Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the Rs 3000 crore non-convertible debenture of Titan Company Ltd (Titan), and reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the company’s bank facilities.

 

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

 

Titan is expected to sustain its healthy operating performance, supported by strong market position across products. Operating revenue grew 41% in fiscal 2023, driven by robust growth in all the three segments (jewellery, watches and eyewear) supported by store expansion. Operating margin is likely to sustain at ~12% over the medium term, driven by operating leverage, favourable product mix, and expectation of sustained healthy margin for all segments such as eyewear, watches and CaratLane Trading Pvt Ltd (CaratLane; ‘CRISIL AA+/Stable’).

 

CRISIL Ratings has noted the announcement by Titan on August 19, 2023, that it has entered into an agreement to acquire the entire share (27.18% of the total paid-up equity share capital) of the founder of CaratLane Trading Pvt Ltd (CaratLane; ‘CRISIL AA+/Stable’), Mr Mithun Sacheti (and his family members), on a fully diluted basis for Rs 4,621 crore. The proposed acquisition would further increase the stake of Titan in CaratLane to 98.28% on a fully diluted basis; the acquisition will be funded through a combination of debt and internal accrual.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Titan and its subsidiaries, which are strategically important to Titan. Also, all the entities have significant operational integration.

 

Gold on loan has been considered as short-term debt for the analysis.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in major business segments: Titan is the market leader in the organised jewellery retailing and watches segments, driven by its strong brands, healthy store additions, association of trust with the Tata brand, and a pan-India distribution network. The company had a strong store network in both jewellery and watch segments with 559 stores in the jewellery segment (Tanishq, Zoya and Mia), 233 CaratLane stores and 1,031 stores for watches as on June 30, 2023. Titan will leverage its brands to expand and maintain its leadership position over the medium term. Tanishq opened its first international boutique in New Jersey (USA) in December 2022.

 

• Healthy operating efficiency: Healthy operating efficiency is reflected in industry-leading operating margin of 10-12% over fiscals 2018 to 2023 (fiscal 2021, being an exception due to disruptions caused by the Covid-19 pandemic). The robust operating efficiency stems from strong control over operations, outsourcing of jewellery-making to karigar parks, in-house design and expertise in manufacturing processes of watches, efficient working capital management, and prudent hedging policies. Robust operating efficiency will enable the company to maintain strong operating profitability over the medium term.

 

• Strong financial risk profile: The financial risk profile is supported by healthy gearing and ample liquidity. As on March 31, 2023, the company has gold on loan and other bank debt liabilities of over Rs 7,494 crore (Rs 5,916 crore in fiscal 2022) and liquidity of over Rs 3,500 crore. Increase in debt during fiscal 2023 is attributed to increased inventory for festivities (Akshaya Tritiya). The capital structure is expected to remain comfortable despite the acquisition of an incremental 27.18% stake in CaratLane (expected to be funded through debt and internal accruals).  Total outside liabilities to tangible networth (TOL/TNW) ratio was ~1.2 times as on March 31, 2023. Furthermore, expansions are prudently managed through a mix of company-owned, company-managed (inventory owned by company and franchisee operated), and franchisee stores with increasing focus on franchise stores going forward. Hence, large-scale retail space additions do not result in heavy capital expenditure.

 

Weaknesses:

• Exposure to regulatory risks in the jewellery division: Titan remains exposed to regulatory risks in the jewellery division. This sector has seen heightened regulatory action in the past. For instance, during fiscal 2014, to curb the import of gold, the government introduced the 80:20 rule, discontinued gold on lease scheme and modified the gold deposit scheme. Subsequently, in fiscal 2015, the gold on loan scheme was restarted and the 80:20 rule was scrapped. Furthermore, since January 2016, the government has mandated jewellers to collect PAN card for all purchases beyond Rs 2 lakh. The government has also introduced the sovereign gold bond scheme, to shift consumer preferences away from physical gold. Import duty on gold was increased 2.5% in fiscal 2020 and later reduced by over 2% to 10.75% in fiscal 2021. Some of these regulatory changes have moderated operating performance in the past. CRISIL Ratings believes that Titan will remain susceptible to changing regulatory norms.

 

• Intense competition in the jewellery segment: Titan is exposed to intense competition in the jewellery retailing segment. Jewellery retailing in India is largely dominated by unorganised players, which have a stronghold in their regions. Besides, organised players have also been expanding rapidly in select regions, posing stiff competition. As Titan expands into newer geographies and cities, it will face severe competition from these local players. However, increasing consumer awareness about branded jewellery and purity of gold, implementation of hallmarking since June 2021 and the trust associated with the Titan brand will enable the company to penetrate new markets over the medium term.

Liquidity: Superior

Titan had ample liquidity in the form of cash and investments of nearly Rs 3,500 crore as on March 31, 2023, and unutilised fund and non-fund-based bank lines of over Rs 8,500 crore as of April 2023. The company has no long-term debt on its balance sheet as on March 31, 2023 and relies mainly on gold on loan facilities for funding needs. It alternates between using gold on loan or working capital bank limits, depending on the cost of funds and gold price movements. Besides, funds raised under its Golden Harvest Scheme also help fund working capital needs. The strong cash accrual (estimated at over Rs 3,000 crore per annum) supports funding of the acquisition of 27.18% stake in CaratLane. Titan is expected to maintain ample liquidity over the medium term.

Outlook: Stable

The business risk profile of Titan will continue to be supported by its dominant position in the organised jewellery segment, strong distribution network, steady demand prospects, and healthy operating capabilities. The company is also expected to sustain its leadership position in the watches and eyecare divisions. The financial risk profile will remain supported by steady cash generation, well-phased, expansion plans, and prudent working capital management.

Rating Sensitivity factors

Downward factors:

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

 

Environment, social, and governance (ESG) profile

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

 

The retail sector has low environmental impact, primarily in the form of low emissions and water consumption and increasing focus on the usage of sustainable packaging. The sector has moderate social impact because of its direct bearing on the health and wellbeing of its workers and customers.

Strong focus on addressing these ESG risks supports the already strong credit risk profile of Titan.

 

Key ESG highlights

• The company and its divisions continue to harness energy from renewable sources such as solar and wind, thereby positively impacting the environment and reducing carbon emissions. The jewellery division invested in a 2-megawatt solar plant, which would ensure that the factory operates completely from renewable energy sources in the coming years.
• In terms of water recycling, 88% of the water used in fiscal 2022 is recycled.
• Titan follows multiple initiatives and policies to promote education, community improvement, community engagement, employee engagement, development and safety and responsible sourcing.
• The governance structure of Titan is characterised by 50% independent directors, a split chairperson and chief executive officer position, extensive financial disclosures, presence of an investor grievance committee and a board comprising six independent directors out of 13 members.

 

There is growing importance of ESG among investors and lenders. Continuous commitment of the company to embed sustainability principles across the organisation and its value chain will play a key role in enhancing stakeholder confidence

About the Company

Titan was incorporated in 1984 as a joint venture between the Tata group and Tamil Nadu Industrial Development Corporation Ltd (TIDCO). It is the market leader in both its core segments, watches, and branded jewellery. The brand portfolio includes Titan, Sonata, Fastrack, Raga, Xylys, and Nebula for watches; and Tanishq, Mia, CaratLane and Zoya for jewellery. Its other business activities include precision engineering, prescription eye wear, accessories, fragrances and ethnic wear. The company has also launched a new brand, Skinn, in the perfume segment in 2013. The Tata group holds about 25% and TIDCO 28% of equity shares, with foreign institutional investors, financial institutions, banks, corporate entities, and the public holding the rest. The manufacturing and assembly plants of Titan are in Hosur and Koyampuththur (Tamil Nadu), and in Dehradun, Roorkee, and Pantnagar (all in Uttarakhand) and Sikkim.

Key Financial Indicators

As on/for the period ended March 31			2023	2022
Operating income		Rs crore	40,634	28,850
Profit after tax (PAT)		Rs crore	3,274	2,198
PAT margin		%	8.1	7.6
Adjusted debt/adjusted networth*		Times	0.65	0.66
Interest coverage		Times	16.82	16.06

Reported financials

*CRISIL Ratings has adjusted gearing by considering gold on loan as debt

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Working capital facility*	NA	NA	NA	2725	NA	CRISIL AAA/Stable
NA	Proposed letter of credit*	NA	NA	NA	125	NA	CRISIL A1+
NA	Non-convertible debentures@	NA	NA	NA	3000	Simple	CRISIL AAA/Stable

*Interchangeable with Import letter of credit, foreign letters of credit, standby letters of credit, bank guarantees, cash credit and working capital demand loan

@yet to be issued