

category, jewellery could so easily have an ‘alternative

history’ - may not

grow apace with demographic (and

income) tailwinds, despite the ‘anchor’ weddin

g

segment, and may even slip down the discretionary

spending ladder. For us, this is the biggest ‘invisible’

that investors must recognise.

4. Street folly: RoCEs are overstated in proforma

a

ccounts. We prefer to see gold on lease and Gold

schemes as debt!

Titan looks like the big winner right now, but ‘DEFENCE’

will be the operating word as SUPERPACK closes in.

Business gains are priced in. Initiate coverage with

NEUTRAL. Thangamayil is evolving in tandem with

regulatory tailwinds. It is poised to drive up return ratios

significantly over the next few years, flowering in its core

markets. Initiate coverage with BUY.

What’s inside?

 SUPERPACK to corner 42% of the market by FY23:

India’s jewellery market has actually remained flat at

Rs 2.7tn over FY14-18 as both volume and price have

remained stable. However, the SUPERPACK is

estimated to have grown at ~11% CAGR, implying a

c

lear shift of business towards the organized trade as

the latter aggressively expanded its footprint by an

estimated 2mn sq feet. We expect the SUPERPACK to

corner ~42% of the domestic market by FY23E (vs ~29%

c

urrently) underpinned by their aggressive expansion

drive, design might and increasingly competitive

pricing vis-à-vis family jewellers.

 Design to separate the men from the boys: Market

share battle will be fought with the breadth/depth of

designs as pricing premium, gold scheme offerings,

repurchase/exchange commission across the

SUPERPACK are converging. ~3/4 of the combined top-

line of key South jewellers comes from the 5 souther

n

states, where customer purchasing behavior is largely

homogenous in terms of designs. 67-100% of thei

r

stores are South-based too, implying weaker artisans

tie-ups in rest of India. Our interactions with

management of major south jewellers suggested that

t

hey are proactively fixing this gap and increasing the

ir

non-south ‘Karigar’ pool. Hence, the design arbitrage

will dwindle in the medium-term. Based on our store

visits, we reckon jewellers like Joyalukkas, Kalyan

J

ewellers and PCJ may be closer to catching up wit

h

Titan on the design curve vis-à-vis others.

Every record should

be considered in

light of the other

outcomes that could

have occurred just

as easily as the

‘visible histories’

that did.

- Nassim Nicholas Taleb,

Fooled by Randomness

Company Reco TP

Titan NEU 820

Thangamayil BUY 650

J

ay Gandhi

jay.gandhi@hdfcsec.com

+91-22-6171-7320

Rohit Harlikar

r[email protected]

+91-22-6639-3036

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 2

 North and West - the bone of contention: The

SUPERPACK accounts for a measly 4% of the BIS-listed

jewellery stores in North and West (vs ~8% stor

e

share/~40% revenue share down South). Scope for

penetration, coupled with higher profitability from

impulse purchases and studded jewellery off-take,

make North and West the bone of contention. Key

south jewellers concur that north and west is where

the battle will be fought. While Titan remains a distant

leader in terms of national presence, able contenders

are visible across all zones. These include PC Jewelle

r

(

North), Kalyan Jewellers, Malabar Gold, Joyalukkas

(South) and Senco (East). GRT (one of the biggest,

leanest and most efficiently managed organized

jewellers in India) believes there is enough scope down

South and will remain there for the next 2-3 years.

 Different strokes for different folks: Most South-based

players prefer the owned store route vs. the franchise

e

r

oute for expansion (barring Malabar). While this

decision may be inconsequential, as major investments

are towards inventory (93-95%), the unencumbered

cash levels and leverage position of select big-box

jewellers warrant a capital infusion for geographical

e

xpansion. However, this advantage for Titan can

dwindle over the next couple of years as select

jewellers are either expected to hit capital markets or

a

re tying up more debt over FY18-20E.

 Exchange schemes – SSSG booster: The up-selling

opportunity presented by an attractive gold exchange

scheme can help the SUPERPACK grow SSSG. ~50-70%

of their customer base are repeat customers who are

ideal candidates for exchange schemes. Titan and PCJ

account for ~5% & ~2% respectively of the total gol

d

exchange market. Across zones, big-box jewellers have

re

vised their exchange programme (more lucrative for

consumers now) to capture the up-selling opportunity.

 Titan wins, but peers closing in. Given the current

design/capital arbitrage, we believe Titan will have

a

h

ead-start on the customer acquisition race over FY18-

21E. Co is confident on achieving its aspired 25%

jewellery revenue growth in FY19E. However, peer

gaps will reduce post FY21 (Phase 2 of our medium

term view) and Titan will find itself defending turf

ag

ainst very strong and able challengers across India

.

T

his may impact Titan’s long-term growth and

profitability.

 Stocks :

o T

itan remains the best business, albeit it’s no

See’s Candy given the industry’s ‘put-up-more-to-

earn-more’ business model. The 2-3 year head-

start on designs and capital provides healthy

growth visibility. Expect revenue/EBITDA/PAT

CAGR of 20/25/23% over FY18-21E and

improvement in ROICs by ~200bps to ~20% (in our

restated format).

Despite baking in all plausible tailwinds in Phase 1,

current valuations keep us at bay. We have a

NEUTRAL recommendation with a DCF-based TP of

Rs 820/sh (implying 42x FY19 EPS). Our FY19/FY20

EPS estimates are 5/9% below consensus.

o Thangamayil is a classic turnaround story with

multiple levers to pull. We expect Thangamayil to

deliver a revenue/EBITDA/PAT CAGR of 18/24/31%

and economic spread (RoIC-WACC) to improve by

~490bps to 4% by FY21. Recommend a BUY with a

DCF-based TP of Rs 650/sh.

 Wait, there’s more (1) Key takes from management

interactions at SUPERPACK, store visits across India, (2)

Key districts across India which could potentially be

(gold)mines for customer acquisition.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 3

Meanwhile, some Street folly…

Key listed jewellers classify (1) Gold procured on lease from banks as Trade Payables, and (2) ‘Deposits outstanding as a

part of schemes’ under Current Liabilities. As both liabilities are interest bearing, we reclassify them as DEBT, which

knocks up capital employed significantly. Titan has recently started classifying gold loans separately, but the Street

continues to exclude them from debt. As a result, jewelers report optically high return ratios. On the other hand, our

method depicts a more genuine picture of the underlying returns profile of the business.

Titan: Proforma vs underlying RoCE

Titan: ROIC – Proforma vs underlying RoIC

PCJ: Proforma vs underlying RoCE

PCJ: Proforma vs underlying RoIC

Thangamayil: Proforma vs underlying RoCE

Thangamayil: Proforma vs underlying RoIC

Source: Company, HDFC sec Inst Research

24.3

29.5

29.4

30.4

30.7

14.2

17.8

19.3

19.7

19.8

0

20

40

FY17

FY18

FY19E

FY20E

FY21E

RoIC - Proforma (%)

Underlying RoIC (%)

16.8

16.6

19.3

22.0

22.1

10.1

9.7

10.6

11.4

11.5

4

8

12

16

20

24

FY17

FY18

FY19E

FY20E

FY21E

RoCE - Proforma (%)

Underlying RoCE (%)

18.7

21.8

23.1

24.5

26.7

10.2

10.8

11.2

11.6

12.2

4

8

12

16

20

24

28

FY17

FY18

FY19E

FY20E

FY21E

RoIC - Proforma (%)

Underlying RoIC (%)

11.5

11.6

12.3

13.8

14.3

7.8

7.6

8.2

9.1

9.5

0

4

8

12

16

FY17

FY18

FY19E

FY20E

FY21E

RoCE - Proforma

Underlying RoCE

11.9

12.3

16.2

23.9

24.8

7.9

9.4

11.9

12.4

0

7

14

21

28

FY17

FY18

FY19E

FY20E

FY21E

RoIC - Proforma

Underlying RoIC

21.5

25.1

26.2

26.6

26.8

13.5

16.4

18.1

18.3

0

10

20

30

FY17

FY18

FY19E

FY20E

FY21E

RoCE - Proforma (%)

Underlying RoCE (%)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 4

Contents

Story in charts .................................................................................................................................................... 5

Competitive positioning of key jewellers ............................................................................................................. 9

Peer Comparison .............................................................................................................................................. 10

Waiting for ‘normal’ times ............................................................................................................................... .11

Mom & Pop jewellers: really squeezed? ............................................................................................................ 15

SUPERPACK to grow at over 12% over FY18-23E ................................................................................................... 16

Weddings : the bedrock of demand ................................................................................................................... 18

Where would jewellery be without brides! ............................................................................................................ 18

Studded jewellery remains healthy ........................................................................................................................ 19

Different strokes for different folks ................................................................................................................... 21

South market is mature, majors will tread out ...................................................................................................... 21

Own store expansion – Mantra down south .......................................................................................................... 22

Phase 1 - Advantage TITAN, Phase 2 - closely fought ............................................................................................. 22

Rising gold prices can drive franchisee throughput ............................................................................................... 24

North & West : The battlegrounds .................................................................................................................... 26

Headroom to penetrate is higher ........................................................................................................................... 26

Able challengers in the fray in North & West ......................................................................................................... 27

Design portfolio : Key factor ............................................................................................................................. 29

Prices converging across the SUPERPACK .............................................................................................................. 29

Tanishq leads on design, peers will catch up .......................................................................................................... 31

Sourcing of gold could be the joker in the pack ..................................................................................................... 31

Expert talk ........................................................................................................................................................ 33

Flagship Store visits .......................................................................................................................................... 37

KPIs : How do top jewellers stack up? ............................................................................................................... 39

Where could the expansion come from? ........................................................................................................... 42

Companies

The Titan Company – Best in class, but no See’s Candy (Initiating Coverage) ................................................ 49

Thangamayil – Turnaround story (Initiating Coverage) ................................................................................. 77

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 5

Story in charts

Indian Bride to keep jewellery demand stable; SUPERPACK accounts for a quarter in weddings

India Consumption Market: ~5% CAGR over

FY18-23E

….jewellery to grow at ~6% CAGR

India Jewellery: Growth drivers over FY18-23

Source: HDFC sec Inst Research

Weddings to contribute half the growth

Gold/Studded contribution

SUPERPACK’s est. wedding share

Source: HDFC sec Inst Research

1.4

3.0

1.1

5.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Gold Volume

CAGR

Gold

realization

CAGR

Mix CAGR

FY18-23E

Domestic

Jewellery

CAGR

2,722

3,570

564

284

FY18 Domestic

Jewellery

Gold Jewellery

Studded

Jewellery

FY23 Domestic

Jewellery

Rs bn

7.4

7.0

-9.6

2.1

-3.3

7.1

6.3

5.7

4.4

-15.0

-10.0

-5.0

0.0

5.0

10.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

Domestic Jewellery (Rs bn)

Domestic Jewellery YoY (%) - RHS

0.3

-2.6

-10.1

2.1

-3.5

6.8

5.3

4.8

3.6

-15.0

-10.0

-5.0

0.0

5.0

10.0

0

1,000

2,000

3,000

4,000

5,000

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

Domestic Jewellery (Rs bn)

Bars & Coins (Rs bn)

Domestic consumption (YoY) - RHS

2,722

3,570

430

195

223

FY18

Domestic

Jewellery

Wedding

Jewellery

Casual

Special

Occasion

FY23

Domestic

Jewellery

Rs bn

Tanishq

2.0

PC Jeweller

3.6

TBZ

0.7

Thangamayil

0.3

GRT

3.3

Joyalukkas

1.9

Kalyan

2.8

Malabar

3.3

PN Gadgil &

Sons

0.5

Others

7.8

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 6

SUPERPACK to corner over 40% of the market; tanishq to double its market share

SUPERPACK’s share to touch 42% by FY23E

Tanishq to nearly double its share by FY23E

Tanishq to lead the SUPERPACK (mkt share)

Source: HDFC sec Inst Research

Design will be key; as offerings across the SUPERPACK converge with time

Player-wise premium over MCX

Effective interest rate on gold schemes

Old Gold Repurchase/Exchange commissions

Jeweller

Repurchase for Cash

(commission %)

Old Gold Exchange

(commission %)

Own

gold

Other

jewellers

Own

gold

Other jewellers

Titan 3% NA 0%

2%(22k) /

8%(below 22k)

PCJ 3% NA 0% 1%

TJL 3% 3% 0%

TBZ 3% NA 0% 3%

Kalyan 1% NA 0% 6%

P N Gadgil

& Sons

3% NA 0%

GRT 3% NA 0%

Source: HDFC sec Inst Research

23.2

24.3

29.2

30.9

33.0

35.6

38.5

41.7

76.8

75.7

70.8

69.1

67.0

64.4

61.5

58.3

0.0

20.0

40.0

60.0

80.0

100.0

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

SUPERPACK

Unorganized

%

4.2

8.1

12.5

2.2

2.0

1.2

0.8

0.4

0.1

1.0

FY18E Tanishq's share

Unorganized …

Malabar Gold

GRT

PCJ (Dom Biz)

Joyalukkas

Kalyan

Thangamayil

Jos Alukkas

PN Gadgil

TBZ

Other organized …

FY23E Tanishq's share

%

14.2

19.5

-

2.7

1.1

0.5

0.6

0.3

0.2

0.7

9.3

FY18E Tanishq

PCJ (Dom Biz)

Malabar Gold

Joyalukkas

Thangamayil

PN Gadgil & Sons

GRT

Jos Alukkas

TBZ

Kalyan

Other organized

FY23E Tanishq

8.1

6.5

6.4

5.9

4.6

4.4

3.9

3.3

2.6

2.3

-

2.0

4.0

6.0

8.0

10.0

Titan

TBZ

Jos Alukkas

P N Gadgil & Sons

Malabar Gold

Thangamayil

GRT

PCJ

Kalyan

Joyalukkas

PNG Jewellers

Premium (%)

12.0

11.4

11.0

10.9

7.8

5.9

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Tanishq

Thangamayil

PC Jeweller

Malabar Gold

GRT

Kalyan

PN Gadgil & Sons

Joyalukkas

Effective Interest rate

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 7

North and West – the bone of contention as South well-entrentched with a cap on profitability

Zone wise revenue split (estimated)

SUPERPACK’s presence <4% in North/West

Top jewellers enjoy ~40% market share

down South

Source: HDFC sec Inst Research

Top Jewellers expansion strategies

Expansion Route

FY19 Store additions commentary

Tanishq

Mix of Owned & Franchisee

40-45

PC Jeweller Mix of Owned & Franchisee ~25

Malabar Gold

Mix of Owned & Franchisee

~30

Senco Gold Mix of Owned & Franchisee NA

Kalyan Jewellers Owned store ~20-25

Joyalukkas

Owned store

~20

GRT Owned store ~5

Thangamayil

Owned store

~5

TBZ Mix of Owned & Franchisee ~15

Source: HDFC sec Inst Research

North

21

South

40

East

15

West

26

%

2.6

11.3

5.4

3.0

9.6

1.1

2.7

3.6

1.2

0.8

1.0

1.4

0.5

0.6

0.8

-

2.0

4.0

6.0

8.0

10.0

12.0

Tanishq

GRT

Joy Allukas

Kalyan

Malabar Gold

Thangamayil

Jos Allukas

Khazana

RMS (%)

Store share (%)

74.7%

25.3%

3.7%

standalone jewellers as % of total

chains as % of total

SUPERPACK as % of total

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 8

Capital – The Achilles heel for Titan’s peers; arbitrage to dwindle over the next two-three years

Leverage : Select jewellers

FCFE : Select jewellers

Avg. cost of debt : select jewellers

Source: HDFC sec Inst Research

Key vitals of top jewellers remain stable

Key vitals of top jewellers

Player wise average store size

Gold price near its six years peak

Source: Company, ROC, HDFC sec Inst Research; above

universe estimated to account for 20% RMS

Source: HDFC sec Inst Research

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Titan

PCJ

Thangamayil

South

-based A

South

-

based B

South

-based C

South-based D

TBZ

PN Gadgil

Net Debt/Equity

Net Debt/EBITDA

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

5,000

Titan

PCJ

Thangamayil

South-based B

South-based C

South-based D

TBZ

PN Gadgil

FCFE (Rs mn)

FCFE yield (%) - RHS

14.6

6.0

3.5

16.5

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Gross Margin

EBIT margin

PAT margin

RoE

Top 9 Jewellers

%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

GRT

Kalyan

Malabar Gold

PC Jeweller

Tanishq

PN Gadgil & Sons

Joyalukkas

TBZ

Thangamayil

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

TBZ

South-based E

South-based C

PN Gadgil

PCJ

Thangamayil

South-based B

South-based D

South-based A

Tanishq

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Gold price (Rs/10 gm)

Avg price

+1 Std dev

-1 Std dev

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 9

Competitive positioning of key jewellers

GRT Joyalukkas Kalyan Malabar Gold PN Gadgil

PCJ (Dom

Biz)

Tanishq TBZ Thangamayil

Design Portfolio

Tonnage

Expansion strategy

Margins

Working capital efficiency

Balance Sheet strength

Return Profile

Presence

Gold sourcing strategy

Wedding share

Geographic reveunue split South - 100%

South - 90%

ROI - 10%

South - 45%

ROI - 55%

South - 90%

ROI - 10%

West - ~98%

South - ~2%

NA South - 100%

Geographic Store split South - 100%

South - 80%

North - 10%

West - 10%

East - Nil

South - 67%

North - 15%

West - 13%

East - 5%

South - 87%

North - 5%

West - 7%

East - 1%

West - 96%

South - 4%

North - 70%

West - 14%

East - 12%

South - 28%

North - 31%

West - 25%

East - 17%

South - 11%

North - 3%

West - 70%

East - 16%

South - 100%

No. of stores (#) 46 78 90 99 25 93 253 37 32

Weakness

Strength

Source: Company, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 10

Waiting for ‘normal’ times…

Peer Comparison : Premium to global peers justified given the growth and return profile

Company

Market

Cap

(USD

mn)

Revenue (USD mn)

Revenue

CAGR

(FY18 -

FY21E)

EBITDA (USD mn)

EBITDA

CAGR

(FY18 -

FY21E)

PAT (USD mn)

PAT

CAGR

(FY18

-

FY21E)

P/E

ROE (%)

FY19E

FY20E FY21E

FY19E FY20E

FY21E

FY19E FY20E FY21E

FY19E

FY20E FY21E

FY19E FY20E

FY21E

India

Titan

11,711

2,919

3,477

4,118

20.2%

311

385

468

24.6%

208

253

303

22.6%

56.3

46.3

38.6

25.2

25.7

25.9

PCJ

778

1,668

1,951

2,297

17.6%

173

205

250

20.5%

115

134

163

27.3%

7.3

6.2

5.1

19.3

19.7

Thangamayil

94

243

286

334

18.1%

11

14

17

23.8%

4

6

7

30.7%

21.6

15.3

12.2

16.0

19.5

20.9

TBZ

90

275

301

330

8.7%

12

14

16

12.8%

4

6

21.2%

24.3

21.1

16.7

5.3

5.9

7.1

Global

Tiffany

16,601

4,524

4,746

4,998

6.2%

1,066

1,147

1,233

7.2%

583

645

707

11.0%

28.5

25.8

23.5

17.7

19.9

18.4

LUK Fook

Holdings

2,742 1,984

2,119

7.9%

232 255

11.4% 172 189

12.0%

15.9

14.5

13.9 14.2

Signet Jewellers

2,579

6,022

5,896

5,701

-3.0%

512

501

549

-9.1%

232

209

258

-15.1%

11.1

12.3

10.0

9.7

6.1

12.3

Chow Tai Fook

Jeweller

12,548 7,864

8,469

13.2%

987 1,105

15.4% 626 706

15.5%

20.1

17.8

14.9 15.8

Source: Company, Bloomberg estimates, HDFC sec Inst Research

Jewellery -Valuation Table

Company CMP

Mcap

(Rs bn)

Reco TP

EPS

P/E (x)

RoE (%)

RoIC (%)

RoCE (%)

FY19E

FY20E

FY21E

FY19E

FY20E

FY21E

FY19E

FY20E

FY21E

FY19E

FY20E

FY21E

FY19E

FY20E

FY21E

Titan 897 804 NEU 820 15.9

19.4

23.2

56.3

46.3

38.6

25.2

25.7

25.9

19.3

19.7

19.8

18.1

18.3

PC Jeweller 136 58 NR NA 20.4

23.9

28.9

7.3

6.2

5.1

19.3

19.7

11.2

11.6

12.2

10.6

11.4

11.5

Thangamayil 483 7 BUY 650 21.0

29.6

37.1

21.6

15.3

12.2

16.0

19.5

20.9

9.4

11.9

12.4

8.2

9.1

9.5

Source: Company, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 11

Waiting for ‘normal’ times

Industry could use some normal, post the FY14-18 drama

Source: Bloomberg, HDFC sec Inst Research

 Industry dynamics have oscillated from being

favorable to unorganized jewellers (FY13-15) to being

favorable for organized jewellers (FY15-till date),

given the spate of regulatory events. The recent

defaults by well-known jewellers (Nirav Modi and

Geetanjali) haven’t helped the industry’s image

amongst lenders, either. With the 5-year drama

behind, the Indian Jewellery industry could use

some ‘normal’.

 Multiple unfavorable regulations such as the ban on

gold on lease (Jul-13) and imposition of the 80:20

import rule (Aug-13) had severely impacted the

financial health of organized jewellers as working

capital needs (and consequently debt) increased.

Jewellers had to purchase raw material (gold)

upfront. This bloated up the capital employed and

put the returns profile of jewellers under pressure.

The capping of Gold deposit schemes to 25% of

networth and the interest that can be paid on such

schemes (Apr-14) further added to the woes of

organized jewellers.

 Second phase of regulations has decisively been in

favor of organized jewellers – 1. 80:20 import rule

revoked (Nov-14), 2. Ban of Gold on lease was

revoked (Feb-15), 3. The cap on Gold deposit

schemes also have been revised upwards to 35% of

networth (FY17). Mandatory hallmarking (to be

implemented soon) too is expected to aid the

unorganised to organised shift.

14

11

25

29

19

14

3

1

(5)

5

23

25

22

21

15

13

6

3

(2)

1

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

(10)

(5)

-

5

10

15

20

25

30

35

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Gold price growth

YoY growth in bank credit O/S to Gems & Jewellery sector (%)

YoY growth in bank credit to Other Industries (%)

-FY14: 80-20

import rule

-FY14: Gold on

lease ban

-FY14: Restrictions

-FY14: Gold on lease ban lifted

-FY15: 80-20 import rule revoked

-FY16: PAN-card mandatory on

transctions >2 lacs

FY16: -1% excise duty levy on mfg

FY17 - Demonetization

FY18 - GST implemetation

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 12

A road fraught with frauds

Year Scams Description

FY18

Nirav Modi - Mehul Choksi PNB

fraud (Feb 2018)

Nirav Modi and Mehul Choksi acquired fraudulent letters of undertaking from PNB

for overseas credit from other Indian lenders, defrauding a bank of more than Rs

113 bn.

FY18

Nathella Sampath jewellery fraud

(Mar 2018)

Promoters and directors of Chennai-based Nathella Sampath Jewelry Pvt Ltd

(NSJPL) defrauded three banks namely SBI, Union Bank and HDFC Bank of Rs 3.8 bn.

Nathella Sampath Jewelry misrepresented financial statements from 2010 and

liquidated the primary asset kept as security/collateral.

FY18 Kanishk Gold scam (Mar 2018)

Kanishk Gold Pvt Ltd (KGPL) allegedly falsified records and financial statements to

get loans from the banks over a 10 year period beginning 2008, defrauding a

consortium of 14 banks led by the SBI to the tune of Rs 8.25 bn

FY17

Shree Ganesh Jewellery house

(2017)

Shree Ganesh Jewellery House cheated a consortium of 25 banks, including 20

nationalised ones, of over Rs 22 bn. It was alleged that the accused had defrauded

the banks through diversion of funds, fraudulent exports to shell companies in

Hong Kong, Singapore and the UAE.

FY13

Winsome Diamonds and Jewellery

(2013)

Winsome diamonds group defrauded consortium of banks of more than Rs 65 bn.

Hasmukh Shah, an ex-director and authorised signatory of Winsome Diamonds

group was allegedly orchestrating the export-import operations of the company

and was also allegedly liasoning with the banks.

Source: Industry, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 13

Domestic Jewellery to grow at 6% CAGR (FY18-23E)

5-year drivers for domestic jewellery industry

Source: Company, HDFC sec Inst Research

Jewellery volumes to mean revert

Gold prices at 6-year peak

Source: Company, HDFC sec Inst Research

Our Industry model pegs the

domestic gems & jewellery

consumption at Rs 3.2tn, of

which the domestic jewellery

market is estimated at Rs

2.7tn (est to have grown at

~6.5% CAGR over FY11-18

largely driven by pricing/mix)

Domestic jewellery pegged to

grow at a similar rate (~6%)

over FY18-23. Gold volume

expected to remain stable

(1.5% CAGR) as unorganized

jewellers increasingly get

marginalized courtesy the

governments push to

formalize the sector.

Gold prices are near its 6-year

peak.

No expert on gold prices,

however, when brent crude

inches up; gold prices follow

suit. Expect gold prices to

remain elevated given the

deteriorating macros.

600

625

650

675

700

725

750

775

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

Jewellery Volume ex-smuggling (tonnes)

+1 Std Dev

-1 Std Dev

Avg

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Gold price (INR/10 gm)

Avg price

+1 Std dev

-1 Std dev

7.4

7.0

-9.6

2.1

-3.3

7.1

6.3

5.7

4.4

-15.0

-10.0

-5.0

0.0

5.0

10.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

Domestic Jewellery (Rs bn)

Domestic Jewellery YoY (%)

- RHS

1.4

3.0

1.1

5.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Gold Volume

CAGR

Gold

realization

CAGR

Mix CAGR

FY18-23E

Domestic

Jewellery

CAGR

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 14

Gold prices – A high correlation with Brent Crude

Gold imports (USD bn) vs Brent Crude

Source: Bloomberg, HDFC sec Inst Research

30

50

70

90

110

130

800

1,000

1,200

1,400

1,600

1,800

2QFY10

4QFY10

2QFY11

4QFY11

2QFY12

4QFY12

2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

LBMA Avg gold price ($/oz)

Brent Crude (USD) - RHS

0

5

10

15

20

25

30

35

0

20

40

60

80

100

120

140

2QFY10

4QFY10

2QFY11

4QFY11

2QFY12

4QFY12

2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

Brent Crude (USD) - LHS

CAD (USD bn)

Gold Imports (USD bn)

No expert on gold prices,

however, when brent crude

inches up; gold prices follow

suit. Expect gold prices to

remain elevated given the

deteriorating macros.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 15

Mom & Pop jewellers: really squeezed?

Beyond demonetisation and GST...

 Myth vs reality: It is assumed that GST will inevitably

lead to massive and quick business migration. While

this may be true for many sectors, it may hold less

relevance in jewellery. What matters more is (1) How

long is the supply chain? (2) Does GST really hit

margins and business processes of unorganized

jewellers?

 Shorter B2C supply chain helps unorganized play:

The shorter the B2C supply chain the easier it is to

keep the entire transaction outside the organized

trade (as long as gold sourcing is guaranteed through

unofficial channels). The B2C supply chain in jewellery

is relatively short with two (or at most three) levels

(manufacturers who sell jewellery to wholesalers or

retailers) ahead of consumers.

The unorganized sector continues to source gold via

illegal channels. These include smuggling and

exchange/recycling. The ex-SUPERPACK exchange +

smuggling market is ~250-300 tonnes p.a. Multiple

retail invoicing, fake invoicing and other methods are

employed to skip the organized route to business.

Cash is the medium of exchange, obviously.

A part of official imports also find its way into the

informal chain through ‘Bill-to-ship’ mechanism

wherein the delivery of gold happens to one

individual and the transaction is billed to another.

There are two ways to do this: (1) Paper Exports:

exports shown on paper but physical gold enters the

unorganized channel, and (2) Multiple retail

invoicing: to circumvent the PAN card requirement

for transactions > Rs 200k, small jewellers prepare

multiple retail invoices. Our walks through Karolbagh

(Delhi) and Jhaveri Bazaar (Mumbai) gave us enough

evidence of these malpractices!

 Easy to manage input-output ratio for Diamonds:

The input-output ratio in converting rough diamonds

into polished ones varies as much as 30-60% of the

input. Also, diamond pricing remains fuzzy, unlike

gold where purity (and hence price) is easy to

establish. This gives diamond polishers and jewellery

makers an opportunity to officially show low output

and sell the rest through the informal chain.

Hence, while the events (GST and demonetisation)

were enablers and may aid in the unorganized to

organized shift in jewellery, the pace of shift may be

more secular.

Domestic gold sourcing routes

Source: HDFC sec Inst Research

Gold Value

Chain

Imports through

formal Channel

Official Trade

Informal trade

using "Bill to

ship to"

Fake exports

Multiple Fake

retail invoices

Smuggling Recycling

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 16

 Hallmarking squeezing mom-and-pop jewellers: Our

interactions across jewellery chains and mom-and-

pop jewellers across India suggests that while

hallmarking is yet not mandatory, consumers are

increasingly insisting on hallmarked jewellery. This

has increased the cost of procurement for jewellers

and the ~25-30% pricing arbitrage between jewellery

chains and standalone jewellers is shrinking. A back-

of-the-envelope calculation in the table below gives a

perspective of how the mom-and-pop jeweller is

getting squeezed due to hallmarking.

Back-of-the envelope calculation suggests mom-

and-pop jeweller getting squeezed

Transaction

Without

Hallmarking

Premium

halved

With

Hallmarking

Premium

maintained

With

Hallmarking

Gold Price (Rs/g)

3,100

Karat

21.0

22.0

Purity (%)

87

92

Cost-based on

purity (Rs/g)

2,711 2,840 2,840

Pricing Premium

(%)

6 3 6

Board rate for

consumer (Rs/g)

2,873 2,925 3,010

Making Charges

(Rs/g)

150 195 195

Making charges (%)

5.2

6.7

6.5

Retail Price (Rs/g)

3,023

3,120

3,205

Gross Profit (Rs/g)

313

280

365

Gross Margin (%)

10.3

9.0

11.4

Organized Jeweller

Gross margin in

north/west (%)

13-15

Organized Jeweller

Gross margin in

South (%)

8-10

Source: HDFC sec Inst Research

 Indian households are getting nuclear: One of the

major shifts underway is that the avg Indian

household is increasingly getting nuclear with

urbanisation, esp. towards tier 1 cities. This remains a

strong catalyst for the shift from family jewellers to

organized chains.

Family Type Distribution – All HHs (%)

IRS 2013

BI 2016

Joint Family

26

22

Nuclear Family with Elders

17

Nuclear Family w/o Elders

53

58

Living Alone

4

3

Source: BARC, HDFC sec Inst Research

 SUPERPACK to grow at over 12% over FY18-23E:

Given some of the above tailwinds for the organized

jewellers coupled with the design spread they offer,

we expect our SUPERPACK (comprising 17 Top

Jewellers) to grow at over 12% CAGR over FY18-23E.

(est. ~11% CAGR over FY16-18E). They will gain avg

~250bps/year in market share over FY18-23E to hit

~42% (vs ~29% currently)

SUPERPACK’s share to touch 42% by FY23E

Source: BARC, HDFC sec Inst Research

Note: We don’t have a categorical definition of unorganized jewellers

and focus only on how the SUPERPACK performance is expected to

pan out.

23.2

24.3

29.2

30.9

33.0

35.6

38.5

41.7

76.8

75.7

70.8

69.1

67.0

64.4

61.5

58.3

0.0

20.0

40.0

60.0

80.0

100.0

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

Organized

Unorganized

%

Nuclear families on the rise.

This coupled with migration

to tier 1 cities is a strong

catalyst for share gain from

family jewellers.

SUPERPACK to clock 12%

revenue CAGR over FY18-23E

and corner 42% of the

domestic consumption by

FY23

Top 6 jewellers to nearly

corner one-third the market

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 17

 Top 6 to corner one-third the market: The top 6

jewellers in India account for 4-5% of the BIS-listed

stores and command ~20% revenue market share

(RMS). Given their ambitious expansion over the next

5 years, RMS-to-store ratio is expected to expand

further. We expect them to account for nearly one-

third of the domestic consumption (Jewellery +

Investment) in India by FY23E.

 Gold jewellery is the big chunk of spend: Falling

diamond prices will underpin this trend. We expect

nearly two-thirds of the growth over FY18-23E to

come from plain gold jewellery sales.

…of which the top 6 will have ~1/3 mktshare

Gold/Studded contribution to industry growth

Source: Company, HDFC sec Inst Research

Player-wise ad spends (% of sales)

Celebrity endorsements

Jeweller Brand ambassador

Tanishq (Titan) Deepika Padukone

PC Jeweller Akshay Kumar, Twinkle Khanna

TBZ Vaani Kapoor

Kalyan Katrina Kaif, Amitabh Bachchan

PN Gadgil Jewellers Salman Khan

Malabar Gold Manushi Chhillar

Source: Company, HDFC sec Inst Research

Launch of new stores in new

regions will keep marketing

investment elevated as top

jewellers focus on brand

building. This however could

be a strong footfall pulling

tool.

0.0

1.0

2.0

3.0

4.0

5.0

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Titan

PC Jeweller

Thangamayil

TBZ

2,722

3,570

564

284

FY18 Domestic

Jewellery

Gold Jewellery

Studded

Jewellery

FY23 Domestic

Jewellery

Rs bn

19.8

32.1

0.3

12.5

FY18E Top 6

jewellers

other

organized

unorganized

FY23E Top 6

jewellers

%

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 18

Weddings : the bedrock of demand

 Where would jewellery be without brides! Weddings

remain the bedrock for gold jewellery demand in

India. With an estimated ~8-10mn weddings in India

and an average ticket size of ~Rs 200k, the wedding

market itself is pegged at over Rs ~1.6tn (~58% of

domestic jewellery sales). The age-old concept of

‘Streedhan’ (property/assets given to the bride for

security at the time of her wedding) remains deep-

rooted in India and consequently lends inelasticity to

demand from this segment. We expect the wedding

segment to add over half the incremental industry

growth. As is well known, this is a weak spot for Titan.

However, Titan is putting its best foot forward to

correct this.

Wedding to add over half of incremental growth

Est. wedding share of key jewellers

Source: HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

2,722

3,570

430

195

223

FY18

Domestic

Jewellery

Wedding

Jewellery

Casual

Special

Occasion

FY23

Domestic

Jewellery

Rs bn

Tanishq

2.0

PC Jeweller

3.6

TBZ

0.7

Thangamayil

0.3

GRT

3.3

Joyalukkas

1.9

Kalyan

2.8

Malabar

3.3

PN Gadgil &

Sons

0.5

Others

7.8

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 19

 Studded jewellery remains healthy: We believe the

~Rs 40bn studded jewellery market (est. 9-10% CAGR

over FY13-18) is expected to remain healthy as the

SUPERPACK push studded jewellery through an

aggressive sales push, including attractive return

policies. While urban centres (especially in the north

& west) will boost studded jewellery off-take, the

predisposition towards purchasing plain gold

jewellery remains strong in heartland India. Hence

blow-out growth in the studded category is unlikely.

We assume a generous 11% CAGR in aggregate

studded revenues over FY18-23E.

 …but falling diamond prices pose risk : Diamond

prices have halved since peaking in Sep-11. This was

largely a function of supply outstripping demand. The

midstream in the value chain ended up with

excessive inventory pile up during the period, which

led to De Beers – the world’s largest diamond miner

recalibrating its production and prices.

Prices have stabilized since FY17. While the motive a

studded jewellery purchase is typically driven by

gifting (thereby insulating it somewhat from diamond

price movement), the category competes with other

hi-ticket consumer discretionary spends such as

automobiles, gadgets, travel, home-décor, etc.

India: Estimated studded ratio trends

…Key jewellers’ studded ratio:

Tanishq 30

PC Jeweller 30

TBZ 23

Joyalukkas 20-22

Kalyan Jewellers 18-20

Malabar Gold 9-12

GRT 3-4

PN Gadgil & Sons 3.2

Thangamayil 0.4

Source: HDFC sec Inst Research

Source: Company, RoC, DRHP, HDFC sec Inst Research

Studded jewellery expected to

grow at 11% CAGR over FY18-

23E as SUPERPACK pushes

through aggressive diamond

activation programmes

Studded jewellery

increasingly competes with

other indulgent

discretionaries. This coupled

with perception of falling

diamond prices may keep the

Indian from loosening her

purse strings in a meaningful

way. We do not factor this

risk yet

-

5.0

10.0

15.0

20.0

25.0

-

200.0

400.0

600.0

800.0

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

Studded Jewellery (Rs bn) - LHS

YoY

Studded ratio (%)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 20

Diamond Prices (USD/carat) for VVS1 diamonds

Diamond Prices (USD/carat) for IF diamonds

Source: Bloomberg, HDFC sec Inst Research

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

Mar-15

Sep-15

Mar-16

Sep-16

Mar-17

Sep-17

Mar-18

Diamond 1 Carat D VVS1 ($)

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

Mar-15

Sep-15

Mar-16

Sep-16

Mar-17

Sep-17

Mar-18

Diamond 1 Carat D IF ($)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 21

Different strokes for different folks

South market is mature, majors will tread out

 As part of our pan-India jewellery tour, we met

unlisted jewellery chains and visited their flagship

stores to gauge the competitive landscape, growth

strategies and spot winners.

Our findings : (1) Most south-based national/regional

chains concur that incremental market share will be

earned through expansion into the North and West

regions, (2) Most South players prefer the owned store

model vs. the franchisee model. Also pace of expansion

may be slower vs. Titan for a couple of years given

capital constraints, (3) Given the predominantly South-

based footprint of key peers, Tanishq’s national design

width will give it an advantage for now. But it is not a

durable hurdle and will dwindle over time.

 South well-entrenched, profitability capped: The

four (now five) southern states in India account for

~41% of the domestic consumption (est Rs 1.25tn)

and ~27% of the BIS-listed stores. Consumer

purchasing behavior gravitates towards traditional

plain gold jewellery where margins are low. Major

jewellers’ EBITDA margins hover in the 4-6% range.

Key players (Tanishq, Malabar Gold, GRT, Joyalukkas,

Kalyan, Jos Alukkas, Khazana, Thangamayil) are well-

entrenched and are estimated to account for ~45-

47% of the South market (in spite of ~10% share in

store count). Given the higher penetration and lower

profitability in South India, most major South-based

jewellers concur that incremental market share gain

will be through expansion in the north and west.

Zone-wise BIS-listed stores

SOUTH: Chains vs Standalone

…top jewellers enjoy ~40% market

share down South

Source: BIS, HDFC sec Inst Research (Note: BIS-listed 21,778 stores used as sample to extrapolate industry behavior and performance)

West

31%

South

27%

East

25%

North

17%

No. of

standalone

stores

75%

Regional/

national

chain

stores

25%

2.6

11.3

5.4

3.0

9.6

1.1

2.7

3.6

1.2

0.8

1.0

1.4

0.5

0.6

0.8

-

2.0

4.0

6.0

8.0

10.0

12.0

Tanishq

GRT

Joy Allukas

Kalyan

Malabar Gold

Thangamayil

Jos Allukas

Khazana

RMS (%)

Store share (%)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 22

 Own store expansion – Mantra down south: Most

South-based jewellers with national ambition intend

to expand through own stores in the North and West.

While there is little advantage in capital by opting for

the franchisee model (over 95% of investment is

towards inventory), we reckon the decision to go the

owned store way is driven by (1) Most jewellers are

yet to travel Tanishq’s learning curve in franchisee

management, (2) Potential franchisees in the rest of

India may also have limited appetite for tying up with

South based chains as they foray into the North or

West.

We believe key challengers will be better prepared

after the next 2-3 years to push the franchisee

throttle as the current capital and design arbitrage

shrinks. There are exceptions, of course. For example,

Malabar Gold intends to expand via the franchisee

route. PCJ which already has a strong foothold in the

north zone is expected to increasingly focus on

pushing throughput via franchisees in the West.

Note Risks pertaining to franchisee model are: (1) Franchisee

Capital erosion if gold prices decline, as most franchisees

don’t enjoy gold on lease arrangement with banks, (2)

Inventory management and design availability at franchisee

stores, and (3) Standardization of customer experience

Top jewellers : Expansion strategies

Top Jewellers expansion strategies Expansion Route FY19 Store additions commentary

Tanishq Mix of Owned & Franchisee 40-45

PC Jeweller Mix of Owned & Franchisee ~25

Malabar Gold

Mix of Owned & Franchisee

~30

Senco Gold Mix of Owned & Franchisee NA

Kalyan Jewellers

Owned store

~20-25

Joyalukkas Owned store ~20

GRT Owned store ~5

Thangamayil

Owned store

~5

TBZ Mix of Owned & Franchisee ~15

Source: Company, HDFC sec Inst Research

 Phase 1 - Advantage TITAN, Phase 2 - closely fought:

Our interactions with lenders also suggest that

unencumbered cash levels and leverage warrant a

capital infusion for some of the unlisted big-box

jewellers, if they have to make any meaningful

investments in the north and west (given their owned

store expansion route. Given that credit flow will be

cautious, Phase 1 (FY19-21E) will see levered

jewellers either raising money through capital

markets or will sit on the fence as less levered

companies gain market share. This is expected to give

Titan a 1-2 year head-start. This is also evident in

Titan’s confidence of achieving its 25% jewellery

revenue growth aspiration for FY19. However, this

capital arbitrage along with the design arbitrage will

narrow down over the medium term. Tanishq will

find itself defending turf against some strong and

able challengers across India, especially those with a

wider national footprint.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 23

Expected IPOs in the next 1-3 years

Kalyan Jewellers

South

Senco

East

Joyalukkas

South

PN Gadgil & Sons

West

Source: Company, HDFC sec Inst Research

Titan: Leaner vs peers

Player-wise FCFE profile

Source: Company, RoC, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research, FY17 RoC for unlisted data

Player-wise estimated avg cost of funds (%)

Est. rev share amongst top 8 jewellers down South

Source: Company, HDFC sec Inst Research

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

TBZ

South-based E

South-based C

PN Gadgil

PCJ

Thangamayil

South-based B

South-based D

South-based A

Tanishq

2.6

GRT

11.3

Joyalukkas

13.7

Kalyan

3.0

Malabar

Gold

9.6

Thangamayil

1.1

Jos Alukkas

7.0

Khazana

3.6

-

2.0

4.0

6.0

8.0

10.0

Titan

PCJ

Thangamayil

South

-based A

South

-based B

South-based C

South-based D

TBZ

PN Gadgil

Net Debt/Equity

Net Debt/EBITDA

(10.0)

(5.0)

-

5.0

10.0

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

5,000

Titan

PCJ

Thangamayil

South-based B

South-based C

South-based D

TBZ

PN Gadgil

FCFE (Rs mn)

FCFE yield (%) - RHS

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 24

 Rising gold prices can drive franchisee throughput:

Not all franchisees of top jewellers employ the gold

on lease method of sourcing gold (a natural hedge).

Hence, their throughput and store inventory depends

to some extent on their open position on gold. With

deteriorating macros, we believe India has entered a

stable-to-rising gold price environment. This makes it

conducive for stoking up franchisee throughput.

About a third of Titan’s jewellery revenue comes

from its L3 channel (FOFO stores) which could see a

pick-up in throughput. PCJ and Malabar Gold have

kicked off franchisee operations with some

franchisees procuring gold on lease from banks,

thereby hedging their inventory.

MCX Gold price trends (Rs/10g)

Tanishq: Owned vs Franchisee stores (%)

Source: Company, HDFC sec Inst Research

L1 + L2

67

L3

33

5,000

15,000

25,000

35,000

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Gold price (Rs/10 gm)

Avg price

+1 Std dev

-1 Std dev

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 25

Owned stores vs Franchisee store economics : a rough cut view

Particulars

Owned Stores

Franchisee Stores

Area (Sq ft) 3,500

2,000

Studded Ratio (%) 25

20

Revenue per sq ft 140,000

80,000

Revenue per store (Rs mn)

490

160

Gold Jewellery rev/store 368

128

Studded Jewellery rev/store 123

32

Franchisee margin (%) @ 50% of GM 0

7.5

Attributable Company revenue/store (Rs mn) 490

148

EBIT margin (%)

10

Attributable Company EBIT/store (Rs mn) 49

15

Capex per sq ft 4500

0

Capex per store (Rs mn) 15.75

0

Est. WC cycle (Days) 145

60

Working capital requirement

195

26

Total Investment (Rs mn) 210

26

RoCE (%) 23.3

56.3

Company, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 26

North & West : The battlegrounds

The SUPERPACK accounts for under 4% of the stores in

North and West (over 45% of domestic consumption)

 Headroom to penetrate is higher : The SUPERPACK

accounts for a measly 3.5% of the BIS-listed jewellery

stores in North and West (vs ~8% in South). Some of

the key jewellers in the North are Tanishq, PCJ,

Kalyan, Senco. In the West it is Tanishq, TBZ, PN

Gadgil & Sons, PNG Jewellers and Waman Hari Pethe.

SUPERPACK occupy 4% outlet share in North

…even lower at 3% in West Zone

Source: BIS, Company, HDFC sec Inst Research

State-wise BIS listed jewellery stores in India: surprisingly low nos. in some Southern states

Source: BIS, HDFC sec Inst Research

83.6%

16.4%

4.8%

standalone jewellers as % of total

chains as % of total

SUPERPACK as % of total

69.7%

30.3%

3.1%

standalone jewellers as % of total

chains as % of total

SUPERPACK as % of total

15

719

435

580

61

355

6

10

632

73

2,024

568

179

254

118

864

2,057

429

3,871

5

2

1,132

85

445

809

1,726

439

53

670

131

3,031

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Andaman

Andhra Pradesh

Assam

Bihar

Chandigarh

Chhatisgarh

Dadra and Nagar …

Daman

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jharkhand

JK

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Meghalaya

Nagaland

Orissa

Pondichery

Punjab

Rajasthan

Tamil Nadu

Telangana

Tripura

Uttar Pradesh

Uttarakhand

West Bengal

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 27

 Impulse purchases + higher studded = higher profits

in North & West: Consumers in the North & West

region of India are more receptive to studded

jewellery and impulse-led lighter-weight jewellery

purchases (14k, 18k jewellery) viz-a-vis their southern

counterparts. Plain gold jewellery typically enjoys

gross margins ranging from 10-14%, while diamond-

studded jewellery has gross margins of 30-35%.

Consequently as studded ratio (studded

jewellery/total revenue) goes up, profitability

improves.

Retail sales by jewellery type

Category

% of retail

sales

Range of weights

(gm)

Avg. ticket

weight (gm)

Necklaces 15%-20%

25-250

30-60

Bangles 30%-40%

8-25

10-15

Chains 30%-40%

10-50

10-20

Earrings 5%-15%

2-30

3-8

Finger rings 5%-15%

2-15

3-7

Source: WGC, HDFC sec Inst Research

Regional tastes in gold jewellery

South

East

West

North

Market

share

40%

15%

25%

20%

Caratage 22k

22k

22k, 18k,

14k

23k, 22k,

18k, 14k

Important

centres

Chennai,

Hyderabad,

Cochin,

Bangalore

Kolkata

Mumbai,

Ahmedabad

New Delhi,

Jaipur

Source: WGC, HDFC sec Inst Research

 Able challengers in the fray in North & West: While

Tanishq remains a distant leader in terms of

presence, it has able challengers in PC Jeweller

(North), Kalyan, Joyalukkas (South) and Senco (East)

given their leading positions vs. other regional

players. This does imply relatively better tie-ups with

‘karigars’. They may thus be closer to catching up

with Tanishq on the design curve vs. other regional

jewellers.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 28

PCJ, Kalyan & TBZ have better width in presence amongst regional jewellers; South players to play catch up

Jewellers Origin North

East

West

South

Store share in

region of origin

Store share in

region of

non-origin

Presence

(No of

States/UTs)

Presence

(No of

Districts)

Tanishq

National

78

46

59

71

NA

26

156

PCJ

North

65

14

10

4

69.9

30.1

20

77

Kalyan

South

13

4

11

58

67.4

32.6

16

71

Joyalukkas

South

5

0

7

59

83.1

16.9

12

58

Malabar Gold

South

5

1

7

86

86.9

13.1

11

64

GRT

South

0

46

100.0

-

5

22

Jos Alukkas

South

0

38

100.0

-

5

30

Thangamayil

South

0

32

100.0

-

1

16

Khazana

South

0

49

100.0

-

5

31

TBZ

West

1

7

25

4

67.6

32.4

11

26

PN Gadgil & Sons

West

0

24

1

96.0

4.0

3

16

PNG Jewellers

West

0

22

0

100.0

-

3

13

Senco

East

9

74

4

81.3

18.7

14

48

Source: BIS, HDFC sec Inst Research

 PCJ has been the most aggressive in store

expansion: PCJ has been the most aggressive in

network expansion. It has added 282k sq. ft of

retailing space (CAGR ~20%) over FY12-18 vs Titan

(ex-Caratlane) 620k sq. ft (CAGR 15%). The race will

continue over the next 5 years as the SUPERPACK

capitalizes on the weakening position of mom-and-

pop jewellers. We believe PCJ will continue to add

~25 stores per year (75% via franchisee route), while

Titan intends to add ~150 stores over FY18-23E (~85%

through the franchisee route). In the west, TBZ

intends to increase its retail space from ~111k sq ft to

150k sq ft over the next 2-3 years. PN Gadgil & Sons

expects to further deepen its presence in Maharastra

by adding ~15 stores over FY18-20E. The Southern

troika (Malabar Gold, Kalyan and Joyalukkas) are

expected to add ~20-30 stores each in FY19.

PN Gadgil (off a small base), PCJ and GRT have expanded aggressively

Area (sq. ft.) FY13

FY14

FY15

FY16

FY17

FY18

5-yr CAGR

5-yr space

addition

Tanishq (ex-caratlane)

608,628

720,123

812,928

902,928

957,407

1,079,742

12.1%

471,114

PC Jeweller

164,572

238,000

313,296

353,213

386,923

419,963

20.6%

255,391

Thangamayil

46,295

56,724

57,624

58,024

4.6%

11,729

TBZ

82,368

88,093

91,000

98,200

108,948

110,666

6.1%

28,298

PN Gadgil

28,412

42,363

53,220

56,256

66,702

100,213

28.7%

71,801

GRT

-

227,000

262,000

297,000

339,000

374,000

13.3%

374,000

Malabar Gold

Joyalukkas

234,000

Kalyan Jewellers

559,000

Source: HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 29

Design portfolio : Key factor

Given that most jewellers are inching towards parity in

terms of gold pricing, monthly scheme offerings and

repurchase/exchange commissions, the battle will

eventually be fought over the breadth and depth of

designs on offer.

 Prices converging across the SUPERPACK: A decade

ago, consumers would fork out a premium of 5-15%

over the MCX gold price whilst purchasing from a top

jeweller. Organized players merrily took advantage of

consumers’ ignorance. This is receding now. Titan’s

gold price premium (over MCX) has considerably

shrunk to ~8% (May-18) vs ~15-16% in FY11 and 10%

in Aug-15. As Titan pushes out its wedding collections

over the next 5 years, this spread can only reduce.

Premia for other top jewellers are converging

already, esp. if geographical differences in gold price

are built in.

 Monthly gold schemes also converging: Monthly

gold investment schemes by organized jewellers seek

to push market share. These have largely converged

across the SUPERPACK. For jewellers, these are

helpful as (1) Revenues are assured, (2) Working

capital efficiency rises. The obvious trade-off is that

the financing cost is higher than gold on lease (~3-4%

p.a.), typically 6-12%.

Player-wise premium over MCX

…Effective interest rate offered on gold schemes

Source: Company, HDFC sec Inst Research, as per 10

th

Jun 18

Source: Website, Company, HDFC sec Inst Research

8.1

6.5

6.4

5.9

4.6

4.4

3.9

3.3

2.6

2.3

-

2.0

4.0

6.0

8.0

10.0

Titan

TBZ

Jos Alukkas

P N Gadgil & Sons

Malabar Gold

Thangamayil

GRT

PCJ

Kalyan

Joyalukkas

PNG Jewellers

Premium (%)

12.0

11.4

11.0

10.9

7.8

5.9

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Tanishq

Thangamayil

PC Jeweller

Malabar Gold

GRT

Kalyan

PN Gadgil & Sons

Joyalukkas

Effective Interest rate

Gold realizations, monthly

scheme offerings, repurchase/

exchange discounts

converging across the

SUPERPACK

Hence, battle will be fought

on designs in the medium-to-

long term

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 30

 Repurchase/exchange indicate similar trends:

Repurchase commissions are charged by jewellers if

the latter wishes to sell/exchange old jewellery for

cash or new jewellery. The commissions depend on

(1) Type of transaction (repurchase or exchange), (2)

Whether the jewellery is their own or that of other

jewellers. These commissions are largely converging

across key jewellers (see table). With mandatory

hallmarking expected to be a reality soon, this

convergence can only accelerate. Also, with tighter

credit (higher collateral and stricter Debt/Equity

norms), we believe jewellers may focus on procuring

more gold via exchange schemes, further driving

down exchange pricing premia. Titan’s stated

strategy of increasing its exchanged gold mix from

~40% in FY18 to ~50% by FY23 is but an indication of

this trend. Co has revised its old gold exchange

scheme recently.

Player-wise: Old Gold Repurchase/Exchange commissions

Jeweller

Repurchase for Cash (commission %)

Old Gold Exchange (commission %)

Own gold

Against Other jewellers

Own gold

Against Other jewellers

Titan

3%

No repurchase

0%

2%(22k) / 8%(below 22k)

PCJ

3%

No repurchase

0%

1%

Thangamayil

3%

0%

TBZ

3%

No repurchase

0%

3%

Kalyan

1%

No repurchase

0%

6%

P N Gadgil & Sons

3%

No repurchase

0%

GRT

3%

No repurchase

0%

Source: HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 31

 Tanishq leads on design, peers will catch up: Two

thirds of jewellery manufactured in India today is

hand-crafted. Hence, (1) Strong tie-ups with Karigars

for each region to cater to local tastes, (2) In-house

manufacturing capabilities, (3) In-house design teams

and/or tie-ups with celebrity designers, and (4) Large

inventory at retail outlets are key to gaining market

share.

 Our industry/store visits suggest that Tanishq has a

headstart in design offerings as its wider geographic

presence implies better Karigar tie-ups in the regions

targeted for expansion. South is largely a

homogenous market in terms of designs

offered/purchased and accounts for ~75% of the

revenues for major South jewellers. This clearly

suggests that south jewellers have some catching up

to do on their tie-ups with Karigars ergo, on the

design curve. However, we suspect able competitors

such as PCJ, Kalyan are closer in the catch-up phase

given their relative breadth of presence vs other

jewellers (ex-Tanishq). PCJ’s in-house manufacturing

capabilities is expected to hold the company in good

stead as the battle over designs intensifies. Malabar

Gold and Joyalukkas too are fast climbing up the

design curve.

 Sourcing of gold could be the joker in the pack:

Jewellers source their raw material through a mix of

(1) Gold on lease through banks, wherein designated

bullion banks charge an interest rate of ~2-4%. This is

the cheapest source of funding inventory and gold

procurement, (2) The (old) gold exchange route is

where consumers exchange their old jewellery for

new jewellery (or for cash), (3) Jewellers also

purchase gold in the domestic spot market.

 The mix of sourcing gold varies across jewellers.

Given that banks have tightened the noose on

lending to the industry, we believe jewellers may

have to re-look their sourcing strategies and focus on

procuring more from their gold exchange schemes.

 An attractive gold exchange scheme helps jewellers

to (1) De-risk its sourcing dependence on Gold on

lease (2) Up-sell costlier (and more profitable)

jewellery to consumers.

 Exchange schemes can drive SSSG for SUPERPACK:

The up-selling opportunity presented by an attractive

gold exchange scheme could help top jewellers stoke

up SSSG as typically the consumer ends up spending

~1.4-1.7x the exchange value. Our industry visit

suggests that top jewellers typically have ~50-70% of

repeat customers who are ideal candidates to push

this too. We estimate Titan and PCJ to account for

~5% & ~2% respectively of the total gold exchange

market. This could nearly double for both over 5

years Across zones, big-box jewellers have revised

their exchange programme (more lucrative for

consumers now) to capture the up-selling

opportunity. .

Tanishq has a 1-2 year head-

start vs peers on designs

given its wider presence

Exchange programme is a

good up-selling tool. Could

push SSSG

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 32

SUPERPACK’s est exchange market share (FY18)

Gold on lease for listed jewellers (FY18)

Source: Company, HDFC sec Inst Research

Source: Website, Company, HDFC sec Inst Research

Bank credit sector and share in exposure

…Credit growth tends to mimics gold prices with a lag

Source: Company, HDFC sec Inst Research

Malabar

Gold

7

GRT

5

Tanishq

5

Joyalukkas

4

Kalyan

3

PCJ (Dom

biz)

2

Khazana

2

Jos Alukkas

1

PNG

Jewellers

1

PN Gadgil

1

Thangamayil

1

TBZ

1

Other

organized

Jewellers

4

251

285

318

397

513

611

699

718

727

690

727

2.30

2.40

2.50

2.60

2.70

2.80

2.90

3.00

200

300

400

500

600

700

800

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Bank Credit O/S to Gems & Jewellery sector (Rs bn)

Share of sector in Total Bank credit to Industries (%) - RHS

11

25

29

19

14

3

1

(5)

5

25

22

21

15

13

6

3

(2)

1

(10)

-

10

20

30

40

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Gold price growth

YoY growth in bank credit O/S to Gems & Jewellery sector (%)

YoY growth in bank credit to Other Industries (%)

16.1

33.8

1.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Tanishq

PCJ

Thangamayil

Rs bn

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 33

Expert talk

Mr. Vijayraghavan

Chief Executive Officer – GRT

 Biggest Jeweller by revenue: GRT is one of the biggest and most efficiently managed

jewellers in India by revenue. If one clubs the private company along with the two

partnerships, the group is estimated to have clocked ~Rs 140bn in revenue from

jewellery. It operates across the four southern states of Tamil Nadu, Karnataka, Kerala

and AP and operates out of ~46 stores in India. The company is one of the leanest

jewellers in India with industry leading stock-turning efficiency.

 ‘FY19 will be the year of consolidation’ Mr. Vijayraghavan was of the opinion that FY19

will mark the year of consolidation after a phenomenal FY18 for the industry and for GRT. Highly leveraged jewelers are

expected to get down to brass tacks and improve working capital efficiency as banks tighten the noose on credit. GRT’s

cash conversion efficiency is amongst the highest, albeit it is also a function of the sales mix.

 Expansion plans: GRT intends to add ~5 stores/year (via leased stores) down south for the next couple of years.

Expansion philosophy is simple – add stores – monitor performance – bring performance to match up to mature

stores within a year – expand again. Kerala is one market down south which GRT doesn’t have a strong presence in and

it intends to change that in a couple of years.

 Focus will be on improving SSSG and studded jewellery for margin expansion: GRT has managed to deliver a ~7-10%

SSSG each year since FY12 and intends to sharpen focus on SSSG even more over the next 2-3 years. This SSSG-led

growth coupled with its focus on pushing studded jewellery is what GRT is banking on to improve margins. A typical day

at GRT’s T Nagar store witnesses ~400 walk-ins, of which only ~12 customers purchase studded jewellery. GRT’s focus is

to up-sell diamond-studded jewellery to these customers through their activation programmes. It is also focusing on

sharpening its quality control process. This is expected to bring in a lot more efficiency in inventory management.

 On GRT's Brand Equity: Consumers prefer purchasing gold from GRT as it hs been considered auspicious to do so for

generations, especially in Tamil Nadu. Given the brand might, efficiency remains best-in-class. GRT turns jewellery

faster than most in the trade.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 34

Mr. Baby George

Chief Executive Officer – Joyalukkas India Pvt. Ltd

 Joyalukkas’ Indian operations (housed in Joyalukkas India) commenced operations in

FY02. The company operates through 78 of its owned/leased stores across India with an

employee count of ~4500.Key states of presence are Tamil Nadu, Kerala, Karnataka,

Telanghana, Gujarat, Maharashtra, AP, Punjab and Delhi

 Expansion will be the focal point: Unlike GRT, Mr. George is of the view that it is

increasingly difficult to sustain SSSG for any player in the South market as competition is fierce and same store sales

may at best be stable going forward. Incremental growth is largely going to come from expansion in north and west.

The jeweller intends to add ~20 stores/year and is eyeing Delhi, Haryana, Punjab, and Maharashtra as grounds for

expansion. (Confident of touching 100 stores by FY19). Down South, the chain intends to add stores in Hyderabad and

Bangalore. A lion’s share of growth for Joyalukkas over the last three years has been through network expansion. That

being said, Mr. George was the first to appreciate the efficiency of GRT’s (competitor) operations down South.

 Studded jewellery to drive margins: Despite being a predominant south player, Joyalukkas enjoys one of the best

studded ratios among peers within the unlisted space and hence better gross margins. Mr. George too highlighted that

studded ratio will be the key margin lever going forward and focus will be to push diamond jewellery.

 Prioritizing exchange-based sourcing: Given the up-selling potential, Mr. George was of the view that most big-box

jewellers will increasingly source gold through their exchange programme. Also, fresh gold purchases have moderated

for the industry given the elevated prices. Joyalukkas too, has tactically managed its sourcing to pull footfalls into

stores.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 35

Mr. Sanjay Raghuraman

Chief Operating Officer – Kalyan Jewellers

 The Thrissur (Kerala) - headquartered Kalyan Jewellers ventured into jewellery retailing in

the year 1993. Indian operation houses ~90 stores across India. The chain has a wider

geographic spread in terms of revenue and stores vs peers (ex-Titan).

 North and west - Focal points for expansion: Mr. Raghuraman highlighted his focus on

north and west for expansion. Key cities targeted for expansion include Mumbai, Delhi,

Kolkata, Rajasthan,UP and MP. Kalyan intends to add ~15-20 stores per year.

 Store size and designs key for gaining BRIDE’s mindshare: The avg. store size for a Kalyan store ranges from 5-8k sq. ft.

Mr. Raghuraman highlighted that the jeweler intends to expand via owned stores but will not budge on store sizes

inspite of the expansion drive as it remains one of the essentials (apart from designs) to capture the bride’s mindshare.

 Studded jewellery off-take better vs peers: Kalyan enjoys better studded jewellery off-take given its wider geographic

presence vs other south jewellers (estimated at 18-20% - FY17). ‘Studded ratio is expected to inch up’ - Mr.

Raghuraman quips as Kalyan further penetrates into the north and west.

 Never shut a single shop: Kalyan Jewellers typically is known for a big-bang store launch with strong brand

ambassadors such as Mr. Amitabh Bachchan endorsing its brand. Hence, break-even point is typically longer for a store.

However, Mr. Raghuraman highlighted that till date the jeweller has not shut a single shop in its history.

 Don’t want to deal with franchisee idiosyncrasies: Management also highlighted that it doesn’t feel comfortable

dealing with franchisee idiosyncrasies such as loyalty issues, franchisee investment vagaries and hence prefers the

owned store route of expansion.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 36

Mr. Sanjeev Bhatia

Chief Financial Officer – PC Jeweller

 PC Jeweller is one of the strongest wedding jewellers in India with an estimated market

share of ~4% (~85% of PCJ’s domestic sales). While it is present in 20 states; the skew is

heavily tilted to the north (~70% stores are in north); the revenue skew towards north is

even more pronounced.

 Focus remains on expansion: Mr. Bhatia highlighted that aggressive expansion is the need

of the hour as competitors are expected to close in on north for incremental share. However, given PCJ’s expansion

plans of 25-30 stores (largely via franchisees) and design capabilities; key vitals of PCJ will remain healthy despite the

competition. Cities targeted for expansion are Pune, Aurangabad, Nagpur in the west and Hyderabad, Bangalore and

Mangalore down south. Mr Bhatia also highlighted that it doesn’t intend to enter well-entrenched South markets

such as Thrissur as profitability levels of the market doesn’t justify expansion there. Over 60% of the top-line growth

can be expected to come from network expansion.

 On track for franchisee tie ups: PCJ added 5 franchiee stores in FY18 and it is on track of executing its franchisee tie-ups

in FY19.

 Competition will increase as South jewellers eyeing North too: South jewellers such as Malabar Gold, Joyalukkas and

Kalyan are increasing their presence in north, Mr. Bhatia quips, however the opportunity to tap is big enough for

everyone to co-exist.

 Efficiency in biz to increase: Management is focusing on reducing its exports biz relevance which should improve

working capital efficiency and hence return ratios. Next 2-3 years will be a combination of aggressive expansion and

getting more lean and efficient at the same time; said Mr. Bhatia

 In-house manufacturing should increase: Over the next 2-3 years, in-house manufacturing should inch up from current

levels which in turn will help PCJ offer a wider assortment of designs to the consumer.

 To up the frequency of collection launches: Mr. Bhatia highlighted that in order to gain market share, PCJ is targeting 1.

Atleast one wedding collection per quarter, 2. One light weight jewellery launch every 2 months.

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 37

Flagship Store visits

Flagship Store Visits

Joyalukkas

Kalyan

Malabar Gold

Location

T-Nagar

Store Size (Sq ft) ~60000 ~44,000 ~40,000

Avg. Annual Throughput (Volume)

-Gold: 1200 kg, of which ~700kg is

exchange

-Silver: 1000 kg

'-Diamond & other precious stones sales:

Rs. 1.1-1.2bn

-Gold: 400kg, of which ~200-250kg is exchange

-Silver: 650-700kg/year

'-Diamond & other precious stones sales: Rs.

600-750m

-Gold: ~500kg

'-Diamond & other precious stones

sales: Rs. ~400mn

'-Silver: 50-60kgs/day

Making Charges

-Gold & Studded Jewellery: Typically range

from 5-30%

-Silver Jewellery & Pieces: Rs 6-20 per

gram

In Gold:

-Chains: 3-13%; Necklaces: 3-25%; Bangles: 3-

15%; Rings/Studs/Lockets: 3-18%; Bracelets: 3-

18%

In Silver:

-Gifts: at MRP; Plates/Glasses Rs 2 per gram;

Anklets: Rs 2-3 per gram

In Gold:

-Plain gold jewellery: 3-12%

-Studded Jewellery: Realizations

range 58-78k/carat

-Ruby-emerged jewellery: 24%

Consumer purchasing behaviour

-Chettinad (necklace) - 30% of gold sales

-Antique jewellery & Nagas - 20-25% of

sales

-Chains & Bangles: 50-60% of sales

-Necklaces: 25% of sales

-Rings & Studs: 20% of sales

-Chains: 30 of sales

-Bangles: 25% of sales

-Necklaces: 30% of sales

-Rings, Anklets & Studs: 15% of

sales

Avg ticket price 50-60k/customer

Plain Gold Jewellery: 35k/customer

Studded Jewellery: 50k/customer

35-45k/customer

Avg. ticket wt: 12-15g (Gold)/. This

has decreased from 16-20g a 3-4

years ago

Customer conversion rate

-200-250 walk-ins; of which 85-90%

conversion rate

-70-80 walk-ins; of which 85-90% conversion

rate

-120-200 walk-ins; of which ~75-

80% conversion rate

No. of Employees

~200 salespeople; avg. emp. Cost

20k/month

~130 salespeople; Avg. emp. cost: Rs

20k/month

~100+ salespeople

Other stores in Chennai

Chrompet (~2500 sq ft)

-Velachary (~2800 sq ft)

Plans to open 1 store in Anna Nagar

Adayar, Chrompet, Velachary Chrompet

Source: Company, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 38

Flagship Store Visits GRT Thangamayil

Location T-Nagar Madurai Coimbatore

Store Size (Sq ft)

~44,000

~5700

~5740

Avg. Annual Throughput (Volume)

Flagship does over Rs 10bn in revenues. Gold:

91%, Diamond: 3%, Silver: 5%, Others: 1%

-Revenue: Rs 2.4bn

-Gold revenue: Rs 2.2bn

-Silver & Diamond revenue: Rs 0.2bn

-Revenue: ~Rs 900mn

-Gold revenue: ~Rs 840mn

-Silver & Diamond revenue: ~Rs 60mn

Making Charges

In Gold:

-Chains: 3-13%; Necklaces: 3-25%; Bangles: 3-

15%; Rings/Studs/Lockets: 3-18%; Bracelets: 3-

18%

In Silver:

-Gifts: at MRP; Plates/Glasses Rs. 2 per gram;

Anklets: Rs. 2-3 per gram

In Gold:

-Chains: 3-13%; Necklaces: 3-25%;

Bangles: 3-15%; Rings/Studs/Lockets:

3-18%; Bracelets: 3-18%

In Silver:

-Gifts: at MRP; Plates/Glasses Rs. 2

per gram; Anklets: Rs. 2-3 per gram

In Gold:

-Chains: 3-13%; Necklaces: 3-25%;

Bangles: 3-15%; Rings/Studs/Lockets:

3-18%; Bracelets: 3-18%

In Silver:

-Gifts: at MRP; Plates/Glasses Rs. 2 per

gram; Anklets: Rs. 2-3 per gram

Consumer purchasing behaviour Not available

Avg ticket price ~40k/customer

Gold and Jewellery: 10-14

grams/customer

Silver, Silver Golusu and Articles: 55-

65 grams/customer

Silver Articles: Rs. 500-

1500/customer

Gold and Jewellery: 10-14

grams/customer

Silver, Silver Golusu and Articles: 55-65

grams/customer

Silver Articles: Rs. 500-1500/customer

Customer conversion rate -400-500 walk-ins; of which 90% conversion rate

Conversion ratio is ~80% of all walk-

ins

Conversion ratio is ~80% of all walk-ins

No. of Employees

Not available

Other stores in Chennai

Has 16 stores in Chennai, Key stores include T-

Nagar, Anna Nagar, Purasaivakkam, Tambaram,

Old Washermenpet, Adyar, Velachery,

Poonamalle

Annanagar, Coimbatore (amongst the

bigger stores)

Madurai, Annanagar, (amongst the

bigger stores)

Source: Company, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 39

KPIs : How do top jewellers stack up?

 South jewellers enjoy higher revenues/sq. ft: As the

table below depicts, South-based jewellers enjoy

higher revenue/sq. ft given (1) Higher share of gold

jewellery which turns faster vs. studded jewellery, (2)

South jewellers’ predeominant owned stores

(Typically, franchisee revenue/sq. ft is lower, given

limited inventory pile).

 While all jewellers have seen their revenue/sq. ft dip

with regulatory hurdles over FY14-16, it merits

mention that Tanishq, GRT and PCJ did better than

the rest. PN Gadgil’s SSSG is yet to catch-up with its

aggressive store expansion drive (47% CAGR in space

addition over FY12-18).

South jewellers enjoy higher revenue per sq ft

Revenue per sq ft (Rs)

FY13

FY14

FY15

FY16

FY17

FY18

5-yr CAGR

Tanishq

131,975

119,805

115,885

96,604

110,678

122,778

-1.4%

PC Jeweller

181,562

168,151

144,879

145,493

137,960

161,886

-2.3%

Thangamayil

328,973

210,017

250,558

220,693

225,507

237,711

-6.3%

TBZ

201,333

207,093

212,549

168,511

155,120

158,261

-4.7%

PN Gadgil

278,473

294,012

230,027

182,858

-13.1%

GRT

417,950

367,960

349,956

379,679

-3.2%

Joyalukkas

326,802

Kalyan Jewellers

148,854

Source: RoC, Company, HDFC sec Inst Research. Note: Estimates are used for unlisted players

 PCJ leads the SUPERPACK in profitability: Given the

variances in expansion routes across jewellers,

revenue/sq ft may not be comparable. EBIT/sq. ft

may be a better metric. PCJ leads here, as ~three-

fourths of its revenue comes from the North region

which is typically a higher margin market. Also we

suspect PCJ’s higher in-house manufacturing vs

industry bellwether Titan is adding to its profitability.

However, with PCJ’s thrust on expansion (guidance

~25-30 store additions in FY19, 75% through the

franchisee route), we believe EBIT/sq ft will taper

down over FY18-23E.

SUPERPACK’s profitability per square foot

EBIT per sq ft (Rs)

FY13

FY14

FY15

FY16

FY17

FY18

CAGR

Tanishq

13,394

11,788

11,499

8,861

10,424

13,546

0.2%

PC Jeweller

-

18,258

19,866

17,485

16,826

20,471

2.9%

Thangamayil

16,906

1,608

(954)

6,088

6,770

8,820

-12.2%

TBZ

17,052

14,036

7,162

2,706

5,403

5,935

-19.0%

PN Gadgil

12,643

12,471

14,693

13,078

13,764

10,544

-3.6%

GRT

14,628

13,247

12,948

14,428

-0.5%

Malabar Gold

15,452

Joyalukkas

15,581

Kalyan Jewellers

5,832

Source: RoC, Company, HDFC sec Inst Research. Note: Estimates are used for unlisted players

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 40

SUPERPACK’s return profile

FY13

FY14

FY15

FY16

FY17

FY18

RoE (%)

Titan

42.3

32.7

27.8

19.7

20.7

24.0

PC Jeweller

29.9

23.2

20.6

18.1

14.6

14.8

Thangamayil

18.9

(7.8)

(15.8)

7.9

9.7

14.4

TBZ

29.6

12.8

3.3

(6.1)

2.9

4.6

GRT

25.1

21.4

20.8

19.9

Joyalukkas

12.4

15.3

20.2

Kalyan Jewellers

1.9

5.4

3.2

PN Gadgil

68.7

79.9

83.7

48.6

47.7

47.8

RoCE (%)

Titan

27.6

20.4

19.5

14.3

13.5

16.4

PC Jeweller

14.9

12.8

12.6

11.7

10.1

9.7

Thangamayil

11.0

1.7

(0.6)

7.7

7.8

7.6

TBZ

16.7

8.7

4.2

2.9

6.2

4.4

Joyalukkas

9.1

11.1

14.6

Kalyan Jewellers

21.7

6.2

4.2

PN Gadgil

14.3

18.3

21.5

18.0

18.8

16.6

RoIC (%)

Titan

40.3

24.5

20.8

13.6

14.2

17.8

PC Jeweller

16.7

14.1

12.8

11.7

10.2

10.8

Thangamayil

11.2

1.1

(0.9)

7.3

7.9

TBZ

16.7

8.8

3.9

2.6

6.1

4.2

Joyalukkas

8.6

10.6

13.1

Kalyan Jewellers

8.9

6.0

4.4

PN Gadgil

14.2

22.0

27.7

20.5

20.4

17.5

Source: RoC, Company, HDFC sec Inst Research

Titan leads the SUPERPACK in

return profile; Thangamayil is

on its road to recovery with

improving RoEs

PCJ’s depressed return ratios

is a function of receivable-

heavy exports

GRT remains one of the most

efficiently managed regional

juggernauts, with a return

profile bettered only by

industry bellwether Titan

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 41

Player-wise inventory days

Player-wise receivable days

Source: Company, HDFC sec Inst Research

Player-wise payable days

Player-wise cash conversion cycle (days)

Source: Company, HDFC sec Inst Research

PN Gadgil & Sons and

Thangamayil have the fastest

turning inventory. This is

because over ~92-93% of their

sales is plain gold jewellery

which typically turns faster

Despite best-in-class studded

ratio (~30%), industry

bellwether Titan is one of the

most efficient in inventory

management

As 90% of PCJ stores are

owned inventory sits in their

books and hence no of days

are higher for PCJ.

Exports biz keeps receivable

days high too for PCJ

Overall, Titan has one of the

shortest cash conversion

cycles despite a meaningful

presence in slow-moving

studded jewellery

0

50

100

150

200

250

FY14

FY15

FY16

FY17

FY18

Titan

PC Jeweller

Thangamayil

TBZ

P N Gadgil & Sons

0

12

24

36

48

60

72

FY14

FY15

FY16

FY17

FY18

Titan

PC Jeweller

Thangamayil

TBZ

P N Gadgil & Sons

0

10

20

30

40

50

FY14

FY15

FY16

FY17

FY18

Titan

PC Jeweller

Thangamayil

TBZ

P N Gadgil & Sons

0

50

100

150

200

250

FY14

FY15

FY16

FY17

FY18

Titan

PC Jeweller

Thangamayil

TBZ

P N Gadgil & Sons

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 42

Where could the expansion come from?

 Our universe of 21,778 stores comprises jewellers

who have been granted a license from BIS (GoI’s sole

agency in India for Hallmarking and Assaying of Gold).

BIS ensures conformance to Gold quality/purity

standards by its listed jewellers.

 BIS-listed jewellers cover ~553 districts out of the

700+ districts in India. We have further cut the data

to districts in states where (1) Per Capita Income >=

National Per Capita Income, (2) Districts with a

minimum of 20 stores. Despite using the second cut

above and restricting our consideration set to 216

districts, the addressable opportunity for expansion

for the SUPERPACK still remains significantly large.

State-wise BIS listed jewellery stores in India

Source: BIS, HDFC sec Inst Research

South leads in chain stores, which account for ~1/4

th

of the universe

Source: BIS, HDFC sec Inst Research

No. of

standalone

stores

75%

Regional/

national

chain

stores

25%

-21,778 BIS-listed stores in

India; Chain stores comprise

only one-fourth in the

universe

-Maharashtra leads the pack

of BIS-listed stores. North

Zone (Mah, Guj, MP and

Goa) enjoy 31% store share

followed closely by the

South pack (TN, Karnataka,

AP, Kerala, Telangana) at

27% store share given the

higher level of awareness

towards quality/purity

amongst customers

Top 15 states contribute

~90% of the BIS listed stores

and contribute ~86% of

India’s GDP

15

719

435

580

61

355

6

10

632

73

2,024

568

179

254

118

864

2,057

429

3,871

5

2

1,132

85

445

809

1,726

439

53

670

131

3,031

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Andaman

Andhra Pradesh

Assam

Bihar

Chandigarh

Chhatisgarh

Dadra and Nagar …

Daman

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jharkhand

JK

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Meghalaya

Nagaland

Orissa

Pondichery

Punjab

Rajasthan

Tamil Nadu

Telangana

Tripura

Uttar Pradesh

Uttarakhand

West Bengal

Mahara

shtra

18%

West

Bengal

14%

Kerala

9%

Gujarat

9%

Tamil

Nadu

8%

Orissa

5%

Karnata

ka

4%

Rajasth

an

4%

AP

3%

UP

3%

Delhi

3%

Others

20%

West

31%

South

27%

East

25%

North

17%

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 43

State-wise BIS listed jewellery stores in India

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Tamil Nadu

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

South remains a closely-

fought; predominately plain

gold jewellery market. (est:

~Rs. 120-130bn). While top

jewellery chains in South only

have ~7% stores share; they

command nearly 40% revenue

market share.

TN remains the largest

market down South (est. at

~Rs. 620-630bn). Almost all

major jewellery chains have a

home in TN. Hence, extremely

competitive.

Realization gap between

standalone & chain jewellers

is low vs India avg.

Coimbatore, Cuddalore, Erode

Kanyakumari, Krishnagiri,

Madurai, Namakkal,

Ramanathapuram,

Thoothukudi, Tiruchirappalli,

Tiruvallur, Vellore are fertile

grounds for expansion as

store share of Top Jewellers

remains low

0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ariyalur

Chennai

Coimbatore

Cuddalore

Dharmapuri

Dindigul

Erode

Kanchipuram

Kanyakumari

Krishnagiri

Madurai

Nagapattinam

Namakkal

Pudukkottai

Ramanathapuram

Salem

Thanjavur

Thoothukudi

Tiruchirappalli

Tirunelveli

Tirupur

Tiruvallur

Tiruvannamalai

Vellore

Viluppuram

Virudhunagar

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

0

50

100

150

200

250

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Maharashtra

West Bengal

Kerala

Gujarat

Tamil Nadu

Orissa

Karnataka

Rajasthan

Andhra Pradesh

Uttar Pradesh

Delhi

Bihar

Haryana

Punjab

Telangana

No. of Standalone stores (%)

No. of National/Regional chain stores (%)

Per Capita State Income (Rs 000') - RHS

Per Capita National Income (Rs 000')

- RHS

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 44

Karnataka

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Telangana

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

SUPERPACK has <= 10% store

share in Dakshina Kannada,

Dharwad, Kolar, Mysore,

Tumkur, Udupi

Bangalore seems well-

populated with store chains.

In Telangana, Ranga Reddy is

one district to tap wherein the

SUPERPACK doesn’t have a

presence.

0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bangalore Urban

Belgaum

Dakshina Kannada

Dharwad

Kolar

Mysore

Tumkur

Udupi

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Hyderabad

Khammam

Ranga Reddy

Warangal

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 45

Delhi

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Haryana

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

North & West are key markets

in terms of size and

profitability as consumers are

more open for higher margin

studded jewellery.

Market is characterized with

more impulse purchases vs a

more planned jewellery/gold

accumulation approach down

South

Both regions combined are

fairly indexed (accounts for

48% of the store share and

~46% of domestic industry

revenue).

Most districts in Delhi are

districts wherein SUPERPACK

has a 3-8% store share.

Tanishq could strengthen its

presence especially in East &

North west Delhi

Haryana remains largely

untapped by the SUPERPACK

(~3% store share). Ambala,

Faridabad, Fatehabad, Hissar,

Rewari, Rohtak & Sirsa offer

high expansion potential

0

2

4

6

8

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Central Delhi

East Delhi

New Delhi

North West Delhi

South Delhi

South West Delhi

West Delhi

Standalone stores (%)

Chain stores (%)

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

0

2

4

6

8

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ambala

Faridabad

Fatehabad

Gurgaon

Hissar

Jind

Rewari

Rohtak

Sirsa

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 46

Rajasthan

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Punjab

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Ditto for Rajasthan. Ex-Ajmer

& Udaipur almost all districts

are fertile grounds for store

expansion for top jewellers.

This is one state where

profitability could be higher

as bejeweled jewellery is

extremely popular in

Rajasthan.

Tanishq, PCJ, Kalyan have

only 2/1/1 stores each in

Jaipur and 1 each in Jodhpur

of the ~270 BIS-listed

jewellers in the 2 districts.

Kalyan & Joyalukkas too have

narrowed down Rajasthan as

a key area for expansion

Ex-Amritsar all districts are

fertile grounds for store

expansion for the SUPERPACK

0

2

4

6

8

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ajmer

Alwar

Bikaner

Churu

ganganagar

Hanumangarh

Jaipur

Jodhpur

Pali

Sikar

Udaipur

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

0

2

4

6

8

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Amritsar

Bathinda

Hoshiarpur

Jalandhar

Ludhiana

Patiala

Sahibzada Ajit Singh

Nagar

Sangrur

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 47

Maharashtra

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Gujarat

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Maharashtra is relatively well

penetrated by the SUPERPACK.

However there are pockets

which still offer a potential to

expand.

Navi Mumbai, Pune &

Aurangabad districts are highly

penetrated by top jewellers

(57%, 39% & 17% store share

respectively).

However, there are nearby

catchments which may offer

significant potential to expand.

PN Gadgil is a classic case in

point. Being one of the larger

Maharashtra-based regional

players, it intends to add 15

stores in Shirdi, Phaltan,

Badlapur and Pune suburbs over

FY18-20.

Of the 19 districts Maharashtra

has (with > 20 stores/district), 16

districts have a miniscule store

presence of the SUPERPACK.

(ranging from 0%-7%)

Gujarat has 22 districts (with >20

stores). Ex-Rajkot, Surat and

Vadodara, SUPERPACK has an

extremely low store presence (0-

4% store share). These districts

are apt for further penetration

0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ahmednagar

Aurangabad

Jalgaon

Kolhapur

Mumbai

Mumbai City

Mumbai suburban

Nagpur

Nashik

NAVI MUMBAI

Osmanabad

Palghar

Pune

Raigad

Ratnagiri

Sangli

Satara

Solapur

Thane

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

0

2

4

6

8

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ahmedabad

Amreli

district

Anand

Banaskantha

Bharuch

Bhavnagar

Devbhoomi

Dwarka

Gir Somnath

Jamnagar

Junagadh

Kheda

Kutch

Mehsana

Morbi

Navsari

Porbandar

Rajkot

Sabarkantha

Surat

Surendranag …

Vadodara

Valsad

Standalone stores (%)

Chain stores (%)

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 48

West Bengal

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Orissa

Source: BIS, Department of Economics & Statistics, HDFC sec Inst Research

Along with the Southern

states & Maharashtra,

Gujarat accounts for a

sizeable chunk of NRIs who

purchase gold jewellery

during their stay in India. NRI

purchases are estimated at

10-20% of sales in Guj (WGC).

West Bengal remains a

predominantly 22k plain gold

jewellery market. Avg ticket

volumes/marriage for upper-

middle class is ~300g and is

higher vs India Avg.

Kolkata is a key market.

Tanishq and Senco are well

represented with 9 and 13

stores respectively. PCJ,

Joyalukkas, Kalyan, Malabar

Gold may want to rev up

expansion in Kolkata to catch-

up on presence.

Ex-Birbhum, the SUPERPACK

is highly under-represented in

West Bengal. SUPERPACK’s

share across districts is ~0-4%

Orissa remains highly-

underpenetrated by the

SUPERPACK. (Store share

ranging from 0-4% across all

16 districts with >/= 20 stores.

0

4

8

12

16

20

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bankura

Bardhaman

Birbhum

Cooch Behar

Darjeeling

Hooghly

HOWRAH

Jalpaiguri

Kolkata

Maldah

Murshidabad

Nadia

North 24 Parganas

Paschim Medinipur

Purba Medinipur

South 24 Parganas

Uttar Dinajpur

Standalone stores (%)

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

0

2

4

6

8

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Angul

Balasore

Bhadrak

Cuttack

Dhenkanal

Ganjam

Jagatsinghpur

Jajpur

Kendrapara

Kendujhar

(Keonjhar)

Khordha

Mayurbhanj

Nayagarh

Puri

Sambalpur

Sundargarh

Standalone stores (%)

Chain stores (%)

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

INITIATING COVERAGE

21 JUN 2018

Titan

NEUTRAL

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Best in class, but no See’s Candy

Over the past decade, industry bellwether Titan has

accumulated ~Rs 85.6bn in pre-tax earnings. However,

the company has had to inject ~Rs 60.4bn to its invested

capital (~10x FY08 exit level). Hence, while it is the best

franchise in trade with (1) A strong brand recall, (2)

Track record of consistent growth, (3) Best-in-class

management, it is clearly no See’s Candy as the industry

works on a ‘put-up-more-to-earn-more’ business model.

We expect Titan to scrape through its targeted 20%

jewellery revenue CAGR over FY18-23E, underpinned by

the sheer opportunity in the wedding and HVD space

However, Phase 2 (post FY21) will be closely fought as

able contenders catch up on capital and design.

Consequently, we expect RoCE (restated) to improve

(~190bps) and nearly peak out by FY21E at ~18%.

We initiate coverage on Titan with a Neutral

recommendation and a DCF-based TP of Rs 820/sh

implying a P/E of 42x FY20 earnings (~20% premium vs

avg 5-yr two-year forward P/E). The premium seems

justified given the growth visibility in Phase 1 (FY18-

21E). Note our FY19/FY20 earnings estimates are ~5/9%

lower than consensus.

Investment rationale

 Phase 1 – Advantage Titan; Phase 2 – Battle is on:

Titan’s decadal track record of compounding

revenue/earnings at a CAGR of 18/22% remains

unmatched. We have divided Titan’s next decade

into two phases – Phase 1 (FY18-21) & Phase 2 (FY21-

28E). Given the capital and design arbitrage Titan

enjoys vs peers, we expect Titan to milk the growth

opportunity through both 1. Expansion, 2. SSSG over

Phase 1. Expect Titan to nearly double its market

share from an estimated 4.2% to ~8.1% of the market

by FY23. Phase 2 is expected to be closely fought as

able peers catch up on both - capital and designs .

 Operating levers crucial to sustain return profile:

Titan’s aggression in the lower-margin wedding space

(~2% share/25% of jewellery sales) is expected to

keep gross margins in check (partly cushioned by

impetus on high-value diamond sales). Given that

both segments need a wider assortment of designs,

pulling operating levers becomes increasingly crucial

to off-set working capital deterioration, if any, led by

wedding and HVD inventory pile up in order to

sustain RoCEs. While we expect Titan to pull this off

in Phase 1 given the head-start vs peers (190bps RoCE

expansion factored over FY18-21E), treading the

margin-efficiency equation cautiously will only get

tougher post FY21E as peers catch up on their

shortcomings.

Financial Summary

YE Mar (Rs mn) FY18

FY19E

FY20E

FY21E

Net Sales 161,198

198,467

236,412

279,992

EBITDA 16,447

21,161

26,153

31,814

APAT

11,186

14,136

17,218

20,625

Dil. EPS (Rs/sh) 12.6

15.9

19.4

23.2

P/E (x) 71.2

56.3

46.3

38.6

ROE (%) 24.0

25.2

25.7

25.9

RoIC (%) 17.8

19.3

19.7

19.8

ROCE (%)

16.4

18.1

18.3

Source: Company, HDFC sec Inst Research

INDUSTRY JEWELLERY RETAIL

CMP (as on 20 Jun 2018) Rs 896

Target Price Rs 820

Nifty 10,772

Sensex 35,547

KEY STOCK DATA

Bloomberg

TTAN IN

No. of Shares (mn) 888

MCap (Rs bn) / ($ mn) 789/11,577

6m avg traded value (Rs mn) 2,268

STOCK PERFORMANCE (%)

52 Week high / low Rs 1,006/501

3M

6M

12M

Absolute (%) 1.9

2.9

68.7

Relative (%) (5.8)

(2.3)

55.1

SHAREHOLDING PATTERN (%)

Promoters 52.91

FIs & Local MFs 6.10

FPIs 20.72

Public & Others 20.27

Source : BSE

Jay Gandhi

jay.gandhi@hdfcsec.com

+91-22-6171-7320

Rohit Harlikar

r[email protected]

+91-22-6639-3036

TITAN : INITIATING COVERAGE

Page | 50

 Exchange programme could help: Over FY16-18,

Titan has increasingly leveraged its exchange

programme to source gold. (FY18: 40% of sales vs

FY16: 20%). This has helped Titan in 1. Improving its

working capital efficiency given the up-selling

opportunity (read SSSG) in such a transaction, 2. de-

risking its gold sourcing needs. It further intends to

increase exchange-based gold sourcing to ~50% of

sales byFY23. Thus, higher sourcing from exchange

programme coupled with improving franchisee

throughput is what we believe will be balancing

levers largely offsetting the wedding and HVD-led

inventory pile up. We expect RoCE’s to improve by

~190bps to 18.4% by FY20. (Note: Our definition for

computing RoCEs differs from the street).

 Category attraction issues persist in non-jewellery:

Non-jewellery continues to face category attraction

issues and is fraught with disruptive offers. This is

evident in the weak FY13-17 performance and

declining profitability. (FY18 marked a recovery).

While Titan has put its best foot forward to correct

these issues, we remain cautiously optmisitic on the

non-jewellery biz and build in a conservative 9%

revenue CAGR over FY18-21E.

 Tailwinds baked in; valuation keep us at bay -

NEUTRAL: Our 20-year DCF bakes in all tailwinds in

Phase 1 on the back of which Titan is expected to

scrape through its 20% revenue CAGR aspiration over

FY18-23 in jewellery. Where we differ is Phase 2,

wherein we expect major jewellers to catch up on–

capital, expansion and designs. (~14% jewellery sales

CAGR expected for Titan). CMP suggests that Titan

continues its scorching growth rate in jewellery over

Phase 2 (FY21-29E) too; which in our view, even for a

brand like Titan is a stretch. Our DCF-based TP of Rs

820/sh; implies a P/E of 42x FY20 earnings (a 20%

premium to Titan’s 5-yr avg. two year forward P/E of

35x). The want from ‘growth’ is massive to justify

current valuations, given Titan’s RoIC of ~18%. (Gold

on lease and gold scheme sales treated as debt).

Note: Our FY19/FY20 earnings estimates are 5/9%

below consensus.

Titan: Our Estimate vs Consensus

(Rs mn)

HDFC Sec Consensus Variance (%)

FY19E FY20E FY21E

FY19E

FY20E FY21E

FY19E

FY20E FY21E

Revenue 198,467 236,412 279,992

193,022

232,869 277,728

2.8

1.5 0.8

EBITDA 21,161 26,153 31,814

20,840

26,117 32,384

1.5

0.1 (1.8)

EBIT 19,418 23,930 29,056

20,411

26,269 -

(4.9)

(8.9) -

APAT 14,136 17,218 20,625

14,697

18,699 20,626

(3.8)

(7.9) (0.0)

Adj. EPS (Rs) 15.9 19.4 23.2

16.7

21.2 23.2

(4.8)

(8.6) 0.1

Source: Company, Bloomberg, HDFC sec Inst Research

TITAN: INITIATING COVERAGE

Page | 51

Phase 1 – Advantage Titan; Phase 2 will be closely fought:

 Titan is expected to nearly double market share by

FY23E to ~8.1% underpinned by a confluence of

factors: 1. Share gain in Wedding & HVD segment,

2. Head-start in expansion given capital and design

shortcomings of peers, 3. Boost to SSSG from

exchange and gold scheme programmes.

 Phase 2 (FY21-29E) will be closely fought as peers

catch up on capital and design.

 Expect Titan to deliver on the wedding front: Titan

seems to be piecing the wedding puzzle well so far.

This segment is estimated to have grown by ~35-40%

over the last couple of years for Titan, albeit on a

small base. We suspect this may have been possible

given 1. It now caters to 18 linguistic communities in

India, the highest amongst jewellers 2. Has a separate

section for wedding collections in key stores, 3. Our

store visits also suggested a wider spread of designs

vs peers. 4. Recent revision in the exchange program

is also expected to perk up wedding output.

Titan to nearly double it’s share by FY23E

Source: HDFC sec Inst Research

 Store size - Only stumbling block: The only stumbling

block in our view is Titan’s smaller avg store size

(~4000 sq. ft vs 6000-8000sq ft for a typical wedding

jeweller). This may limit Titan’s ability of showcasing

a wider spread of designs at one go. This is important

because for wedding purchases, consumers typically

prefer to shop at a store with a wider assortment of

jewellery pieces.

FY18 Key wedding jewellers’ avg store size

Source: HDFC sec Inst Research (estimates for unlisted players)

 Expect doubling of wedding market share by FY21E:

Notwithstanding the store size issue, increasing

awareness amongst consumers about under-caratage

by unorganized jewellers and the sheer headroom to

grow in the wedding market (SUPERPACK is

estimated to account for only 26% of the wedding

market) should help Titan see through its wedding

target of 50% of gold revenue by FY23 (vs currently:

35%). We expect Titan’s wedding segment to grow at

~30% CAGR, implying nearly doubling its share in the

wedding market to ~4% over FY18-21E.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

GRT

Kalyan

Malabar Gold

PC Jeweller

Tanishq

PN Gadgil & Sons

Joyalukkas

TBZ

Thangamayil

4.2

8.1

12.5

2.2

2.0

1.2

0.8

0.4

0.1

1.0

FY18E Tanishq's …

Unorganized

…

Malabar Gold

GRT

PCJ (Dom Biz)

Joyalukkas

Kalyan

Thangamayil

Jos Alukkas

PN Gadgil

TBZ

Other organized …

FY23E Tanishq's …

TITAN: INITIATING COVERAGE

Page | 52

FY18 Estimated SUPERPACK’s wedding share (%)

Source: HDFC sec Inst Research

 Premium vs peers could reduce as wedding thrust

increases: Given that the wedding segment is

extremely competitive and fraught with consumer

discounts, we expect Titan’s pricing premium to

reduce over peers with time. (Link to table 1) ; (Link

to table 2)

Tanishq’s Padmavat collection:

Source: Company, HDFC sec Inst Research

 Studded ratio to marginally inch up: We remain

upbeat on the growth in studded jewellery (expect

23% CAGR over FY18-21) and expect growth to be

largely realization-led given Titan’s focus on

increasing its high-value diamond share in the

portfolio.

FY18 Gross margins and studded ratio to remain

stable

Source: Company, HDFC sec Inst Research

Tanishq

2.0

PC Jeweller

3.6

TBZ

0.7

Thangamayil

0.3

GRT

3.3

Joyalukkas

1.9

Kalyan

2.8

Malabar

3.3

PN Gadgil &

Sons

0.5

Others

7.8

27

28

29

30

31

32

33

25.0

25.5

26.0

26.5

27.0

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Consolidated gross margin (%)

Studded ratio (%) - RHS

TITAN: INITIATING COVERAGE

Page | 53

 Peers to play catch-up in Phase 1; Phase 2 will be

well contested: Current unencumbered cash levels

and leverage on books warrant a capital infusion for

some of the unlisted big-box jewellers if they have to

make any meaningful market share gains in the north

and west. Also given the predominant south presence

of some of these jewellers (South market accounts

for ~75% of their top-line), peers will have to catch-

up on the design curve vs Titan. This gives Titan an

easy 1-2 year headstart on its expansion drive as

peers catch up on both – Capital (to expand) and

designs. That being said, Phase 2 is expected to be

evenly contested as the above arbitrages dwindle

over time.

Note: There are some extremely efficiently managed

unlisted companies such as GRT which have decided

to restrict their ambitions to the South market for the

next couple of years as they see opportunity even

down south. Amongst other South jewellers, Kalyan

and Joyalukkas intend to add ~15-20 stores each this

year through the owned store model whilst Malabar

Gold intends to add ~25-30 stores in FY19 largely

through the franchisee route. PC Jeweller has guided

for ~25-30 stores (90% via franchisees in FY19).

Player-wise leverage position

Source: Company, RoC, DRHP, HDFC sec Inst Research

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Titan

PCJ

Thangamayil

South-based A

South-based B

South-based C

South-based D

TBZ

PN Gadgil

Net Debt/Equity

Net Debt/EBITDA

TITAN: INITIATING COVERAGE

Page | 54

Exercising operating levers crucial to sustain return profile

 HVD could partly cushion the impact on gross

margins caused by the aggression in the wedding

segment. Both categories require a sizeable

assortment for the consumer to choose from;

therein lies the risk of deterioration in working

capital efficiency

 Increased throughput through franchisees (currently

L3 accounts for ~33% of jewellery revenue) and the

revised exchange programme (given SSSG upside)

could help partly cushion the deterioration in

working capital efficiency.

 We factor in a marginal deterioration of the cash

conversion cycle as a consequence from 107 days in

FY18 to 116 days in FY21. This makes sales velocity

and the consequent operating levers crucial for

sustenance of return profile.

 HVD could play the role of a balancing lever for

margins: Over FY16-18, Titan’s jewellery EBIT margins

improved ~190bps despite the thrust on the

perceived lower-margin wedding segment (estimated

to have grown at 35-40% over FY16-18E). While we

suspect the improvement in studded ratio (170bps)

to ~30% over FY16-18 may have had a role to play in

stabilizing gross margins, wedding segment too is

suspected to have delivered reasonable margins.

However, as Titan penetrates further into the

heartland of India, we do not expect the wedding

segment to enjoy the same margins as before.

Increased thrust on high-value diamond sales could

partly cushion the impact on gross margins. (Our

industry checks suggest that typically high-value

diamond jewellery enjoy higher margins).

 Revised exchange programme to help stock SSSG:

The SUPERPACK typically has ~50-70% repeat

customers who are ideal candidates for an up-sell.

We believe the exchange program could help stoke

SSSG and consequently EBIT margins given the up-

selling opportunity it presents. A consumer typically

spends ~1.4-1.7x the value of the jewellery

exchanged. This consumer purchasing behavior can

be seen for Titan too. Over FY16-18, jewellery

revenue grew at a CAGR of 23% and store additions

clocked ~11% CAGR, implying the SSSG growth was a

major contributor to jewellery growth. We reckon the

underpinnings of this SSSG growth lies in the tactical

shift Titan made in its gold sourcing route. It

increased its sourcing from the exchange programme

to 40% of jewellery sales (vs 20% in FY16). Given that

Titan further intends to leverage the exchange

programme (Sourcing via exchange expected to touch

~50% of sales by FY23E), it is plausible that the

company achieves its target of ~12-13% SSSG CAGR

over the next 5 years.

 Jewellery EBIT margins to inch up: We expect Titan

to use its operating levers to ensure that it delivers

on the EBIT margin front. Jewellery EBIT margins

expected to improve by 100bps to ~12% over FY18-

21E as the exchange program-led SSSG growth

cushions the impact the program has at the gross

margin level.

Titan revised its gold

exchange policy in March

2018. Made it more

lucrative for consumers by

reducing the commission it

charges on exchange of

gold.

Titan now incurs a marginal

cost in the exchange

transaction vs making a

margin on it earlier. Hence,

could be gross margin

dilutive; however increases

avg. ticket sizes.

Loss in gross margin could

be made up for at the EBIT

level as the programme

stokes SSSG.

TITAN: INITIATING COVERAGE

Page | 55

Jewellery top-line to grow at 22% CAGR (FY18-21E)

Jewellery EBIT margins to inch up

Source: Company, HDFC sec Inst Research

Tanishq’s SSS Retail growth trend

Source: Company, HDFC sec Inst Research

70

31

26

25

3

12

10

8

29

-7

-15

6

-13

68

-8

-25

-12

-40

30

-5

3

4

15

52

51

18

12

17

-60

-40

-20

0

20

40

60

80

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

Tanishq's SSS Retail Growth (%)

10.1

9.8

9.9

9.2

9.4

11.0

11.4

11.7

12.0

8.0

9.0

10.0

11.0

12.0

5,000

10,000

15,000

20,000

25,000

30,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Jewellery EBIT (Rs mn)

Jewellery EBIT margin (%) -

RHS

7.4

9.2

(7.4)

21.5

25.1

24.5

21.2

20.2

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

50,000

100,000

150,000

200,000

250,000

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Jewellery revenue (Rs mn)

YoY (%) - RHS

TITAN: INITIATING COVERAGE

Page | 56

 Expect a marginal deterioration in cash conversion

cycle: We reckon the cash conversion cycle typically

improves as 1. sourcing from the exchange

programme increases as can be seen over FY16-18. 2.

L3 throughput increases as a % of total revenue over

FY18-21E. However, given the thrust on wedding and

HVD sales, we expect a marginal deterioration in the

cash conversion cycle from ~107 days to ~116 days

over FY18-21E on a net basis. (Note: we exclude gold

loan and Golden Harvest Scheme (GHS) advances

from our computation of the cash conversion cycle as

we classify them as debt).

Cash conversion cycle to inch up as wedding and HVD’s share increases

Source: Company, HDFC sec Inst Research

 Ergo, sales velocity and operating levers become

crucial to sustain return profile: Given that working

capital intensity is expected to inch up from current

levels and gross margin levers to remain capped,

sales velocity and subsequent operating levers

become crucial if Titan intends to sustain its return

profile. We believe Titan will manage to improve its

RoCE by ~190bps in Phase 1 (FY18-21E) to 18.3%

courtesy its 1-2 year head-start on capital and designs

vs peers. However the increase in competitive

intensity in Phase 2 (FY21-29E). will keep RoCEs

stagnant.

115

107

111

115

116

105

108

111

114

117

120

-

20

40

60

80

100

120

140

FY17

FY18

FY19E

FY20E

FY21E

Inventory

Receivables

Payables

Loans & Advances

Other current assets

Other current liabilities

Cash conversion cycle (days) - RHS

Days

TITAN: INITIATING COVERAGE

Page | 57

Sales velocity/op. leverage key to sustain RoIC

Titan: Return profile

Source: Company, HDFC sec Inst Research

Expect GHS’ contribution to inch up

FY18: Estimated Gold sourcing

Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research, RoC – FY17 financials

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

RoE (%)

RoCE (%)

RoIC (%)

Titan’s GHS has been a hero

product and has helped the

company in customer

acquisition. This too is

expected to contribute more

14.0

17.0

17.9

18.8

10

12

14

16

18

20

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

FY17

FY18

FY19E

FY20E

FY21E

GHS sales (Rs mn)

as % of jewellery sales

Gold on

lease

41

Old gold

exchange

40

Spot

purchase

19

17.8

19.8

-

5.9

1.2

5.1

FY18 RoIC

Revenue

growth

EBIT margin

Invested

Capital

FY21E RoIC

TITAN: INITIATING COVERAGE

Page | 58

 Elevated gold prices could stoke up franchisee

throughput and roll-outs: Given the deteriorating

macros, we believe we have entered a stable-to-

rising gold price environment, making it conducive for

stoking up inventory purchases/throughput of Titan’s

L3 (FOFO) channel (~est: 33% of jewellery revenues).

Franchisee roll-outs could increase too. This is

evident in Titan’s guidance of ~40-45 store additions

(85-90% through franchisees) in FY19.

Gold prices near its peak

Channel-wise revenue mix (%)

Source: Company, HDFC sec Inst Research

L1 + L2

67

L3

33

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar

-15

Mar-16

Mar-17

Mar-18

Gold price (Rs/10 gm)

Avg price

+1 Std dev

-1 Std dev

TITAN: INITIATING COVERAGE

Page | 59

Watches: A play on smart tech, design and channels

 Category attraction issues persist in watches

 FY18 marked a recovery; execution on smart tech,

design and channels – key for a turnaround

 Expect watches segment to clock ~7% CAGR over

FY18-21E with improving margins

 Category attraction issues persist in watches: India’s

Rs 85bn watches market continues facing category

attraction issues as the ubiquitous smartphone

decreases the need for a separate timepiece. The

market is fraught with discounts and while Titan

continues to be a market leader - enjoys ~25% share

in the overall watch market/~65% in the organized

market (sold ~15m pieces in FY18), it is increasingly

competing with global players (mobile companies)

with deep pockets and new entrants in smart

watches, wearables and other non-watch categories.

Titan’s ability to introduce smart watches ahead of

mobile companies which straddle across price points

will be key for it to sustain interest in this category.

Watches: Revenue, YoY

Watches: EBIT, EBIT margin (%)

Source: Company, HDFC sec Inst Research

 FY18 marked a recovery: The watches segment has

grown at a weak 5% CAGR over FY13-18, while

margins nearly halved over FY13-17 given the

competitive landscape and investments in new

brands such as Favre Leuba. However, the company

did see a pick-up in profitability in FY18 underpinned

by 1. A pick up in mature brands such as fastrack, 2.

Good traction in new product launches (Ceramic

Edge, Titan We, Raga Masaba). 3. Growth in Rs

4,000+ price-point products was higher than overall

growth, implying the premiumization theme played

out, 4. Successful execution of its cost-cutting

initiatives (curbing discounts in trade channels, re-

organization of the service vertical, consolidation of

large format stores, VRS scheme to reduce employee

costs, higher local procurement and renegotiation of

media contracts).

2

3

4

5

6

7

8

9

16,000

18,000

20,000

22,000

24,000

26,000

28,000

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs mn)

YoY growth (%) - RHS

4

6

8

10

12

14

800

1,200

1,600

2,000

2,400

2,800

3,200

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBIT (Rs mn)

Margin (%) - RHS

TITAN: INITIATING COVERAGE

Page | 60

 Execution on smart tech, design and channels – key

for a turnaround: We believe Titan could see a

revival in its watches biz as 1. Pipeline of product

launches remains healthy. 2. Titan intends to deliver

smart watches straddled across price points and

across brands, 3. Focus remains on revving up both

volumes (through Sonata and Fastrack) and

premiumization (Xylys and Raga), 4. Healthy store

additions planned (~40 stores) in FY19, 5. Focus is to

push more through effective channels such as E-

Commerce and Multi-Brand Outlets, thereby aiding

sales as well margins. We expect Titan’s watches

segment to grow at a CAGR of ~7.4% over FY18-21E

with a 200bps improvement in margins.

Watches: Estimated realization per piece

Watches: Estimated. EBIT per piece

Source: Company, HDFC sec Inst Research

(5)

(3)

(1)

1

3

5

7

9

1,100

1,200

1,300

1,400

1,500

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Realization per piece (Rs)

YoY growth (%) - RHS

(40)

(20)

0

20

40

60

80

100

60

80

100

120

140

160

180

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBIT per piece (Rs)

YoY growth (%) - RHS

TITAN: INITIATING COVERAGE

Page | 61

Eyewear: Investment mode on

 The Rs 70bn prescription eyewear category is a

category entered out of force. Industry remains

highly competitive and fraught with disruptive

offers by competitors.

 Titan’s eyewear biz can be divided into 2 segments

1. Prescription eyewear 2. Sunglasses. Profitability in

the former remains challenged given the disruptive

offers by strong competitors whilst the latter (a

dealer-led biz) continues to struggle as restocking

levels remain low given most dealers still remain

skeptical of registering under the new GST regime.

 Expect the eyewear biz to grow at 9% CAGR over

FY18-21.

 What has been the hurdle? A typical prescription

eyewear biz is a high-fixed cost biz and hence

requires scale to be in the money. Titan’s eyewear biz

can be divided into two segments 1. Prescription

eyewear, 2. Sunglasses. Profitability in the former

remains challenged given the disruptive offers by

strong competitors like Lenskart. Also, Titan’s

premium brand perception has not helped either and

hence sales velocity remains subdued. The Sunglasses

biz continues to struggle since it is predominantly

dealer-led and most dealers still remain skeptical of

registering under the new GST regime, consequently,

restocking levels remain low. Whilst eyewear revenue

grew at a CAGR of ~8% over FY15-18 to Rs 4.15bn,

profitability has been on the decline.

 What’s Titan doing to fix it? 1. To correct the

premium brand perception, Titan plans to launch

products at lower price points, especially in the sub-

Rs 500 and sub-Rs 1000 price range. This would be

supported by a ramp-up in marketing spends with a

clear intention to improve brand salience and acquire

new customers, 2. Customer service would be used

as a key differentiator vs. competition. 3. To expand

reach, Titan intends to ramp up store expansion and

open 40 new stores in FY19 (vs. 22 stores opened in

FY18. Further, it would commence sale of branded

frames through its distribution channels and is

looking to aggregate smaller unorganized stores

under the Titan Eyeplus brand. All these initiatives

are expected to aid SSSG growth and quadruple its

customer base to 10mn (vs ~2.4mn currently).

 Expect eyewear biz to clock ~9% CAGR over FY18-

21E: Given the above initiatives, we expect the

eyewear biz to recover and grow at ~9% CAGR over

FY18-21E, however improvement in profitability is

only expected to be gradual given the marketing

investments needed to spur growth. Expect eyewear

EBIT margins to improve by ~80bps over FY18-21E to

~1.3%.

TITAN: INITIATING COVERAGE

Page | 62

Eyewear: Revenue, YoY growth

Eyewear: EBIT, EBIT margin

Source: Company, HDFC sec Inst Research

Eyewear: Estimated Realization per piece

Eyewear: Estimated EBIT per piece

Source: Company, HDFC sec Inst Research

0

2

4

6

8

10

12

14

3,000

3,500

4,000

4,500

5,000

5,500

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs mn)

YoY growth (%)

- RHS

0

1

2

3

4

5

6

7

8

0

50

100

150

200

250

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBIT (Rs mn)

EBIT margin (%)

- RHS

(1)

0

1

2

3

4

5

6

600

620

640

660

680

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Realization per piece (Rs)

YoY growth (%) - RHS

(100)

(50)

0

50

100

150

-

10

20

30

40

50

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBIT per piece (Rs)

YoY growth (%) - RHS

TITAN: INITIATING COVERAGE

Page | 63

Tailwinds baked in

Valuations keep us at bay

 Expect Titan to deliver on its 2.5x FY18 jewellery

revenue aspiration: Over FY15-18, Titan jewellery biz

grew by ~12% CAGR while its non-jewellery biz grew

at ~6% CAGR. The modest performance in jewellery

was despite an unfavorable regulatory stance

towards organized jewellery. However, the current

regulatory wind underneath the organized jewellers’

wings is expected to aid top jewellers to gain market

share. In case of Titan, given its capital and design

arbitrage vs peers, we expect the company to gain

more than it’s fair share from the market, atleast in

Phase 1 (FY18-21E). Given these underpinnings, we

expect Titan to deliver on its ambitious 2.5x FY18

jewellery revenue target by FY23E. Overall, we expect

Titan to deliver 20% revenue CAGR with jewellery

sales growing at 22% CAGR and Non-jewellery

revenue growing at 9% CAGR over FY18-21E.

 EBITDA margins to inch up by 120bps as operating

leverage kicks in: Strong sales velocity, a stable gross

margins profile and operating levers are expected to

improve EBITDA margins. We factor in a ~120bps

margin improvement over FY18-21E.

Revenue to grow at 20% CAGR over FY18-21E

EBITDA to grow at 25% CAGR, margins

Source: Company, HDFC sec Inst Research

-10

-5

0

5

10

15

20

25

50

100

150

200

250

300

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs bn)

YoY Growth (%) - RHS

8

9

10

11

12

5

10

15

20

25

30

35

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBITDA (Rs bn)

EBITDA margin (%) - RHS

TITAN: INITIATING COVERAGE

Page | 64

Jewellery to contribute bulk of revenue

…Ditto for EBIT

Source: Company, HDFC sec Inst Research

 Expect 23% earnings CAGR over FY18-21E: A 20%

revenue growth with a 100bps EBIT margin expansion

is expected to rev up earnings at 23% CAGR over

FY18-21E.

APAT to grow at 23% CAGR over FY18-21E

Source: Company, HDFC sec Inst Research

15.1

29.7

-

14.2

1.0

0.0

0.4

FY18 EBIT

Jewellery

Watches

Others

Unallocable

FY21E EBIT

Rs bn

101

109

119

113

130

161

198

236

280

1.3

11.1

(17.4)

18.6

39.8

26.4

21.8

19.8

7.2

6.7

6.9

6.0

6.2

6.9

7.1

7.3

7.4

-20

-

10

0

10

20

30

40

50

100

150

200

250

300

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs bn)

YoY (%) - RHS

APAT margin (%) - RHS

162.4

280.0

-

107.7

5.1

1.3

3.5

FY18 Revenue

Jewellery

Watches

Others

Unallocable

FY21E Revenue

Rs bn

TITAN: INITIATING COVERAGE

Page | 65

85%+ of cash generated has gone towards WC and capex over FY15-18

FY15

FY16

FY17

FY18

Total

[A] Sources of funds (Rs bn)

Cash from Operations (excl WC change)

9.2

7.4

8.0

12.0

36.6

Other Income

0.8

0.6

0.4

0.1

1.8

Total

9.9

8.0

8.4

12.1

38.4

[B] Application of funds (Rs bn)

Working Capital

2.8

10.0

(2.2)

8.8

19.3

Capex

2.1

2.5

6.3

2.9

13.9

Investments

(0.1)

(0.4)

4.3

(3.9)

(0.1)

Dividend

2.2

4.8

0.0

2.8

9.7

Borrowings

10.6

(9.1)

(5.0)

3.2

(0.2)

Others

(1.4)

0.9

(0.6)

(0.1)

(1.2)

Net change in cash

(6.2)

(0.9)

5.6

(1.6)

(3.1)

Total

9.9

8.0

8.4

12.1

38.4

Cumm. WC + Capex (As % of cumm. cash generated)

86.4

Source: Company, HDFC sec Inst Research

FCFE yield near its lowest in a decade

Source: Company, HDFC sec Inst Research

(5)

5

15

25

35

45

-

200

400

600

800

1,000

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Mkt Cap (Rs bn) - LHS

FCFE yield (%)

ROE (%)

TITAN: INITIATING COVERAGE

Page | 66

Valuation

1 year forward P/E band

2 year forward P/E band

Source: Bloomberg, HDFC sec Inst Research

 Our DCF bakes in all plausible tailwinds; NEUTRAL:

Our 4-stage DCF-based TP of Rs 820/sh factors in all

plausible revenue and margin tailwinds as mentioned

in our arguments. TP implies a P/E of 42x FY20E

earnings (20% premium vs 5-year, 2-year forward

P/E). Valuations keep us at bay. Recommend a

neutral stance on the name. Underlying DCF

assumptions - WACC of 10.3% - factors in 1. Cost of

equity of 13.5% [Long-term index expected returns x

(1-LTCG)], 2. Post-tax cost of debt of 3.4% (Note. We

include GML and advances from customers as part of

debt and hence, the effective rate is low).

 Stage 1: FY18-23E: We build in 20% jewellery revenue

CAGR as 1. Capital position of key peers and wider

design portfolio may give Titan a headstart in

network expansion and SSSG. Non-jewellery expected

to grow at 9% CAGR during this period. FCFE is

expected to grow ~27% CAGR over FY19-23E and

RoCE is expected to improve by ~220bps over this

period.

 Stage 2: FY23-29E: We build in 12.6% jewellery

revenue CAGR as top challengers catch-up on capital,

hence expansion and designs. Non-jewellery

expected grow at 9% CAGR during this period. FCFE is

expected to grow at ~22% CAGR over FY23-29E and

RoCE is expected to remain flat over this period.

 Stage 3: FY29-40E: FCFE expected to grow at 10%

CAGR.

 Stage 4 (Terminal stage): Assumed a terminal growth

rate of 5%.

150

300

450

600

750

900

1,050

15

20

25

30

35

40

45

50

55

60

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

P/E

5 Yr Avg. P/E

3 yr. Avg P/E

CMP (RHS)

100

250

400

550

700

850

1,000

20

25

30

35

40

45

50

55

60

65

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

P/E

5 Yr Avg. P/E

3 yr. Avg P/E

CMP (RHS)

TITAN: INITIATING COVERAGE

Page | 67

DCF

(Rs mn)

FY20E

FY21E

FY22E

FY23E

FY24E

FY25E

FY26E

FY27E

FY28E

FY29E

Revenue (Rs mn)

236,412

279,992

325,313

375,269

430,177

485,424

547,900

613,251

680,874

749,772

YoY

19.1

18.4

16.2

15.4

14.6

12.8

12.9

11.9

11.0

10.1

No. of stores (#)

408

443

473

503

523

543

563

583

603

623

YoY

9.4

8.6

6.8

6.3

4.0

3.8

3.7

3.6

3.4

3.3

EBIT*(1-t)

16,990

20,339

24,342

28,655

33,648

39,078

45,034

51,860

58,290

65,455

Depreciation

2,223

2,758

3,311

3,877

4,465

5,083

5,724

6,381

7,045

7,741

Capex

(4,566)

(5,164)

(5,448)

(5,605)

(6,041)

(6,409)

(6,717)

(6,967)

(7,118)

(7,869)

Changes in WC (Winv)

(13,389)

(14,915)

(16,391)

(16,982)

(18,275)

(17,870)

(20,411)

(21,163)

(22,831)

(22,406)

FCFF

1,258

3,018

5,814

9,946

13,797

19,881

23,630

30,111

35,385

42,922

YoY (%)

(49.4)

139.9

92.6

71.1

38.7

44.1

18.9

27.4

17.5

21.3

Interest (1-t)

(396)

(409)

(426)

(459)

(518)

(592)

(671)

(756)

(845)

(936)

Net Borrowings

5,536

6,440

6,894

7,921

11,162

10,311

11,858

12,915

14,163

14,871

FCFE

6,398

9,048

12,283

17,407

24,441

29,600

34,817

42,270

48,703

56,857

YoY (%)

(2.9)

41.4

35.7

41.7

40.4

21.1

17.6

21.4

15.2

16.7

Period No.

-

1

2

3

4

5

6

7

8

9

PV (FCFF)

1,258

2,735

4,776

7,404

9,308

12,156

13,094

15,122

16,106

17,705

Terminal Value

3,002,250

Kd

5.2%

Kd*(1-t)

3.4%

Ke

13.5%

Net Debt (Mar-19E)

22,345

PV-Explicit Period

330,460

PV-Terminal Value

419,593

Equity Value (Rs mn)

727,708

Equity value per share

(INR)

820

FY20 Implied P/E (x)

42

Terminal growth rate (%)

5.0%

WACC

10.3%

Terminal FCF multiple (x)

19.7

No. of shares (mn)

888

CMP

897

Upside/(Downside)

-8.6%

Source: Company, HDFC sec Inst Research

TITAN: INITIATING COVERAGE

Page | 68

 Current price implies: CMP suggests that Titan

continues its scorching growth rate in jewellery over

Phase 2 (FY21-29E) too, which in our view, even for a

brand like Titan is a stretch.

Reverse DCF (Rs mn)

FY20E

FY21E

FY22E

FY23E

FY24E

FY25E

FY26E

FY27E

FY28E

FY29E

Revenue (Rs mn)

236,412

284,171

340,388

408,235

486,821

581,011

694,064

829,513

992,180

1,148,501

YoY

19.1

20.2

19.8

19.9

19.3

19.5

19.6

15.8

No. of stores (#)

408

443

473

503

523

543

563

583

603

623

YoY

9.4

8.6

6.8

6.3

4.0

3.8

3.7

3.6

3.4

3.3

EBIT*(1-t)

16,990

20,670

25,567

31,374

38,405

47,315

57,851

71,308

86,579

102,275

Depreciation

2,223

2,760

3,325

3,921

4,565

5,274

6,052

6,900

7,821

8,856

Capex

(4,566)

(5,206)

(5,621)

(5,989)

(6,713)

(7,475)

(8,288)

(9,141)

(10,019)

(11,774)

Changes in WC (Winv)

(13,389)

(16,220)

(19,900)

(22,786)

(25,979)

(30,467)

(36,825)

(43,863)

(54,037)

(50,836)

FCFF

1,258

2,004

3,371

6,520

10,278

14,647

18,789

25,204

30,344

48,521

YoY (%)

(49.4)

59.3

68.2

93.4

57.6

42.5

28.3

34.1

20.4

59.9

Interest (1-t)

(396)

(413)

(441)

(495)

(583)

(703)

(848)

(1,022)

(1,231)

(1,456)

Net Borrowings

5,536

6,897

8,106

9,976

14,220

15,405

18,997

23,245

28,844

31,192

FCFE

6,398

8,488

11,036

16,001

23,915

29,349

36,939

47,428

57,957

78,257

YoY (%)

(2.9)

32.7

30.0

45.0

49.5

22.7

25.9

28.4

22.2

35.0

Period No.

-

1

2

3

4

5

6

7

8

9

PV (FCFF)

1,258

1,816

2,769

4,854

6,934

8,956

10,412

12,658

13,811

20,015

Terminal Value

3,393,939

Kd

5.2%

Kd*(1-t)

3.4%

Ke

13.5%

Net Debt (Mar-20E)

22,345

PV-Explicit Period

344,553

PV-Terminal Value

474,335

Equity Value (Rs mn)

796,543

Equity value per share

(INR)

897

FY20 Implied P/E (x)

46

Terminal growth rate (%)

5.0%

WACC

10.3%

Terminal FCF multiple (x)

19.7

No. of shares (mn)

888

CMP

897

Upside/(Downside)

0.0%

Source: Company, HDFC sec Inst Research

TITAN: INITIATING COVERAGE

Page | 69

Titan: Key Assumptions

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

Jewellery Biz

Net Revenue (Rs mn)

69,898

80,324

86,274

94,206

87,227

105,964

132,569

164,991

199,959

YoY (%)

39.5

14.9

7.4

9.2

(7.4)

21.5

25.1

24.5

21.2

-Gold Jewellery

51,725

58,636

60,392

64060

62,803

74,599

93,175

115,468

139,341

YoY (%)

37.6

13.4

3.0

6.1

-2.0

18.8

24.9

23.9

20.7

-Studded Jewellery

18,174

21,687

25,882

30,146

24,423

31,365

39,393

49,523

60,618

YoY (%)

45.0

19.3

16.5

-19.0

28.4

25.6

25.7

22.4

EBITDA (Rs mn)

6,393

8,360

8,728

9,694

8,388

10,311

15,009

19,175

23,839

YoY (%)

41.9

30.8

4.4

11.1

-13.5

22.9

45.6

27.8

24.3

EBITDA margin (%)

9

10.4

10.1

10.3

9.6

9.7

11.3

11.6

11.9

Total gold sold (tonnes)

19.3

19.4

18.6

20.1

20.0

21.0

25.9

31.4

36.8

YoY (%)

7.6

0.6

-4.3

8.3

-0.6

5.1

23.1

21.4

17.2

Average gold price (Rs/gm)

25,685

30,180

28,279

27,685

27,311

30,862

30,708

31,629

32,578

YoY (%)

33.6

17.5

-6.3

-2.1

-1.4

13.0

-0.5

3.0

Studded share (%)

26.0

27.0

30.0

32.0

28.0

29.6

29.7

30.0

30.3

Total no. of stores

163

179

198

209

227

286

330

373

408

Revenue/store (Rs mn)

441

470

458

463

400

413

430

469

512

EBITDA/store (Rs mn)

40

49

46

48

38

40

49

55

61

Revenue per sq ft (Rs)

-

150,281

129,858

122,900

101,671

113,432

128,137

139,809

152,253

Watches Biz

Net revenues (Rs mn)

15,284

16,774

17,889

19,188

19,744

20,611

21,315

23,046

24,673

YoY (%)

20.1

9.8

6.6

7.3

2.9

4.4

3.4

8.1

7.1

EBITDA (Rs mn)

2,266

2,151

2,075

2,293

1,953

1,464

2,459

2,996

3,282

YoY (%)

11.9

-5.1

-3.5

10.5

-14.8

-25.1

68.0

21.9

9.5

EBITDA margin (%)

14.8

12.8

11.6

12.0

9.9

7.1

11.5

13.0

13.3

Watches sold (mn pieces)

15.7

15.4

14.4

14.7

13.9

14.1

15.2

16.1

17.1

YoY (%)

15.4

-2.2

-6.0

2.0

-5.8

1.5

8.0

6.0

Eyewear Biz

Net revenues (Rs mn)

3,320

3,745

4,140

4,150

4,527

4,938

YoY (%)

12.8

10.5

0.2

9.1

EBITDA (Rs mn)

320

296

238

134

136

173

YoY (%)

-7.6

-19.5

-43.5

1.1

27.3

EBITDA margin (%)

9.6

7.9

5.7

3.2

3.0

3.5

Eyewear sold (mn)

5.4

5.9

6.2

6.3

6.8

7.4

YoY (%)

10.0

5.0

1.0

8.0

Other Biz

Net revenues (Rs mn)

3,303

4,135

5,111

2,421

3,124

3,811

4,415

5,209

6,147

Source: Company, HDFC sec Inst Research

TITAN: INITIATING COVERAGE

Page | 70

Key Risks

Name

Description

Volatility in gold, silver and diamond prices

Any material fluctuations in gold, silver and diamond prices might affect the profitability of

the company.

Delay in store rollout plans

Any delay in setting up new stores will make it difficult for the company to meet our

revenue and earnings estimates.

Inventory risk

Any material misjudgment in estimating customer demand could adversely impact the

results by causing either a shortage of inventory or an accumulation of excess inventory.

Changing regulations

The regulatory environment in which company operates is evolving and is subject to

change. The Government of India may implement new laws or other regulations that could

adversely affect the company’s operations.

Maintaining and developing the brand

Brand is crucial factor for the success in the jewellery business. Any negative publicity with

respect to business could adversely impact the company’s business, results of operations

and financial condition.

Source: Company, HDFC sec Inst Research

Key Personnel

Name

Designation

Description

Mr. Bhaskar Bhat

Managing Director

He assumed the position of Managing Director in 2002. Most of Bhaskar's

working experience has been in Sales & Marketing. He started his career as a

Management Trainee at Godrej & Boyce Manufacturing in 1978. After

spending five years at Godrej, he joined the Tata Watch Project in 1983, which

later became Titan Company Ltd.

Mr. C K Venkataraman

CEO - Jewellery

He has headed the Jewellery division since 2005. He joined Titan Company

Limited in 1990, and worked in the Advertising and Marketing functions before

becoming the Head of Sales & Marketing for the Titan brand in 2003.

Mr. S Ravi Kant

CEO - Watches & Accessories

He joined Titan in 1988 as Head- Direct Marketing and moved on to head

Retailing, followed by Exports. After managing international businesses for

watches and jewellery for over a decade, he took over the watches business in

2015

Mr. Ronnie Talati

CEO - Eyewear

He joined Tata Press in 1976. In 2005 he headed the new business unit to

target youth. Thus 'Fastrack' came into existence. In 2013, Mr. Talati took over

as the Chief Marketing Officer of Watches & Accessories Division.

Mr. S Subramaniam

CFO & Head Of IT Function

A CA and ICWA by profession, he has over 25 years of experience in Finance

and Business roles. Mr. Subramaniam has been driving strategic finance & has

been a part of the top management teams for the past 10 years.

Source: Company, HDFC sec Inst Research

TITAN: INITIATING COVERAGE

Page | 71

Story in Charts

Revenue to grow at 20% CAGR over FY18-21E

EBITDA to grow at 25% CAGR, margins

Source: Company, HDFC sec Inst Research

Jewellery to contribute bulk of revenue

…Ditto for EBIT

Source: Company, HDFC sec Inst Research

15.1

29.7

-

14.2

1.0

0.0

0.4

FY18 EBIT

Jewellery

Watches

Others

Unallocable

FY21E EBIT

Rs bn

-10

-5

0

5

10

15

20

25

50

100

150

200

250

300

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs bn)

YoY Growth (%) - RHS

8

9

10

11

12

5

10

15

20

25

30

35

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBITDA (Rs bn)

EBITDA margin (%)

- RHS

162.4

280.0

-

107.7

5.1

1.3

3.5

FY18 Revenue

Jewellery

Watches

Others

Unallocable

FY21E Revenue

Rs bn

TITAN: INITIATING COVERAGE

Page | 72

Titan: Est. growth in wedding segment, market

share (%)

…HVD to inch up too

Source: Company, HDFC sec Inst Research

Jewellery mix has largely remained stable

Cash conversion cycle to inch up as wedding and

HVD’s share increases

Source: Company, HDFC sec Inst Research

12

16

21

26

33

41

8.0

9.0

10.0

11.0

12.0

13.0

-

5

10

15

20

25

30

35

40

45

FY18

FY19E

FY20E

FY21E

FY22E

FY23E

-HVD sales (Rs bn)

as % of jewellery sales - RHS

115

107

111

115

116

100

102

104

106

108

110

112

114

116

118

122

124

126

128

130

132

134

FY17

FY18

FY19E

FY20E

FY21E

Inventory days

Cash conversion cycle (days) - RHS

33

44

57

73

92

113

2.0

2.6

3.2

3.9

4.7

5.6

-

1.0

2.0

3.0

4.0

5.0

6.0

-

20

40

60

80

100

120

FY18

FY19E

FY20E

FY21E

FY22E

FY23E

-Wedding jewellery (Rs bn)

Wedding market share (%) - RHS

0

10

20

30

40

50

60

70

80

90

100

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Gold jewellery

Studded jewellery

%

TITAN: INITIATING COVERAGE

Page | 73

Titan: Return profile

Titan: Leverage and FCFE profile

Source: Company, HDFC sec Inst Research

Titan: Estimated gold volume sold (tonnes)

Expected to add ~380k sq feet over FY18-21E

Source: Company, HDFC sec Inst Research

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

RoE (%)

RoCE (%)

RoIC (%)

5

15

25

35

45

55

65

50

60

70

80

90

100

110

120

130

140

150

160

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Area addition (sq ft '000) LHS

Stores addition (nos.) RHS

0.5

0.3

0.6

0.3

-

0.1

0.2

0.3

0.4

0.5

0.6

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

FCFE (Rs mn)

Net Debt/equity

5.1

23.1

21.4

17.2

16.2

-

5.0

10.0

15.0

20.0

25.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

FY17

FY18

FY19E

FY20E

FY21E

Gold sold (tonnes)

YoY (%) - RHS

TITAN: INITIATING COVERAGE

Page | 74

Company Profile: The Titan Company

Titan is a manufacturing company that produces India's

largest and best-known range of personal accessories —

watches, jewellery, sunglasses and prescription eyewear.

The company is a joint venture between Tata and the

Tamil Nadu Industrial Development Corporation. It

commenced operations in 1984 under the name Titan

Watches Limited. In 1994, Titan diversified into jewellery

with Tanishq and subsequently into eyewear with Titan

Eyeplus. In 2013, Titan entered the fragrances segment

with the brand Skinn, Leveraging precision engineering

core competencies from watch making, Titan initiated

TEAL (erstwhile PED) in 2005, catering to global majors

across industry verticals like aerospace, automotive, oil &

gas, engineering, hydraulics, solar and medical

instruments. The Company's subsidiaries include Carat

Lane, Favre Leuba AG and Titan Engineering and

Automation Limited

Key lines of business

 Jewellery: Tanishq offers a premium range of gold

jewellery studded with diamonds and precious, semi-

precious stones in various hues in 18KT and a wide

range of plain gold jewellery in 22KT pure gold.

Platinum jewellery also forms part of the product

range. The jewellery is manufactured in a fully

integrated manufacturing plant with state-of-the-art

equipment. Zoya offers premium studded jewellery

catering to the needs of the elite. In 2016, Titan

acquired majority stake in online jewellery player

Carat Lane.

 Watches: The four main watch brands include Titan

for the mid-premium segment, Fastrack focused on

the youth and trendy fashion space, Sonata for the

mass market and Xylys for the premium market. The

Titan brand architecture comprises several sub-

brands, each of which is a market leader in own

space. Notable among them are Titan Edge, Titan

Raga, Nebula. The company manufactures over 15

million watches per annum and has a customer base

of over 100 million. Helios, India's multi-brand watch

retailer, offers designs across 30 international brands

in addition to Titan brands.

 Eye wear: Titan Eyeplus, the third major line of

consumer business from Titan Company Ltd, offers a

variety of differentiated products to the end

consumer consisting of frames, lenses, contact lenses

and sunglasses. The Company's eyewear brands are

retailed through Titan Eye Plus stores.

TITAN : INITIATING COVERAGE

Page | 75

Income Statement (Consolidated)

Year ending March (Rs mn) FY17

FY18

FY19E

FY20E

FY21E

Net Revenues

129,789

161,198

198,467

236,412

279,992

Growth (%) 15.1%

24.2%

23.1%

19.1%

18.4%

COGS 95,382

118,071

145,281

172,821

204,399

Employee Expense 7,939

8,851

10,699

12,508

14,253

A&P Expense

4,630

4,940

5,954

7,092

8,400

S&D Expense

1,694

2,418

2,878

3,192

3,780

Rent Expense 1,954

2,418

2,779

3,073

3,640

Other Expenses 6,636

8,053

9,716

11,574

13,707

EBITDA 11,555

16,447

21,161

26,153

31,814

EBITDA Growth (%)

23.6%

42.3%

28.7%

23.6%

21.6%

EBITDA Margin (%)

8.9%

10.2%

10.7%

11.1%

11.4%

Depreciation 1,105

1,314

1,744

2,223

2,758

EBIT 10,450

15,133

19,418

23,930

29,056

Other Income (Including EO

Items)

(322)

722

777

917

1,032

Interest 377

529

524

558

585

PBT

9,750

15,326

19,671

24,289

29,503

Total Tax 2,760

4,279

5,508

7,044

8,851

RPAT before associate earnings 6,991

11,047

14,163

17,245

20,652

Share of Associate earnings

(18)

(28)

RPAT 6,973

11,019

14,136

17,218

20,625

Exceptional Gain/(loss)

(1,027)

(167)

-

Adjusted PAT 8,000

11,186

14,136

17,218

20,625

APAT Growth (%) 18.6%

39.8%

26.4%

21.8%

19.8%

Adjusted EPS (Rs)

9.0

12.6

15.9

19.4

23.2

Source: Company, HDFC sec Inst

Research

Balance Sheet (Consolidated)

Year ending March (Rs mn) FY17

FY18

FY19E

FY20E

FY21E

SOURCES OF FUNDS

Share Capital - Equity 888

888

Reserves 41,436

50,011

60,185

72,048

85,176

Total Shareholders Funds 42,324

50,899

61,072

72,936

86,064

Minority Interest

264

(18)

Long Term Debt

-

Short Term Debt 26,066

23,349

27,828

33,364

39,803

Total Debt 26,066

23,349

27,828

33,364

39,803

Net Deferred Taxes (861)

(1,351)

Other Non-current Liabilities &

Provns

-

13

TOTAL SOURCES OF FUNDS

67,792

72,892

87,544

104,943

124,511

APPLICATION OF FUNDS

Net Block 10,745

13,511

15,908

18,252

20,658

CWIP

1,432

430

Goodwill on Consolidation 1,230

1,230

Other Non-current Assets

949

1,083

Total Non-current Assets 14,356

16,255

18,652

20,995

23,402

Investments 370

344

Inventories

49,257

59,248

67,884

82,158

98,070

Debtors 2,076

2,957

4,186

5,634

7,439

Other Current Assets

5,428

8,860

9,256

10,830

12,826

Cash & Equivalents 11,727

6,195

9,352

11,019

13,267

Total Current Assets 68,488

77,261

90,678

109,640

131,602

Creditors

7,828

8,777

10,222

12,176

14,421

Other Current Liabilities & Provns

7,595

12,190

11,907

13,860

16,415

Total Current Liabilities

15,423

20,968

22,129

26,036

30,836

Net Current Assets 53,066

56,293

68,548

83,604

100,766

TOTAL APPLICATION OF FUNDS 67,792

72,892

87,544

104,943

124,511

Source: Company, HDFC sec Inst Research

TITAN : INITIATING COVERAGE

Page | 76

Cash Flow

Year ending March (Rs mn)

FY17

FY18

FY19E

FY20E

FY21E

Reported PBT 9,750

15,492

19,671

24,289

29,503

Non-operating & EO Items (420)

(1,083)

(805)

(944)

(1,060)

Interest Expenses 377

529

524

558

585

Depreciation

1,105

1,314

1,744

2,223

2,758

Working Capital Change 9,475

(8,758)

(9,099)

(13,389)

(14,915)

Tax Paid (2,779)

(4,279)

(5,508)

(7,044)

(8,851)

OPERATING CASH FLOW ( a ) 17,509

3,216

6,527

5,692

8,020

Capex (2,608)

(2,921)

(4,140)

(4,566)

(5,164)

Free Cash Flow (FCF) 14,901

295

2,387

1,126

2,856

Investments (8,029)

3,947

-

Non-operating Income 408

78

777

917

1,032

INVESTING CASH FLOW ( b ) (10,229)

1,105

(3,363)

(3,650)

(4,132)

Debt Issuance/(Repaid) (1,243)

(2,717)

4,479

5,536

6,440

Interest Expenses

(377)

(529)

(524)

(558)

(585)

FCFE 13,281

(2,951)

6,342

6,105

8,711

Share Capital Issuance -

-

Dividend (36)

(2,784)

(3,962)

(5,354)

(7,496)

Others -

99

0

(0)

FINANCING CASH FLOW ( c )

(1,656)

(5,931)

(7)

(376)

(1,641)

NET CASH FLOW (a+b+c) 5,624

(1,610)

3,157

1,667

2,247

EO Items, Others 1,552

1,240

Closing Cash & Equivalents 7,789

6,179

9,336

11,003

13,250

Source: Company, HDFC sec Inst Research

Key Ratios

Year ending March FY17

FY18

FY19E

FY20E

FY21E

PROFITABILITY (%)

GPM

26.5

26.8

26.9

27.0

EBITDA Margin

8.9

10.2

10.7

11.1

11.4

EBIT Margin

8.1

9.4

9.8

10.1

10.4

APAT Margin 6.2

6.9

7.1

7.3

7.4

RoE

20.7

24.0

25.2

25.7

25.9

RoIC (or Core RoCE)

14.2

17.8

19.3

19.7

19.8

RoCE 13.5

16.4

18.1

18.3

EFFICIENCY

Tax Rate (%)

25.6

27.6

28.0

29.0

30.0

Fixed Asset Turnover (x) 13.2

11.7

11.1

10.5

10.1

Inventory (days)

132

123

125

127

128

Debtors (days)

6

8

9

10

Other Current Assets (days)

15

20

17

Payables (days)

22

19

Other Current Liab&Provns (days)

21

28

22

21

Cash Conversion Cycle (days)

115

107

111

115

116

Net D/E (x) 0.3

0.3

Interest Coverage (x)

27.7

28.6

37.1

42.9

49.7

PER SHARE DATA (Rs)

EPS

9.0

12.6

15.9

19.4

23.2

CEPS

10.3

14.1

17.9

21.9

26.3

Dividend

2.6

3.7

5.0

7.0

9.0

Book Value

47.7

57.3

68.8

82.2

96.9

VALUATION

P/E (x)

99.5

71.2

56.3

46.3

38.6

P/BV (x)

18.8

15.6

13.0

10.9

9.3

EV/EBITDA (x) 70.2

49.5

38.5

31.3

25.9

EV/Revenues (x)

6.2

5.0

4.1

3.5

2.9

OCF/EV (%)

2.2

0.4

0.8

0.7

1.0

FCF/EV (%)

1.4

0.0

0.3

0.1

0.3

FCFE/Mkt Cap (%) 1.2

(0.4)

0.8

1.1

Dividend Yield (%)

0.3

0.4

0.6

0.8

1.0

Source: Company, HDFC sec Inst Research

INITIATING COVERAGE

21 JUN 2018

Thangamayil

BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Turnaround story

Thangamayil (TJL) is one of the leading tier-2 and 3

town-focused jewellers in Tamil Nadu. The past

decade has been a roller coaster ride for TJL as it

went from nearly doubling revenue/tripling profits

every alternate year over FY08-13 to being arm-

twisted by banks to liquidate un-hedged inventory

and mitigate gold price risk in FY14-15. Gross

margins shrunk to nearly a quarter (3.6% in FY15) of

their decadal peak in FY12. Subsequent regulatory

interventions and a stressed balance sheet didn’t

make a case for expansion either.

 However, given the current tailwinds in organized

jewellery and a healing balance sheet, conditions

seem apt for TJL to stage a turnaround. We expect

TJL to deliver revenue/EBITDA/PAT CAGR of

18/24/31% over FY18-21 underpinned by 1. Network

expansion, 2. Volume-led SSS growth, 3. Favourable

product and gold sourcing mix.

 A classic turnaround story in the making, as the

economic (RoIC-WACC) spread swings ~490bps to 4%

(vs -0.9% currently). We initiate coverage with a BUY

recommendation and target a DCF-based TP of Rs

650 (implies 22x FY20E EPS), over 50% discount to

industry bellwether Titan.

Investment thesis

 Getting down to brass tacks to stoke SSSG: After a

roller-coaster decade, Thangamayil is getting down to

brass tacks and pulling multiple levers to stoke SSSG –

1. Widening the design portfolio at display by building

additional floors in select stores, 2. Renovation of

stores-- ~60% area in sq. ft. until FY18, (3) Volume

push led by product-specific melas and (4)

increasingly leveraging its gold deposits scheme to

gain share from the unorganized space. We expect

the aforementioned levers to drive SSS retail growth

(Est 17/13/13% for FY19/FY20/FY21E) largely

underpinned by volumes.

 Store expansion to resume via owned store route:

TJL remained on the fence since FY15 in terms of

expansion as its balance sheet couldn’t afford one.

(added only 2 stores over FY15-18E). Regulatory

challenges also warranted a cautious stance on

expansion for a player of TJL’s scale. However, a

spate of pro-organized player regulations coupled

with a healing balance sheet (Debt mix has improved,

Net Debt/EBITDA has improved to 5.8x in FY18 vs

~87x in FY15), management feels confident to step up

expansion plans. It intends to add ~4k sq. ft/year (~4

stores/annually) over FY18-20E. Bulk of the additions

will be in tier-3 and 4 cities within Tamil Nadu via

owned stores, where competitive intensity from big-

box jewellers remains low.

Financial summary

YE Mar (Rs mn) FY18

FY19E

FY20E

FY21E

Net Sales

13,793

16,554

19,457

22,708

EBITDA 593

763

935

1,126

APAT

229

288

406

510

Diluted EPS (Rs/sh)

16.7

21.0

29.6

37.1

P/E (x) 27.3

21.6

15.3

12.2

ROE (%)

14.4

16.0

19.5

20.9

RoIC (%)

7.9

9.4

11.9

12.4

ROCE (%)

7.6

8.2

9.1

9.5

Source: Company, HDFC sec Inst Research

INDUSTRY JEWELLERY RETAIL

CMP (as on 20 Jun 2018) Rs 449

Target Price

Rs 650

Nifty 10,772

Sensex 35,547

KEY STOCK DATA

Bloomberg

TJL IN

No. of Shares (mn) 14

MCap (Rs bn) / ($ mn) 6/90

6m avg traded value (Rs mn) 8

STOCK PERFORMANCE (%)

52 Week high / low Rs 701/229

3M

6M

12M

Absolute (%) (9.6)

(32.9)

84.7

Relative (%) (17.3)

(38.1)

71.1

SHAREHOLDING PATTERN (%)

Promoters 66.4

FIs & Local MFs 6.8

FPIs -

Public & Others 26.7

Source : BSE

Jay Gandhi

jay.gandhi@hdfcsec.com

+91-22-6171-7320

Rohit Harlikar

r[email protected]

+91-22-6639-3036

THANGAMAYIL : INITIATING COVERAGE

Page | 78

 Once bitten, twice shy; balance sheet getting

healthier: The arm-twisting by bankers in FY14-15

forced the management into liquidating its un-

hedged gold inventory. This in turn put a lot of

stress on TJL’s balance-sheet. The management has

since been focused on increasingly procuring gold

through low-cost naturally-hedged sources such as

Gold-on-lease (GoL). Gold sourced through GoL has

increased to 25% of Gold sales (volume) from a

mere 2% in FY15.

 Margins to inch up gradually: 1. Room to increase

making charges, 2. Thrust on higher-margin silver

biz, 3. Savings from in-house manufacturing, 4.

Improving studded jewellery mix are key levers

which we believe could help in gross margin

expansion. However, given the customer profile TJL

caters to and increased competition from strong

players such as GRT who intend to further

penetrate in Tamil Nadu could restrict the quantum

of margin expansion. We expect TJL’s gross margin

to expand by 50bps to 9.4% by FY21E. Gross margin

benefits coupled with SSSG growth to trickle down

to operating margins too. We build in a ~80bps EBIT

margin expansion to ~4.5% over FY18-21E, similar

to its bigger south peers. Growth in PAT (31%

CAGR over FY18-21E) is expected to be even more

pronounced as increased use of low cost gold on

lease would keep interest expense in check.

 In the midst of a turnaround; initiate coverage

with a BUY: The cocktail of sector tailwinds and

healthier balance sheet to carry out its initiatives on

both – store additions and SSSG growth is expected

to help TJL in its long overdue turnaround. We find

comfort in TJL’s valuation (16x FY20 EPS) especially

given 1. the expected earnings growth (31% CAGR),

2. the sharp swing expected in economic spread

(~490bps) over FY18-21E We initiate coverage with

a BUY reco and DCF-based target price of Rs 650

(implying 22x FY20 EPS).

THANGAMAYIL : INITIATING COVERAGE

Page | 79

Getting down to brass tacks to stoke SSSG

 TJL is getting down to brass tacks to stoke SSSG –

1. Widening the design portfolio on display by

building additional floors in select stores, 2.

Renovation of stores, 3. Volume push led by

product-specific melas and 4. increasingly

leveraging its gold deposits scheme to gain share

from the unorganized space.

 SSSG expected to clock 17/13% in FY19/FY20)

largely underpinned by volumes.

 Product-specific melas aid in grabbing footfalls: TJL

sporadically during the year conducts product-

specific melas such as Bangle Mela, Chain Mela, etc.

It started this practice in Oct-17 in tier2 & 3 towns.

Typically, TJL keeps inventory (specific product)

equivalent to that of the entire store and hence the

sheer breadth and width of designs pulls consumers

into the store as A. There is very limited

competition from top jewellers in tier 2 & 3 towns,

B. Unorganized players find themselves inadequate

to compete with the variety on offer. Any unsold

inventory is then sold in the next city where the

mela is organized.

Chain mela TVC: (Click on link)

 Rejuvenating brand image via store renovations:

Given the cautious stance on expansion, TJL’s

management decided to renovate stores to fix the

problem of declining SSSG. This has helped TJL

attract new consumers and improve SSSG too. This

is evident in the SSSG jump for the retail biz in FY18

(~19% YoY). The new brand image aids in pushing

making charge hikes to consumers too. Renovation

is being done at half the cost of store addition (~Rs

2500 per sq ft). The company has already

refurbished ~34k sq ft (i.e., ~58% of its retail

footprint) at the end of FY18 and intends to

renovate the rest by Sept-2018.

Estimated space renovated (Sq ft)

Source: Company, HDFC sec Inst Research

-

5,000

10,000

15,000

20,000

25,000

FY16

FY17

FY18

Sq ft rennovated

THANGAMAYIL : INITIATING COVERAGE

Page | 80

 Expanding shelf creatively: TJL has tied up with the

landlord of select stores (In tier 2 towns) to construct

additional floors in select stores. Arrangement is such

that the capex for construction of the additional

floors is borne by the respective landlords, while

incremental rent is borne by TJL. We believe this

creative expansion of shelf and consequently wider

range/collection to choose from will improve TJL’s

SSSG. FY18’s SSSG spurt is a case in point (19%).

 Probable axe on unregulated deposits – Advantage

Thangamayil: Gold deposit schemes typically are

great up-selling tools for jewellers. (A consumer

typically spends 1.4-1.7x the accumulated deposits).

TJL is estimated to have garnered ~18-20% of its

revenue from its gold-deposit scheme in FY18 (similar

to that of Tanishq), the management intends to put

more thrust on this tool to build consumer stickiness

and increase SSSG. Given the limited presence of the

SUPERPACK in TJL’s geography of presence currently

(Refer to – Where will the expansion come from?)

We expect this tool to be a “Hero product” in tier 3/4

cities/towns for TJL as the govt. is expected to clamp

down on unregulated deposits of unorganized

jewellers.

Jewellery scheme-led advances to grow at 18%

CAGR over FY18-21E

Source: Bloomberg, HDFC sec Inst Research

 Expect ~17/13% SSSG in FY19/FY20E: The

aforementioned levers are expected to rev up TJL’s

SSSG and drive bulk of the growth over the next

three years. We expect ~17/13% SSSG in FY19 &

FY20 respectively.

SSSG to drive bulk of the growth

Source: Company, HDFC sec Inst Research

… TJL’s mainstay (Gold ornaments) to do well

Source: Company, HDFC sec Inst Research

(5.4)

(4.2)

18.7

17.5

13.3

13.0

0.3

1.7

0.0

3.7

4.3

3.6

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

FY16

FY17

FY18

FY19E

FY20E

FY21E

SSSG (%)

Store expansion (%)

(20.0)

(10.0)

-

10.0

20.0

30.0

FY16

FY17

FY18

FY19E

FY20E

FY21E

SSSG - Gold Value growth

SSSG - Gold Volume growth

617

612

750

1,460

1,759

2,064

2,400

-20

0

20

40

60

80

100

400

900

1,400

1,900

2,400

2,900

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Jewellery-related advances from customers (Rs mn)

YoY (%) - RHS

THANGAMAYIL : INITIATING COVERAGE

Page | 81

Store expansion to resume via owned store route

 After being forced to sit on the fences since FY15,

Thangamayil finally intends to resume its

expansion drive and intends to add 4-5 stores and

~4-5k sq. ft/yr.

 Bulk of the additions will be in Tier 3 and 4 towns

where presence of the rest of the SUPERPACK is

limited. 12/32 TJL stores are in cities/districts with

per capita income below the state average.

 Top market Chennai remains elusive in TJL’s store

portfolio.

 Store expansion to resume via owned store route:

TJL remained on the fences since FY15 in terms of

expansion as its balance sheet couldn’t afford

expansion. (Just added 2 stores over FY15-18E).

Regulatory challenges also warranted a cautious

stance on expansion for a player of TJL’s scale. A

spate of pro-organized player regulations coupled

with a healing balance sheet gives management the

confidence to resume a cautious expansion drive. It

intends to add ~4-5k sq. ft/year (~4-5

stores/annually) over FY18-20E. (Note: Net

debt/equity has remained unchanged over the last

3 years, debt mix has improved led by use of low

cost gold on lease facility). Net Debt/EBITDA has

improved to 5.8x in FY18 vs ~87x in FY15. Bulk of

the store additions will be in tier-3 and 4 cities

within Tamil Nadu, where competitive intensity

from big-box jewellers remains limited and

expansion will be via owned stores. No franchisees

for TJL currently as management concedes the

brand isn’t ready for it.

TJL to add 4 stores annually

…~4-5k sq ft per year

Source: Company, HDFC sec Inst Research

23

30

31

32

36

40

44

300

400

500

600

700

800

20

25

30

35

40

45

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

No. of Stores (#)

Revenue per store (Rs mn) - RHS

46,295

56,724

57,624

58,024

62,824

67,624

72,424

180

210

240

270

300

330

360

38,000

44,000

50,000

56,000

62,000

68,000

74,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Retail Space (Sq ft)

Revenue per sq ft (Rs '000) - RHS

THANGAMAYIL : INITIATING COVERAGE

Page | 82

 Sufficiently funded for expansion ambitions: We

believe a throughput of ~3-5kg gold/day/new store

could easily be handled with at an investment of

~Rs 450-500mn per year (incl. a capex of ~Rs 20-

30mn). Hence, TJL’s cautious network expansion

ambitions can easily be funded given the expected

improvement in leverage.

TJL: Net Debt/Equity

TJL: Net Debt/EBITDA

Source: Company, HDFC sec Inst Research

1.0

1.2

1.4

1.6

1.8

2.0

2.2

FY16

FY17

FY18

FY19E

FY20E

FY21E

Net Debt/Equity

2.0

3.0

4.0

5.0

6.0

FY16

FY17

FY18

FY19E

FY20E

FY21E

Net-Debt/EBITDA

THANGAMAYIL : INITIATING COVERAGE

Page | 83

 Where could the expansion come from? While TJL

for the next two years intends to focus on Tier

2/3/4 towns (12/32 TJL stores are in districts with

per capita income below the state avg) for

expansion. We believe the scope for expansion for

TJL is present even in districts with higher than avg.

state per capita income for TN. Also the Chennai

market which is estimated to be a ~Rs 600-650bn

market remains elusive in TJL’s store portfolio.

Inspite of a strong presence of SUPERPACK; TN presents ample expansion potential

Source: Bloomberg, HDFC sec Inst Research

0

5

10

15

20

25

30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ariyalur

Chennai

Coimbatore

Cuddalore

Dharmapuri

Dindigul

Erode

Kanchipuram

Kanyakumari

Krishnagiri

Madurai

Nagapattinam

Namakkal

Pudukkottai

…

Salem

Thanjavur

Thoothukudi

Tiruchirappalli

Tirunelveli

Tirupur

Tiruvallur

Tiruvannamalai

Vellore

Viluppuram

Virudhunagar

Sivagangai

Theni

Standalone stores

Chain stores (%)

District Per Capita Income

State per capita income

Tanishq (#)

PC Jeweller (#)

Thangamayil (#)

Rest of Superpack (#)

THANGAMAYIL : INITIATING COVERAGE

Page | 84

TJL’s expansion Potential

Districts

Per Capita

Income (Rs)

TJL stores

Standalone

stores

Chain

stores

Superpack

Stores

TJL % of

chain stores

Superpack

% of chain

stores

Kanyakumari

16,559

70

18

5

-

5.6

Tirupur

57,706

3

26

13

5

21.4

12.5

Tiruvallur

65,781

19

9

1

-

3.6

Virudhunagar 47,042

4

18

12

5

30.8

16.1

Kanchipuram 46,828

33

30

7

-

10.9

Coimbatore

47,812

1

91

35

9

2.7

7.0

Tiruchirappalli

61,631

36

10

6

-

12.8

Thoothukudi

70,667

3

46

12

6

23.1

10.2

Erode 81,094

1

54

13

7

7.1

10.3

Namakkal 55,719

1

24

6

2

16.7

6.7

Chennai

56,506

141

82

36

-

15.7

Madurai

34,640

2

59

19

10

9.5

12.5

Krishnagiri 58,133

1

33

13

6

6.3

12.2

Tirunelveli 37,390

4

64

25

11

15.4

12.2

Vellore 37,707

49

16

6

-

9.1

Salem 48,802

1

58

19

8

5.0

10.3

Dindigul

40,366

3

21

10

5

27.3

15.6

Cuddalore

63,467

85

21

6

-

5.7

Dharmapuri 65,011

1

18

5

3

20.0

13.0

Sivagangai 54,259

3

9

4

60.0

28.6

Thanjavur 72,479

33

12

11

-

23.4

Ramanathapuram 70,778

1

45

11

4

9.1

7.1

Pudukkottai

35,241

21

4

2

-

7.7

Theni 52,900

2

16

4

3

50.0

15.0

Tiruvannamalai 30,181

43

14

3

-

5.3

Nagapattinam 70,689

32

3

1

-

2.9

Viluppuram

41,912

1

43

18

1

5.6

1.6

Ariyalur

35,539

23

5

0

-

Source: Department of Statistics and Economics, Company, BIS, HDFC Sec Inst Research

In order to assess the

expansion potential for TJL;

we have cut the TN market

into 28 districts which have

>20 BIS listed stores each

wherein the superpack’s

share in the chain stores

</=10%

Further, we have placed a

necessary condition

(Thangamayil’s store share

should be </= 20% of chain

stores) for districts with per

capita income greater than

state avg.

For Districts with per capita

income </= state avg;

(Thangamayil’s store share

should be </= 15% of chain

stores)

The highlighted states give an

inkling of the expansion

potential

Note Chennai is an exception

and Thangamayil will at some

point need to contemplate

having a presence in the city.

THANGAMAYIL : INITIATING COVERAGE

Page | 85

Top-line to gain steam; margins to inch up gradually:

 Expect SSSG-led revenue growth of 18% CAGR:

Given the thrust on SSSG, we expect revenue to

grow at a CAGR of 18% over FY18-21E. We build in

SSSG of ~17/13/13% in FY19/FY20/FY21E.

Revenue to grow at 18% CAGR over FY18-21E

Gold to contribute bulk of the incremental top-line

Source: Company, HDFC sec Inst Research

 Multiple margin levers to pull:

o Lever 1: Room to increase making charges: The

hand-twisting by bankers led TJL to sell its

unhedged inventory at throw-away prices to

repay lenders. This can be seen in the below table

wherein Gross margins dropped to 6.5% in FY14

(vs 10.7% in FY13) and the company barely broke-

even at the operational level.

o Lever 2: Thrust on higher-margin silver &

studded biz: Management intends to put

impetus on the higher margin silver jewellery

(gross margin: 15.6% in FY18) and silver articles

and studded jewellery (~9% in FY18). While the

management is confident of increasing its

diamond share to 5% of sales, we take a cautious

stance on this one, as the nature of the beast

(read: TN consumer buying behavior) and TJL’s

tier 3/4 customer profile doesn’t allow us to build

an upbeat forecast on studded jewellery. An

inkling can be seen in GRT’s (one of the most

efficient jewellers in India) studded ratio.

o Lever 3: Savings from in-house manufacturing:

TJL intends to increase its in-house

manufacturing to ~55-60% by FY20, this could

usher in savings of ~2-3% on making charges

-25

-20

-15

-10

-5

0

5

10

15

20

25

10

12

14

16

18

20

22

24

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs bn)

Growth Y-o-Y (%) - RHS

13,793

22,708

8,250

426

312

73

FY18 revenue

Gold Jewellery

Silver

Jewellery/Articles

Diamond

Others

FY21E revenue

Rs mn

THANGAMAYIL : INITIATING COVERAGE

Page | 86

 …increasing competitive intensity could blunt the

pace of margin expansion: Given the customer

profile TJL caters to and increased competition from

strong players such as GRT who intend to further

penetrate in Tamil Nadu could restrict the quantum

of margin expansion. We expect TJL’s gross margin to

expand by 50bps to 9.4% by FY20E. Modest gross

margin benefits coupled with SSSG-led operating

leverage is expected to trickle down to operating

 We build in a ~80bps EBIT margin expansion to

~4.5%, similar to that of its bigger south peers.

Growth in PAT (33% CAGR over FY18-20E) is expected

to be even more pronounced as increased use of low-

cost gold on lease would keep interest expense

growth in check.

…Margins to inch up gradually

TJL’s Revenue Mix

Source: Company, HDFC sec Inst Research

 TMJL Plus Stores to aid in pushing silver

jewellery/articles sales: These are typically small

150-200 sq ft stores which TJL intends to use to push

silver throughput.

Mix of jewellery procurement (%)

Own manufacturing

30

Job Work (Metal Provided) 40

Direct Purchase 30

Source: Company, HDFC sec Inst Research

(2.0)

-

2.0

4.0

6.0

8.0

10.0

12.0

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Gross Margin

EBIT margin

%

94.3

94.6

94.2

92.7

92.8

92.9

92.7

92.4

5.2

5.3

5.7

7.1

6.8

6.4

6.2

6.0

0.5

0.1

0.2

0.4

0.7

1.1

1.6

88.0

90.0

92.0

94.0

96.0

98.0

100.0

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Gold Jewellery

Silver Jewellery/Articles

Diamond/others

THANGAMAYIL : INITIATING COVERAGE

Page | 87

Once bitten, twice shy; balance sheet getting healthier

 Once bitten, twice shy; balance sheet getting

healthier: The hand-twisting by bankers in FY14-15

by forcing the management into liquidate its un-

hedged gold inventory to mitigate gold price risk

put a lot of stress on TJL’s financials. This can be

seen in the double whammy of 1. EBIT shrinking, 2.

Interest increasing, hence interest coverage ratio

deteriorated significantly during this period. The

management has since been focused on

increasingly procuring gold through low cost

hedging sources such as Gold-on-lease (GoL). Gold

sourced through GoL has increased to 25% of Gold

sales (volume) from a mere 2% in FY15. This will

help improve the interest cover profile for the

company and the positive impact on bottom-line

will be more pronounced vs the EBIT growth over

the next three years.

GML as % of total gold volume sold increasing

…Debt mix improving

Interest cover improving

…31% PAT CAGR expected over FY18-21E

Source: Company, HDFC sec Inst Research

17.2

-

2.2

7.0

15.1

25.4

27.1

28.6

29.8

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY21E

Gold metal Loan (Rs mn)

As % of Gold volume sold - RHS

2.1

0.3

(0.2)

1.5

1.9

2.7

2.2

2.4

2.6

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

(200)

-

200

400

600

800

1,000

1,200

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBIT (Rs mn)

Interest coverage - RHS

(142)

77

(147)

33

64

26

41

25

-200

-150

-100

-50

0

50

100

(400)

(200)

-

200

400

600

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

PAT (Rs mn)

YoY (%) - RHS

-

20

40

60

80

100

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY21E

GML

Advances from customers

LT+ST borrowings

THANGAMAYIL : INITIATING COVERAGE

Page | 88

In the midst of a turnaround

 TJL’s story is primarily about its economic spread

(RoIC - WACC) improving.

 While sales velocity and margins are expected to

contribute the bulk of this ~490bps improvement

in spread. In the long-run, working capital

efficiency will be the key enabler as profitability

improvement is capped given the 1. customer

profile (Tier 2/3/4 markets), 2. Consumer

purchasing behavior of TN market, (predominant

plain gold jewellery buyers), lack of presence in

Chennai.

Economic spread to improve significantly

Source: Company, HDFC sec Inst Research

 Additional stores to keep inventory days elevated:

TJL’s inventory turns deteriorated in FY18 led by the

re-launching of 14 stores which typically requires

additional inventory stock to be placed in stores.

Given the store additions planned, we expect

inventory days to marginally inch up.

…contributors to economic spread

TJL: Return Profile

Inventory levels to marginally inch up

Source: Company, HDFC sec Inst Research

11.0

1.7

(0.6)

7.7

7.8

7.6

8.2

9.1

9.5

11.2

1.1

(0.9)

7.3

7.9

9.4

11.9

12.4

(5.0)

-

5.0

10.0

15.0

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

RoCE

RoIC

2.3

(8.5)

(10.8)

(3.0)

(1.9)

(0.9)

0.9

3.5

4.0

(15.0)

(10.0)

(5.0)

-

5.0

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

RoIC - WACC Spread

100

124

81

82

83

104

107

110

113

55

65

75

85

95

105

115

125

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Inventory days (#)

(0.9)

4.0

3.3

1.8

1.1

FY18 RoIC -

WACC Spread

Revenue

EBIT margin

Invested Capital

FY21 RoIC -

WACC Spread

%

THANGAMAYIL : INITIATING COVERAGE

Page | 89

Valuation

1-year forward P/B band

2-year forward P/B band

Source: Bloomberg, HDFC sec Inst Research

 3-stage DCF-based TP of Rs 650/sh; recommend

BUY: We expect TJL to deliver a revenue/EBITDA/PAT

CAGR of 18/24/31% respectively over FY18-21E led

by SSSG led spurt in revenue, operating and financial

leverage (led by increased use of low-cost gold on

lease arrangement with banks). Our DCF-based TP of

Rs 650/sh, implies a P/E of 22x FY20 earnings & over

50% discount to Titan.

 Stage 1 (FY18-21E): Revenue/EBITDA/PAT grow at

18/24/31% respectively. We expect RoIC to improve

to 12.4% in FY21 from 7.9% in FY18. Stage 2 (FY21-

30E): Revenue/EBITDA/PAT grow at 11/12/13%

respectively. We expect RoIC to improve to 13.2% in

FY30 from 12.4% in FY21. Stage 3 (Terminal stage):

We expect a terminal growth rate of 5%.

 Our DCF assumes a WACC of 8.6% - assumes 1. Ke

of 16.6% (> Titan) given the scale of the biz and

sensitivity of value on working capital efficiency and

profitability. 2. Post-tax cost of debt of 5.2% (Note.

We treat GML and advances from customers as

debt and hence, the effective rate is low).

100

200

300

400

500

600

700

0

1

2

3

4

5

6

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

P/B

5 Yr Avg. P/B

3 yr. Avg P/B

CMP (RHS)

100

200

300

400

500

600

700

0

1

2

3

4

5

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

P/B

5 Yr Avg. P/B

3 yr. Avg P/B

CMP (RHS)

THANGAMAYIL : INITIATING COVERAGE

Page | 90

DCF

(Rs mn)

FY20E

FY21E

FY22E

FY23E

FY24E

FY25E

FY26E

FY27E

FY28E

FY29E

FY30E

Revenue (Rs mn)

19,457

22,708

26,332

30,240

33,639

37,401

41,239

45,063

49,217

53,237

57,591

YoY

17.5

16.7

16.0

14.8

11.2

10.3

9.3

9.2

8.2

No. of stores (#)

36

40

44

48

52

56

60

64

68

72

76

YoY

12.5

11.1

10.0

9.1

8.3

7.7

7.1

6.7

6.3

5.9

5.6

SSSG (%) - Value

13.3

13.0

12.7

12.0

8.5

8.7

8.0

7.1

7.2

6.3

6.4

EBIT*(1-t)

561

683

824

961

1,071

1,205

1,329

1,467

1,602

1,750

1,910

Depreciation

99

106

115

125

137

149

164

179

196

214

234

Capex

(88)

(114)

(132)

(151)

(168)

(187)

(206)

(225)

(246)

(266)

(288)

Changes in WC (Winv)

(747)

(871)

(1,009)

(1,135)

(1,057)

(1,016)

(829)

(805)

(929)

(887)

(1,033)

FCFF

(175)

(195)

(202)

(200)

(18)

151

458

616

623

811

824

YoY (%)

(113.7)

11.4

3.4

(0.8)

(91.1)

(951.0)

202.1

34.6

1.1

30.2

1.6

Interest (1-t)

(230)

(262)

(296)

(333)

(369)

(405)

(444)

(484)

(525)

(567)

(610)

Net Borrowings

765

823

926

951

791

927

933

925

1,008

978

1,057

FCFE

359

367

428

418

404

674

946

1,057

1,107

1,223

1,271

Period No.

-

1

2

3

4

5

6

7

8

9

10

PV (FCFF)

(175)

(180)

(171)

(156)

(13)

100

279

345

322

385

360

Terminal Value

23,911

Net Debt (Mar-20E)

2820

PV-Explicit Period

1273

PV-Terminal Value

10462

Equity Value (Rs mn)

8914

Equity value per share

(INR)

650

FY20 Implied P/E (x)

21.9

Terminal growth rate (%)

5.0%

WACC

8.6%

Terminal FCF multiple (x)

29.0

No. of shares (mn)

13.7

CMP

461

Upside/(Downside)

40.9%

Source: Company, HDFC sec Inst Research

THANGAMAYIL : INITIATING COVERAGE

Page | 91

Key Personnel (Thangamayil)

Name

Designation

Description

Balarama Govinda Das Managing Director

He is a founder member has been driving the business of manufacturing and trading

gold, silver and diamond jewellery for more than 30 years. Under his leadership,

Thangamayil Jewellery turned into a public limited company.

Ba. Ramesh Joint Managing Director

He is a founder member. He entered the family business at his young age to handle

gems and jewellery trading. He brought about the concept of competitive pricing of

certain key products in the gold industry when rest of South India was working on a

concept of comparative pricing (prevailing market prices)

N.B.Kumar Joint Managing Director

A founder member and entered the family business of trading gems and jewellery in

the early eighties and has been managing the day-to-day affairs of the Company

with a specific focus on human resource planning and development.

B. Rajesh Kanna Chief Financial Officer

He holds a Diploma in Gemology. He joined Thangamayil Jewellery in 2008. He

served as General Manager of Thangamayil Jewellery Limited.

Source: Company, HDFC sec Inst Research

Name

Description

Volatility in gold prices

Any material fluctuations in gold, silver and diamond prices might affect the profitability of the

company.

Geographic concentration:

We believe geographical concentration poses a downside risk to our estimates as natural

calamities (drought, flood) and political instability may derail growth. In our view, a natural

calamity can have substantial impact (since majority of the stores are located in semi-

urban/rural area) on its financials, but a downfall of the state government is at best likely to

impact financials for 1-2 quarters.

Regulatory risks

Jewellery demand was severely hit in August 2017, when the government decided to amend

PMLA (Prevention of Money Laundering Act), which required disclosing an identity card for any

purchase above Rs 50,000. Demand returned to normal levels in October 2017 after the PMLA

Act provisions were revoked. Any government moves to reduce the current disclosure

threshold of Rs 200,000 may dampen demand for organised jewellers.

Aggressive expansion by competitors:

Many south-based jewellers such as Kalyan Jewellers, Malabar Gold, and Joyalukkas, GRT may

want to strengthen their hold down south and since this is a low-hanging fruit for most of

them, TJL may face some competition in Tier 2/3/4 towns where they are present.

Maintaining and developing the brand

Brand is crucial factor for the success in the jewellery business. Any negative publicity with

respect to business could adversely impact the company’s business, results of operations and

financial condition.

Source: Company, HDFC sec Inst Research

THANGAMAYIL : INITIATING COVERAGE

Page | 92

Company Profile: Thangamayil

 Thangamayil Jewellery Limited (TMJL), is one of the

leading 2 & 3 city-focused jewellers in Tamil Nadu.

 Thangamayil was originally established in 1947 as

Balu Jewellery in Madurai. It became a private

limited company in 2000 In 2010, Thangamayil

Jewellery held its initial public offering (IPO).

 Thangamayil Jewellery primarily sells gold, silver,

diamonds and platinum jewellery. The company’s

flagship store is located in Madurai and is selling

jewellery with BIS hallmarking license since 2001.

The company sources its jewellery from other

Indian states such as Andhra Pradesh, Gujarat,

Kerala and West Bengal. The company has a total of

58,000 square feet in area, across all its 32

showrooms.

Source: Company

THANGAMAYIL : INITIATING COVERAGE

Page | 93

Story in Charts

Revenue to grow at 18% CAGR over FY18-21E

EBITDA; EBITDA margin

Source: Company, HDFC sec Inst Research

Volume to contribute lion’s share of growth

…Ditto for Silver

Source: Company, HDFC sec Inst Research

-25

-20

-15

-10

-5

0

5

10

15

20

25

10

12

14

16

18

20

22

24

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Revenue (Rs bn)

Growth Y-o-Y (%) - RHS

0

1

2

3

4

5

6

-

200

400

600

800

1,000

1,200

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBITDA (Rs mn)

Margin (%) - RHS

12,817

21,067

-

85%

15%

FY18 Gold revenue

Volume

Realization/mix

FY21E Gold revenue

Rs mn

884

1,264

-

100%

0%

FY18 Silver jewellery

revenue

Volume

Realization/mix

FY21E Silver jewellery

revenue

Rs mn

THANGAMAYIL : INITIATING COVERAGE

Page | 94

EBIT to double over FY18-21E

…Interest cover to expand

Source: Company, HDFC sec Inst Research

Du Pont Analysis

FY16

FY17

FY18

FY19E

FY20E

FY21E

PAT margin (%)

0.8

1.1

1.7

2.1

2.2

Sales/Assets (x) 3.5

3.5

3.0

2.8

Equity Multiplier (x) 2.7

2.6

2.9

3.3

3.4

3.3

Source: Company, HDFC sec Inst Research

2.1

0.3

(0.2)

1.5

1.9

2.7

2.2

2.4

2.6

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

(200)

-

200

400

600

800

1,000

1,200

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

EBIT (Rs mn)

Interest coverage - RHS

512

1,020

-

18.1%

2.2%

5.6%

FY18 EBIT

Revenue

Gross Margin

EBIT margin

FY21E EBIT

Rs mn

THANGAMAYIL : INITIATING COVERAGE

Page | 95

Cash conversion cycle to gradually inch up

Thangamayil – Return Profile

Source: Company, HDFC sec Inst Research

Free Cash Flow and D/E

Sales velocity to contribute bulk of PAT growth

Source: Company, HDFC sec Inst Research

(20.0)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

ROE (%)

RoIC (%)

ROCE (%)

1.8

1.9

1.6

1.5

2.1

1.3

1.2

0.5

1.0

1.5

2.0

2.5

(500)

-

500

1,000

1,500

2,000

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

FCFE (Rs mn)

Net Debt to Equity - RHS

229

510

-

18%

8%

FY18 PAT

Revenue

EBIT margin

Financial Leverage

FY21E PAT

Rs mn

125

80

77

92

77

80

82

60

70

80

90

100

110

120

130

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Inventory days

Cash Conversion cycle

THANGAMAYIL : INITIATING COVERAGE

Page | 96

Income Statement (Consolidated)

Year ending March (Rs mn) FY17

FY18

FY19E

FY20E

FY21E

Net Revenues 12,995

13,793

16,554

19,457

22,708

Growth (%) 2.2%

6.1%

20.0%

17.5%

16.7%

COGS

11,959

12,568

15,051

17,660

20,577

Employee Expense 263

320

375

441

515

A&P Expense 107

113

136

160

187

Rent Expense 37

39

47

55

65

Other Expenses 145

159

182

204

238

EBITDA

484

593

763

935

1,126

EBITDA Growth (%) 12.1

22.5

28.5

22.6

20.4

EBITDA Margin (%) 3.7

4.3

4.6

4.8

5.0

Depreciation 94

82

93

99

106

EBIT

390

512

670

837

1,020

Other Income (Including EO

Items)

11

16

60

114

131

Interest 208

188

300

344

390

PBT 193

339

430

607

761

Total Tax 53

111

142

200

251

RPAT 140

229

288

406

510

Exceptional Gain/(loss)

-

Adjusted PAT 140

229

288

406

510

APAT Growth (%) 32.7

63.7

26.0

41.0

25.4

Adjusted EPS (Rs) 10.2

16.7

21.0

29.6

37.1

Source: Company, HDFC sec Inst Research

Balance Sheet (Consolidated)

Year ending March (Rs mn) FY17

FY18

FY19E

FY20E

FY21E

SOURCES OF FUNDS

Share Capital - Equity 137

137

Reserves

1,356

1,550

1,780

2,107

2,504

Total Shareholders Funds 1,493

1,687

1,918

2,244

2,642

Long Term Debt 356

306

256

206

156

Short Term Debt 2,022

3,483

4,253

5,067

5,941

Total Debt

2,378

3,789

4,509

5,274

6,097

Net Deferred Taxes

(55)

16

Other Non-current Liabilities &

Provns

-

TOTAL SOURCES OF FUNDS 3,816

5,492

6,443

7,534

8,755

APPLICATION OF FUNDS

Net Block 723

742

732

721

728

CWIP

7

9

Other Non-current Assets 105

98

Total Non-current Assets 836

848

838

827

835

Inventories 3,120

4,759

4,864

5,877

7,046

Debtors 9

13

15

18

Other Current Assets

146

167

168

170

172

Cash & Equivalents 202

319

2,098

2,454

2,796

Total Current Assets 3,476

5,258

7,144

8,516

10,031

Creditors 271

234

303

356

416

Other Current Liabilities & Provns

225

380

1,236

1,453

1,696

Total Current Liabilities

496

614

1,539

1,809

2,111

Net Current Assets 2,981

4,644

5,604

6,707

7,920

TOTAL APPLICATION OF FUNDS 3,816

5,492

6,443

7,534

8,755

Source: Company, HDFC sec Inst Research

THANGAMAYIL : INITIATING COVERAGE

Page | 97

Cash Flow

Year ending March (Rs mn)

FY17

FY18

FY19E

FY20E

FY21E

Reported PBT 193

339

430

607

761

Non-operating & EO Items 1

(17)

(60)

(114)

(131)

Interest Expenses 208

188

300

344

390

Depreciation

94

82

93

99

106

Working Capital Change 206

(1,546)

819

(747)

(871)

Tax Paid (61)

(111)

(142)

(200)

(251)

OPERATING CASH FLOW ( a ) 642

(1,065)

1,439

(12)

4

Capex (38)

(102)

(83)

(88)

(114)

Free Cash Flow (FCF) 604

(1,167)

1,357

(99)

(109)

Investments -

-

Non-operating Income -

78

60

114

131

INVESTING CASH FLOW ( b ) (38)

(24)

(22)

26

18

Debt Issuance/(Repaid) (320)

1,223

420

421

433

FCFE 284

56

1,777

322

324

Share Capital Issuance -

-

Dividend (17)

(33)

(58)

(80)

(112)

Others (159)

16

-

FINANCING CASH FLOW ( c ) (496)

1,206

362

341

321

NET CASH FLOW (a+b+c)

108

117

1,779

356

342

EO Items, Others 12

13

14

15

16

Closing Cash & Equivalents 202

319

2,098

2,454

2,796

Source: Company, HDFC

sec Inst Research

Key Ratios

FY17

FY18

FY19E

FY20E

FY21E

PROFITABILITY (%)

GPM 8.0

8.9

9.1

9.2

9.4

EBITDA Margin 3.7

4.3

4.6

4.8

5.0

EBIT Margin

3.0

3.7

4.0

4.3

4.5

APAT Margin 1.1

1.7

2.1

2.2

RoE 9.7

14.4

16.0

19.5

20.9

RoIC (or Core RoCE) 7.9

7.9

9.4

11.9

12.4

RoCE 7.8

7.6

8.2

9.1

9.5

EFFICIENCY

Tax Rate (%) 27.6

32.6

33.0

Fixed Asset Turnover (x) 11.3

11.1

12.5

13.7

14.8

Inventory (days) 83

104

107

110

113

Debtors (days) 0

0

Other Current Assets (days)

4

3

Payables (days) 5

7

Other Current Liab & Provns (days) 6

10

27

Cash Conversion Cycle (days) 77

92

77

80

82

Net Debt/Equity (x) 1.5

2.1

1.3

1.2

Interest Coverage (x)

1.9

2.7

2.2

2.4

2.6

PER SHARE DATA (Rs)

EPS 10.2

16.7

21.0

29.6

37.1

CEPS 17.1

22.6

27.8

36.8

44.9

Dividend 2.0

3.5

4.8

6.8

9.3

Book Value

108.9

123.0

139.8

163.6

192.5

VALUATION

P/E (x) 44.6

27.3

21.6

15.3

12.2

P/BV (x) 4.2

3.7

3.3

2.8

2.4

EV/EBITDA (x) 17.4

16.4

11.3

9.7

8.5

EV/Revenues (x)

0.6

0.7

0.5

0.4

OCF/EV (%) 7.6

(11.0)

16.7

(0.1)

0.0

FCF/EV (%) 7.2

(12.0)

15.7

(1.1)

FCFE/Mkt Cap (%) 4.6

0.9

28.5

5.2

Dividend Yield (%) 0.4

0.8

1.1

1.5

2.0

Source: Company, HDFC sec Inst Research

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 98

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

400

500

600

700

800

900

1,000

1,100

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Titan

TP

RECOMMENDATION HISTORY

200

300

400

500

600

700

Jun-17

Jul

-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Tangamiyl

TP

Date

CMP

Reco

Target

21-Jun-18

449

BUY

650

Date

CMP

Reco

Target

21-Jun-18

896

NEU

820

INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 99

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INDIAN GEMS & JEWELLERY : SECTOR REPORT

Page | 100

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