It has been a triple whammy of sorts for Titan in the past one year. Weak consumer sentiment, not-so-favourable regulations and increasing competitive pressure projected that the going was not easy for the company that made the most of a decade long dream run in gold prices from 2002. The next two quarters though promise to be better as its new Gold Harvest Scheme kicks in.
However, increasing competition from regional players which now have national aspirations with aggressive store expansion, marketing strategies and regulatory changes will continue to pose a challenge. Analysts aren’t too worried and carry the opinion that as and when the consumer sentiment recovers, the stock will follow suit. They believe the company, which has changed the landscape of the Indian jewellery market and purchasing behaviour of consumers, would have enough in its arsenal to stay ahead in the long term.
Titan, a joint initiative of Tata group and Tamil Nadu Industrial Development Corporation, entered the market by offering mid- to high-range quartz watches in 1984. After covering suitable ground in the sector, the company diverted its attention towards jewellery in the ‘90s. In the past, over generations, families would frequent the same jeweller, convinced that the shopkeeper would not cheat them in terms of pricing and quality of gold.
The first disruption in the market came when Tata Group launched its jewellery brand Tanishq in 1995 with the intention of selling jewellery that is uniform in design, quality and price— a move that changed the landscape of the jewellery market. The yellow metal until then shone only for the local dealers (or as we now term them, unorganised dealers).
Since then, Titan has become the largest player in the branded jewellery space. With a network of 174 Tanishq stores and 33 GoldPlus outlets across the country, its jewellery business accounts for around 80% of the overall company’s sales (See: Bright spot). What upset the applecart for Titan was the change in the regulations.
Titan has emerged as the largest player in the branded jewellery space and continues to derive 80% of its revenue from it
First, apart from hiking the import duty, the gold lease period was also reduced from 180 days to 90 days. The second was that the new Companies Act of 2013 now construed the advances collected under gold schemes as public deposits and capped the return at 12% and the total amount of deposits to 25% of net worth. The termination of the Gold Harvest Scheme, which contributed around 30% of the total jewellery revenue for Titan, greatly impacted sales in the second half of FY15 (See: Where is the sheen). Almost all jewellers not only stopped accepting fresh deposits, but also had to offer the option of redemption through jewellery purchases or switch over to new schemes.
Where is the sheen
Closure of the Gold Harvest Scheme has taken a toll on Titan’s sales
All this had an impact on their working capital which turned negative. The company relaunched the scheme in compliance with the new regulations in November last year. However, owing to existing limitations, the collections were significantly lower at ₹68 crore at the end of March 15 compared with ₹1,300 crore in March 2014.
According to an Edelweiss report, the limit for GHS is around ₹780 crore as per the new calculations. This will increase by another ₹50 crore in FY16 when the change in accounting standard comes into play. “GHS used to contribute around 25-30% of jewellery sales for Titan. With the current regulatory limitation, the new scheme is expected to contribute around 10% of jewellery revenues,” says Bharat Chhoda, research analyst at ICICI Securities.
The new standards will likely lead to higher capital employed figure as Titan will not be required to provide for the proposed dividend. To make up for the loss of deposits, Titan has tied up with ICICI Bank and HDFC Bank for a pilot recurring deposit scheme wherein the bank will pay interest on the deposits and the company will give discount on purchases as the scheme does not fall under the purview of the Companies Act.
While this takes care of the regulatory hurdle, Titan has been facing the heat from regional players as well. Unlike a couple of years ago when these regional chains kept their cards close to their chest, they now have been using the public platform extensively to reach out to the masses and spread their brand recognition.
From media interactions to venturing into e-commerce, these regional chains have been utilising every opportunity that gives them a good mileage over competition. “Regional jewellers have made clear their ambition to go national and have raised money to fund their expansion plans. While PC Jewellers took the IPO route, Kalyan Jewellers raised a hefty ₹1,200 crore from Warburg,” says Abneesh Roy, associate director, Edelweiss Securities.
“We don’t recognise ourselves as regional players. We have national presence and have been expanding at the rate of 30% annually. We entered Orissa recently and will soon be entering into Rajasthan and West Bengal as well,” points out Ramesh Kalyanaraman, executive director, Kalyan jewellers.
One of the key differentiators for them has been their hold over local consumer preferences. “When we enter a new city or state, our approach for new customer acquisition is to cater to the local needs. For example, our stock composition in Mumbai is quite diversified depending on the locality, for Borivali its more Gujarati specific while in Thane, it caters more to the preference of local Maharashtrians,” he adds.
Similarly, PC Jewellers, TBZ and Joy Alukkas have aggressive expansion plans. “In Ahmedabad, there was only Titan with a proper showroom few years ago. But now players such as Kalyan Jewellers have also opened their showrooms matching the standards of Titan. As a result now customers have more options,” adds Shantibhai Patel, president of Gem and Jewellery Trade Council of India. According to him, they understand the need of divergent demographics rather well. “Regional brands have the legacy to back them up. They have been in this business for a really long time and, therefore, the trust level of consumers is very strong towards them,” he adds.
According to the 2013 report, ‘All that glitters is Gold’ by FICCI-AT Kearney, the growth of national chains like Titan is inhibited by the strong hold of regional and local players over consumers. The report also highlights that since 2008, the share of regional chains in the jewellery business has been constantly increasing. Over the past five years, while the market share of regional brands has considerably increased from 7% to 17%, those of national chains have seen comparatively lesser growth from 3% to 5%.
But CK Venkataraman, CEO-jewellery division at Titan, is not losing sleep over competition from regional players. “There are several regional chains coming out with the ambition to play at national level and that challenge is intensifying for Titan. But one has to understand that firstly most of these players are not listed and their figures are not visible so we can’t really comment on their performance. Secondly, not all of them cater to the same audience.”
For instance, Venkataraman mentions that Lalitha is a big regional player in the south but it is a price warrior. Its targets value buyers who are more price sensitive. “It’s like if a small car manufacturing company comes into the market, BMW won’t be affected,” he mentions.
However, Titan is not taking it easy and is adding more stores to its network (See: Grand design). It opened about 30 new Tanishq stores in FY15 in smaller towns through the franchisee route. In FY16, the company also added 20,000 sq ft across three recently added jewellery stores. It is looking to open 30 to 40 jewellery stores by the year end. Sensing the change in the buying behaviour of consumers, the company has been working towards going online with their own in-house online portal, Titan e-store.
Titan has a strong network of jewellery stores, but rivals too are catching up
“We have ambitious plans for e-commerce and have been working towards enhancing our online store to provide good customer experience,” adds Venkataraman.
“What we deliver in Tanishq is not a FMCG product that can be discounted by 20-30% and put on sale online, it demands trust. So, we are not, at present, collaborating the jewellery segment with online portals,” he mentions. But the company is seriously looking at the omni-channel route to expand its business.
With gold prices touching a four-year low, market sentiment hasn’t been favourable either. Consumers haven’t really been rushing to buy gold both online and offline. With an annual consumption of 850-900 tonne, India remains the second-largest consumer of gold in the world, next only to China. A poor rainfall and harvest meant a weak rural demand which drives nearly 60% of the demand for the yellow metal.
However, the festival season followed by the marriage season is likely to see demand improve in the second half of 2015. Demand is likely to be at least 554 tonne compared with 346.2 tonne in the first half. As a result, for the past two quarters, jewellery revenues have fallen by 15% (March 2015 quarter) and 11% (June 2015 quarter). On a same store basis, the decline has been sharper at 25% and 12%, indicating that much of the growth has come from new store additions.
In a bid to bring in more customers, Titan, like all other jewellers, slashed its making charges by 3% and was able to increase its customer base by 7%, containing the decline in overall customers to 5%. “We have rationalised our prices. Also, once GHS (launched in November 2014) completes its 11-month period, we are hopeful of seeing improved sales,” says Venkataraman.
While the performance in the jewellery segment has been subdued for the past couple of quarters, net sales in the watch and eyewear businesses grew by 9% and 20% during the June 2015 quarter. Despite the sluggish economy and reluctance in consumer demand, the watch business managed to keep its market share intact.
“In the watch business, Titan still continues to lead and our growth rate in upper price band, which is over ₹4,000, has been phenomenal. Also our plans to position Titan watches as a premium brand has been working very handsomely,” says Rajan Amba, general manager – global product creation-Titan. Besides launching new models across brands such as Fastrack and Raga, the company has revealed that it will be launching a smart watch keeping in line with the changing preferences
Despite the short-term blips of waning consumer demand and regulatory interferences, analysts believe the second half would be better for the industry and for Titan. “Weaker consumer sentiment might have pulled down the sales of jewellery division of Titan but as and when the discretionary spends pick up, Titan will be the first beneficiary given its brand equity,” says Pramal Kamdar, associate research analyst, Religare Institutional Research.
The company is equally optimistic that it will do well in the coming quarters. “Consumer demand has affected not only us but the market in total. I believe it’s a cycle and we will come out of it. Also when GHS kicks in, possibly from the third quarter, we will see some recovery and we expect a good quarter,” adds Amba.
The company will buy gold at the lowest cost possible so it will be a combination of going for gold on lease and buy on spot or hedge depending on how international prices behave. “Titan is currently following a hybrid model, that is, a combination of both gold on lease and gold on spot. They are going for either options depending on what costs them the lowest as it gives them the opportunity to scale up their operating margin,” points out Chhoda.
The long term prospects for the industry continue to look bright as well. According to the report by Research and Markets, the gems and jewellery industry, one of the major contributing segments to the Indian economy, is expected to grow at an average of 15% over 2014-19. Almost all the players feel that there is enough room for all of them to grow.
“When I opened the first store in Kerela in 2002, all the players were family based jewellers. Now, the regional players might be growing and expanding and it will for sure intensify the competition. But I believe a healthy competition in the organised domain will result in price standardisation and innovation in design across the industry,” says Joy Alukkas, chairman of Joy Alukkas.
As for Titan, in FY16, revenues are expected to grow by a modest 10%, lead by recovery in the second half. Analysts expect the company to be back on track from FY17. They also predict revenue to grow by 20% and profit to grow by a similar number. At its current market price of ₹318, the stock trades at 25X its estimated FY17 earnings.