Can Titan manage its problem of plenty?

AT TITAN INDUSTRIES’ JEWELLERY FACTORY in Hosur, near Bangalore, you walk on gold, literally. Minute particles of the metal float all around and often stick to your clothes and shoes. Titan has installed around a dozen foot scrubbers at the factory to extract gold from shoe soles. Last year, nearly 25 kg of gold, worth Rs 7 crore at current prices, was recovered. P. Balasubramanian, manager, technology cell, at the jewellery division, says they get nearly 6 g of gold every week from a single scrubber.

Titan’s balance sheet is similarly gilded. In the last three years, revenue has grown more than twice to Rs 6,700 crore, its net profit three times (Rs 430 crore), value four times (Rs 18,000 crore) and operating cash flow five times
(Rs 1,025 crore). Indeed, Titan is now the fifth-most valued firm within the Tata Group, after Tata Consultancy Services, Tata Motors, Tata Steel, and Tata Power. Barely a decade ago, it was almost given up for dead. So what should managing director Bhaskar Bhatt, who has been with Titan since its beginning in 1984, do with the cash fest?

Titan is already a market leader in all the businesses it operates in, be it watches (Titan, Raga, Fastrack, Sonata, and Xylys), jewellery (Tanishq), prescription eye care (Titan Eye+), or fashion accessories (Fastrack). Tata companies such as Tata Motors, Tata Steel, Tata Chemicals, Tata Global Beverages (formerly Tata Tea), and Indian Hotels also have a history of building on their successes at home to emerge as global players. Will Bhatt then go for that big acquisition, either here or abroad? Continue diversifying and build scale? Return the money to shareholders? Or combine any of these?

The folks at Bombay House, Tata Group’s headquarters in Mumbai, haven’t begun pushing him to come up with a new strategy, or a big idea, yet. “Bombay House representatives on the board such as Ishaat Hussain and Noel Tata are hands-off,” says Bhatt. Neither is there any directive from Ratan Tata. In the last year, Bhatt hasn’t met Tata even once to discuss Titan.

Maybe being headquartered in Bangalore distances Titan from Bombay House’s everyday gaze. Titan is also somewhat different from some of the other group companies. Though the Tatas control 25% and run the company, it is, strictly speaking, a joint venture—the Tamil Nadu Industrial Development Corporation (Tidco) owns another 28%. On the board, the Tatas always nominate the MD, and TIDCO the non-executive chairman. For all practical purposes, however, Tidco is a sleeping partner. Then, while Tata Steel, Tata Motors, Tata Consultancy, Indian Hotels, etc., have stuck to their core businesses, Titan has moved across categories and seeded new ventures over the years.

“We started with watches, then diversified into jewellery, followed it by a foray into precision engineering, prescription eye wear, and Fastrack fashion accessories,” says Bhatt. “The pressure [to keep performing] is more internal than external. Our only agenda is to generate profitable growth and we have been quite successful at that.”

These days, Titan is trying to temper shareholder expectations by cautioning them about a worsening macro-economic environment. “It’s true that the company is generating a good amount of cash but the operating environment may change tomorrow. So we remain cautious and keep our fingers crossed,” says S. Subramaniam, chief financial officer. But the expectations are on longer term strategy.

The opportunity staring Titan in the face is to grow the jewellery business. From accounting for just about half of total revenue five years ago, it accounted for nearly 77% of sales last fiscal. Next year, jewellery is expected to clock Rs 9,000 crore in sales, an 80% jump in a year, no doubt aided by the rise in gold prices. But despite such impressive numbers, Tanishq is a market leader with just a 4.5% share. That translates into a huge opportunity. “Just imagine if we are able to garner 10% of the estimated Rs 1.35 lakh crore jewellery market in the next five years,” says Bhatt.

A BIGGER PUSH INTO JEWELLERY will help Titan keep making profits, but may not solve the problem of gainfully employing the cash it’s generating. During the year ending March 2011, Titan generated free cash flows worth Rs 1,044 crore, up three times from Rs 312 crore in the previous year. This surge is partly due to the unstoppable rise in gold prices, but also because of Titan’s Golden Harvest scheme, which lets customers make equal monthly cash deposits for 11 months; Titan makes the 12th payment. The next month, the depositor can use all the money to buy Tanishq jewellery.

This isn’t necessarily a smart scheme for individuals—there’s no hedge against gold prices and there are instruments that offer better returns—but Titan has made good use of the affinity that Indians have towards gold. Essentially it is raising capital at 9.1% when State Bank of India’s benchmark prime lending rate stands at 14.75%. Last year, Titan raised Rs 630 crore from customer deposits and had negative working capital.

The other reason for the cash is the business model. It is one of India’s largest speciality retailers with 665 stores at the end March 2011, but the bulk of them, nearly 600, are owned by franchisees. Titan trains the staff, plans and designs the interiors, and actively helps the franchisee make the most on his investment through constant advertising. “Our retail strategy is management intensive but asset light. We control the entire customer/purchase experience. The investment can come from anywhere,” says Bhatt. Titan has followed the same model in Titan Eye+ and Fastrack.

While the street loves this, it also realises that it leaves Titan with few avenues to deploy its cash in its own business. “The company has mastered the model of an asset-light growth in the consumer discretionary space. The rate of its internal cash generation is now in excess of the recurring growth capital required for its organic growth plans,” says Ajay Parmar, head, institutional research, Emkay Financial Services, which has a hold rating on the stock.

The default outcome in such a scenario will be the build up of a huge cash chest similar to what Infosys Technologies has or Bajaj Auto once had. But that will result in a decline in return on net worth, something the markets may not appreciate. The other option is to significantly increase dividend payouts. In the last five years, the payout ratio has hovered between 25% and 30% of net profit, in line with other large Tata companies. But parting with a larger share of profits may imply giving up on potential growth opportunities. Will Bhatt and his colleagues do that given that diversification lies in Titan’s DNA?

THE STREET’S EXPECTATIONS are high. Parmar feels that Titan’s growing cash pile (Rs 1,110 crore of cash and equivalents in fiscal 2011, nearly six times that of fiscal 2010) opens many possibilities, including a big overseas buyout. He cautions that given Titan’s premium valuation—nearly 36 times its 12-month trailing earnings, twice that of S&P CNX Nifty—the management will need to be extremely careful about selecting its target. “Titan offers very high return on equity (49% average in the last three years) and return on capital employed (40% three-year average) to its shareholders. The management has to make sure that diversification or inorganic expansion doesn’t dilute these ratios unnecessarily. Otherwise, the stock market will react negatively.”

Of course, given the Tata parentage, Titan may not give too much credence to short-term share price fluctuations as long as the deal has the potential to create shareholder value in the long term. “They have a record of going against the market if they are convinced about the strategic fit of a large deal, whether it was the acquisition of Corus by Tata Steel or the Jaguar Land Rover (JLR) buyout by Tata Motors. And most often their stance has been proved right in the longer term,” says Devang Mehta, vice president and head of equity sales at Anand Rathi Financial Services.

According to him, Titan is on a better footing than many of its group cousins to make a large overseas acquisition. “Equity valuations are far lower today than they were when other Tata Group companies closed big-ticket overseas acquisitions. Lower valuations offer the right opportunity for Titan to land a good deal without stretching its balance sheet too much,” says Mehta. He expects Titan to look for an opportunity in the luxury space, given the group’s strategy in the past to acquire marquee luxury brands such as JLR and Indian Hotels’ equity investment in Orient Express Hotels. Of course, with Titan, the Tatas will also need to carry their partners along.

IT'S NOT AS IF TITAN HASN'T evaluated entering the luxury watch space, but, for the time being, it believes it makes better sense to sell watches than buy a global watch brand. It has launched a chain called Helios—there are 13 stores already, with a target of 40 by year end—that sells luxe watches. “It’s not possible for any single brand to dominate the high-end luxury space given fickle brand loyalty among consumers and high branding costs. With Helios we will keep the growth in luxury watches under Titan’s profit and loss account, without worrying about a particular brand’s market share,” says Ajoy H. Chawla, vice president and business head, Titan and retail.

Ishaat Hussain, executive director, Tata Sons, says Titan has an “outstanding reputation” in West Asia, where it is a leading brand. But, he adds, “at present, there are no plans for any major foray into overseas markets.”

Unlike watches, which are largely similar products around the world, jewellery is influenced by local trends. “Jewellery is a localised business with a lot of cultural influence on the design and purchase behaviour. This makes it tough to globalise the Tanishq division the way you would do with other consumer products,” says C.K. Venkataraman, chief operating officer of Titan’s jewellery division.

As Arvind K. Singhal, chairman, Technopak Advisors, a management consultancy firm that focusses on fashion and retail, argues, jewellery demand and its consumption patterns are closely related to culture and traditions in India, while in the West, jewellery is largely a fashion accessory. “This makes it tough for Indian jewellers to crack the markets in Europe and North America and vice versa.”

Titan learnt this the hard way when it tried to enter the U.S. jewellery market by opening a Tanishq store each in Chicago and New Jersey in 2008. But poor customer response and mounting losses compelled it to pull out.

So, isn’t that exactly the reason why a big overseas buyout of a familiar name may work for Titan? Bhatt concedes there’s intellectual merit to the argument. He adds that the kind of company that he’d be attracted to would be something like Tiffany’s, but that would be too big a deal.

Singhal takes a view which is different from the street’s. He believes Titan should pursue overseas opportunities once it becomes a goliath with revenue of around Rs 40,000 crore, at a point when the home market may appear small. “Today, it shouldn’t waste its time and resources on hunting for a marquee foreign buyout. India is such a large market and Titan has just scratched the surface. Everything is in its favour right now.”

This strikes at the heart of understanding why Titan has been so successful recently. While operating efficiencies and better strategy are two reasons why, the Tata name has also had a role to play. “We don’t have to go out of our way to push our products because of the trust the Tata name enjoys among our customers. They know that our dealings with them will be fair and that Titan will always be around to offer after sales service. How many brands can offer that peace of mind to their customers?” asks Adil Buhariwala, store manager at a Titan store on Linking Road.

Opened a year and a half ago, this company-owned showroom made Rs 4.5 crore in fiscal 2011, nearly twice the target. Next year’s goal is Rs 7 crore, which Manjit Gill, regional sales manager of Titan watch division, Mumbai west, is confident of besting. “We didn’t open this store to push up our share of revenue, but to give customers a new shopping experience and thus establish Titan as a high-end watch brand,” says Gill.

The mood is no different at a Tanishq store a few kilometres away. “We are successful because we don’t come across as typical retailers. We don’t discourage walk-ins or those who just browse,” says Jagdish Sandesha, the store’s sales manager. Replicating this globally won’t be easy. “Outside India, we’ll be like any other jeweller,” says Venkataraman.

SO WHERE DOES THAT leave Bhatt and his cash? Chances are that the company will make a big push into retail and Titan will alter its franchisee model. Tanishq is opting for company-owned outlets and some of the stores being opened are massive, over 20,000 square feet. All the Helios stores are company owned. There are also some faint stirrings of cooperation with Trent, the Tata Group’s retail arm, of which Noel Tata is the managing director. Recently, Trent and Titan jointly approached Gopalan Innovation Mall in Bangalore for better rates.

Retail is a capital intensive business which Titan can afford. Helios shows that it is not averse to selling other brands, (TAG Heuer, etc.) as long as it doesn’t compete with Titan; don’t be too surprised if you see Tiffany labels on Tanishq racks next. Even in eye wear, Titan Eye+ (expected to grow from 177 stores to 400 in three years) is being modelled along the lines of Europe’s Vision Express. And finally, retail is business Bombay House is betting on. Tie these up and you can see Titan slowly morph into a multi-brand retailing company.