Rating Rationale
December 31, 2019 | Mumbai
Titan Company Limited
Long-term rating upgraded to 'CRISIL AAA/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.2850 Crore
Long Term Rating CRISIL AAA/Stable (Upgraded from 'CRISIL AA+/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facility of Titan Company Limited (Titan) to 'CRISIL AAA/Stable' from 'CRISIL AA+/Positive', and reaffirmed the rating on the short term bank facility and commercial paper programme at 'CRISIL A1+'.

The upgrade reflects CRISIL's belief that business profile of the company will continue to improve over the medium term on account of dominant market position in jewellery retail segment, aided by healthy store additions and strong financial profile. In addition, watch segment is expected to witness healthy growth while sustaining the improvement in profitability.

Titan being the market leader in jewellery segment through its Tanishq branded stores, is expected to continue its better than industry growth. Titan has outpaced revenue growth of other large jewellery retail players rated by CRISIL. Between fiscals 2016 and 2019, revenues grew at a compounded annual growth rate (CAGR) of 21%. Strong brand image and trust coupled with ability to provide wide range of designs and robust business model aided Titan's growth.

Though growth moderated to 9% in the first half of fiscal 2020 as industry got adversely impacted by sudden surge in gold prices in mid-June 2019 and cautious bank lending to the sector. Demand is expected to be better in the second half of fiscal 2020 on account of festival, wedding sales and consumers adjusting to the new normal of higher gold prices.

The company is expected to maintain operating margins at 10-12% on the back of industry leading gross margins and good mix of studded products of around 30% of total sales. Additionally, Titan's revenue and profitability diversity has been improving aided by significant improvement in profitability of watch segment over fiscal 2018 and first half of fiscal 2020 and strong expected growth from Titan's engineering subsidiary, Titan Engineering and Automation Limited (TEAL; 'CRISIL AA-/Stable/CRISIL A1+'). CRISIL also expects that losses from new ventures like sarees (Taneira), etc. to not have significant impact on overall profitability and some ventures may also turn profitable over the medium term as they scale up.

The rating continues to reflect Titan's leadership position in jewellery and watches business, healthy operating efficiency and a strong financial risk profile with expected healthy cash accruals of over Rs.1300-1700 crores, gearing and total outside liabilities to tangible networth (TOL/TNW) of less than 0.5 times and 1 time respectively over the medium term. These rating strengths are partially offset by the company's exposure to regulatory risks in the jewellery division and exposure to competition from other organised and unorganised players, in the jewellery segment.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Titan and its subsidiaries, which are strategically important to Titan, and have a significant degree of operational integration with Titan.

Furthermore, CRISIL has amortised the goodwill and intangibles arising from the acquisition of 66.59% stake in Carat Lane Trading Private Limited (CaratLane; 'CRISIL AA-/Stable') over a period of five years starting fiscal 2017. CRISIL has also considered gold on loan as short term debt for its analysis.

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

Key Rating Drivers & Detailed Description
Strength
* Leadership position in its major business segments: jewellery and watches
Titan is the market leader in the organized jewellery retailing and watches segments. The company's market leadership in these segments is driven by its strong brands, healthy store additions, association of trust with the Tata brand, and its pan-India distribution network.

Over the last two years, Titan has also increased its pace of store additions in jewellery segment from ~10-20 stores per annum to ~40-50 stores per annum and the same is expected to continue over the medium term. This coupled with its already strong store network of 308 Tanishq, 34 Mia and 71 CaratLane stores as on September 30, 2019 will further augment company's market position in India.
CRISIL believes that Titan will leverage its brands to expand and maintain its leadership position over the medium term.

* Healthy operating efficiency
Titan also has healthy operating efficiency reflected in its industry-leading operating margins of 11% in fiscal 2019. The company's healthy operating efficiency stems from strong control over operations, outsourcing of jewellery-making to karigar parks, in-house design and expertise in manufacturing processes of watches, efficient working capital management, and prudent hedging policies. CRISIL believes that Titan's robust operating efficiency will enable it to maintain its strong operating profitability over the medium term.

* Strong financial risk profile
Titan's financial risk profile is marked by healthy gearing and ample liquidity. As on March 31, 2019, the company had gold on loan and other bank debt liabilities of Rs.2393 crore. Also, Titan's expansions are prudently managed through a mix of company-owned, company-managed (inventory owned by company and franchisee operated), and franchisee stores with increasing focus on franchise stores going forward. Hence, large-scale retail space additions do not result in heavy capital expenditure (capex). CRISIL believes that Titan's capex will remain between Rs.300-400 crores per annum over the medium term; this will be largely funded through internal accruals of over Rs.1300-1700 crores per annum.

Weakness
* Exposure to regulatory risks in the jewellery division
Titan remains exposed to regulatory risks in the jewellery division. This sector had seen heightened regulatory action in the past. For instance, during fiscal 2014, to curb the import of gold, the government introduced the 80:20 rule, discontinued gold on lease scheme and modified the gold deposit scheme. Subsequently, in fiscal 2015, the gold on loan scheme was re-started and 80:20 rule was scrapped.

Furthermore, since January 2016, the government has mandated jewelers to collect PAN card for all purchases beyond Rs.2 lakhs. The government has also introduced the sovereign gold bond scheme, to shift consumer preferences away from physical gold. Import duty on gold was increased by 2.5% in fiscal 2020. Some of these regulatory changes had moderated the company's operating performance in the past. CRISIL believes that Titan will remain susceptible to changing regulatory norms.

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

Titan had ample liquidity in form of cash and marketable securities of around Rs.1136 crores as on March 31, 2019. Company mainly relies on gold on loan facilities for funding needs and therefore has low average bank limit utilization of 2% for 12 months ended November 2019. Given strong cash accruals and ample liquidity, CRISIL believes that Titan will maintain its healthy liquidity profile over the medium term.

Outlook: Stable

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

Rating Sensitivity factors
Downward Factor
*Significant impact due to regulatory changes, or due to supply related issues impacting Titan, leading to deterioration in business risk profile
*Sustained reduction in operating profit margin to below 8% significantly impacting cash generation.
*Material weakening of credit metrics, for instance TOL/TNW exceeding 2.3-2.5 times, due to aggressive debt funded expansion plans or acquisitions.

About the Company

Titan was incorporated in 1984 as a joint venture between the Tata group and Tamil Nadu Industrial Development Corporation Ltd (TIDCO). Titan is the market leader in both its core segments, watches, and branded jewellery. Titan's brand portfolio includes Titan, Sonata, Fastrack, Raga, Xylys, Favre Leuba and Nebula for watches; and Tanishq, Mia, Carat Lane and Zoya for jewellery. Its other business activities (around 5% of the turnover as of 1H fiscal 2020) include precision engineering and prescription eye wear. The company has also launched a new brand, Skinn in the perfume segment in 2013. The Tata group and TIDCO hold about 25% and 28%, respectively, of Titan's equity shares, with Foreign Institutional Investors, financial institutions, banks, corporate entities, and the public holding the rest. Titan's manufacturing and assembly plants are in Hosur and Coimbatore (Tamil Nadu), and in Dehradun, Roorkee, and Pantnagar (all in Uttarakhand), Sikkim.

For the six months ended September 20, 2019, Titan reported consolidated revenues of Rs.9,813 crore and PAT of Rs.675 crore against Rs.9,018 crore and Rs.629 crore respectively during the same time last year.

Key Financial Indicators*
As on/for the period ended March 31 2019 2018
Revenue Rs crore 19,779 16,156
Profit after tax Rs crore 1389 1102
PAT margin % 7.0 6.8
Adjusted Debt/Adjusted Networth Times 0.39 0.33
Interest coverage Times 41.3 32.4
*Company Reported
CRISIL adjusted gearing considering gold on loan as debt 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs.crore)		 Rating assigned
with outlook
NA Proposed Cash Credit* NA NA NA 2400 CRISIL AAA/Stable
NA Proposed Letter of Credit** NA NA NA 450 CRISIL A1+
NA Commercial Paper NA NA 7-365 days 500 CRISIL A1+
*One way interchangeability to Import letter of credit, foreign letters of credit and Standby letters of credit to the extent of sanctioned limit
**Interchangeable with standby letter of credit and bank guarantees
 
Annexure - List of entities consolidated
Name of entities Extent of consolidation Rationale for consolidation
Carat Lane Trading Private Limited Full Strategically important and have significant degree of operational integration.
Titan Engineering & Automation Limited Full Strategically important and have significant degree of operational integration.
Favre Leuba A G, Switzerland Full Strategically important and have significant degree of operational integration.
Titan TimeProducts Limited (till 18 June 2018) Full Strategically important and have significant degree of operational integration.
Titan Watch Company Limited, Hong Kong
(100% subsidiary of Favre Leuba A G)		 Full Strategically important and have significant degree of operational integration.
Montblanc India Retail Private Limited Full Strategically important and have significant degree of operational integration.
Green Infra Wind Power Theni Limited Full Strategically important and have significant degree of operational integration.

Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      07-12-18  CRISIL A1+  06-07-17  CRISIL A1+  27-07-16  CRISIL A1+  CRISIL A1+ 
            31-07-18  CRISIL A1+      22-03-16  CRISIL A1+   
Non Convertible Debentures  LT    --    --    --    --  22-03-16  Withdrawal  CRISIL AA+/Stable 
Fund-based Bank Facilities  LT/ST  2400.00  CRISIL AAA/Stable      07-12-18  CRISIL AA+/Positive  06-07-17  CRISIL AA+/Stable  27-07-16  CRISIL AA+/Stable  CRISIL AA+/Stable 
            31-07-18  CRISIL AA+/Stable      22-03-16  CRISIL AA+/Stable   
Non Fund-based Bank Facilities  LT/ST  450.00  CRISIL A1+      07-12-18  CRISIL A1+  06-07-17  CRISIL A1+  27-07-16  CRISIL A1+  CRISIL A1+ 
            31-07-18  CRISIL A1+      22-03-16  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Cash Credit Limit* 2400 CRISIL AAA/Stable Proposed Cash Credit Limit* 2400 CRISIL AA+/Positive
Proposed Letter of Credit** 450 CRISIL A1+ Proposed Letter of Credit** 450 CRISIL A1+
Total 2850 -- Total 2850 --
*One way interchangeability to Import letter of credit, foreign letters of credit and Standby letters of credit to the extent of sanctioned limit
**Interchangeable with standby letter of credit and bank guarantees
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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