Titan Company Limited (500114) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Titan Company Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C. K. Venkataraman, Managing Director of Titan Company Limited. Thank you, and over to you, sir.

Thank you. Good evening, all of you. It's wonderful to see so many of you on the call. Before I share highlights of the quarter, I'd like to quickly call out people who are with me this side: Ravi, CEO of the Watches and Wearables Division; Ajoy Chawla, our CEO of Jewellery Division; Saumen Bhaumik, newly became CEO of the Eyewear Division; Suparna Mitra, Chief Sales and Marketing Officer of the Watches and Wearables Division; Rajeshwari Srinivasan, Chief Operating Officer of Taneira; Manish Gupta, Chief Operating Officer, Fragrances and Accessories; and of course, Subbu, CFO; Nandu is Deputy; and we have Ramachandran, Pulkit and Govind from the Finance Department; and Raj Narayan, our Chief Human Resources Officer. So welcome to the call. Once again, it's been quite a satisfactory quarter. If you were to look at the retail sales slide, which is, I think, Slide Number -- Page 42, you can see the performance in the quarter for the main formats of the company, World of Titan, Helios, CaratLane, Tanishq were all ahead of -- I'm sorry, I have a bad cough, bear with me. All these formats grew in retail sales Y-o-Y better compared to Q2 and H1 of FY '20, and are in line and slightly in excess of the estimates that we had declared on the last call. So from what we read about the competitive performance, particularly, in Jewellery and Watches, we're clear that we are gaining -- continuing to gain ground and market share. Our assessment is that compared to our 16% growth of Tanishq. By and large, the industry was in high single digits or maybe worse, lower double digits, which confirms our double-digit decline, which confirms our continuing trend in market share gain in this situation. And even in the watch business, the performance has been very similar. We are sort of ruling the roost in the department stores with the Titan brand. The toughest environment with all the international brands that you can name fighting neck to neck with Titan, and Titan emerging well deservedly at the top. So overall, the retail sales growth performance was very good. The primary sales growth was a little muted, relatively speaking, in the Jewellery business. We had a base effect in terms of a large institutional order of coins in FY '19, and that was an unlike to like situation for FY '20. In the watch business, we had some pressures on the trade side of the business, which, of course, finally caught up back in the month of January. So the results take into account all this and overall, we are reasonably satisfied with our performance. And I have nothing more at the moment to add to individual businesses, so I think the CEOs are here, and we can start the Q&A, and then I'll come in appropriately as and when. Thank you very much.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Sir, good set of numbers. My first question is on Taneira. So on a base of 7 stores, you added 3 stores this quarter and you have expanded to new cities, Pune, Mumbai, in the last 2 quarters. So my questions are, how is the sales per square feet in this format? And what is the gross margin and EBITDA margin on a longer-term basis? And are you also looking at departmental stores in terms of the brand because you do operate in most of your businesses in the departmental stores, so will this brand also be taken into that in the medium, long term?

Abneesh, full remarks to you on totally surprising us with the first question. But it's a great thing that you are asking a question about Taneira, which is going to be a big, big bet for us in the future. Yes, the customer value proposition of Taneira has been very, very squarely built. We are very convinced about the differentiation that we have brought into this unorganized kind of market with a national brand and a national chain. And the metrics that you're talking about, gross margin, sales per square foot, stock turn and all that are currently in our focus. Our emphasis in the next 1 or 2 years is going to be actually building acceptable levels of gross margin, acceptable levels of sales per square foot. So that franchising becomes a viable, exclusive way of growth and thereby, we can gallop towards FY '25. So at the moment, I am not in a position to share information on gross margin sales per square foot or EBITDA, in any case, is academic at the moment, it's a -- so it's a startup business.

But sir, one follow-up. In terms of expansion plan, at least, you now go aggressive because 2 quarters itself, I think, 5 stores have been added. At least that bit of confidence has come?

Yes, yes. We're very confident. The reason why we set up those stores is we wanted a certain kind of coverage of the country in terms of cultures and catchments and all that, so that we can build the business in a proper manner. So we're going to take FY '21 to do that. And thereafter, actually, take it into an explosive growth of expansion. So we have now high streets, some villas, some mall stores. So we have a good mix of formats, regions and cultures for us to now sort of fix all the operating parameters for building the growth thereafter.

Sir, my second and last question is on the Jewellery business. When I see the like-to-like growth, Tanishq and CaratLane has seen a very different kind of a movement. So Tanishq, the like-to-like growth has actually accelerated this quarter versus the first 6 months. So 9 month is 7% and this quarter is 9% in terms of like-to-like growth. CaratLane, there is a significant slowdown from 23% for the 9 months, it's only 14% in this quarter. So what's the -- why this divergence is there? And in CaratLane, why there is a bigger slowdown compared to, say, Tanishq?

Actually see, CaratLane has got a two-pronged approach, Abneesh, one is the retail store and what you see here is a retail store thing. CaratLane also has a big online business and the online growth continues unabated. So I wouldn't go so much by 1 particular quarter here, I would like to see a more a secular aspect here. On a secular basis -- now just go back to that. So if you look at our like-for-like growth of 23% for 9 months, it's a very, very handsome growth in any business today. And I look at it rather than wonder why 14% happened versus Tanishq being better and all that. That 9% is anywhere lower than the 14% of CaratLane. So to that extent, it doesn't matter so much.

And sir, one last follow-up. So Q4 marriage dates looks good and base also turns quite favorable for the Jewellery business, just 21% versus 36% in Q3. So any comment on, say, Q4? And how you're seeing FY '21? I know guidance you may give a bit later, but any sense on FY '21 based on qualitative?

This is Ajoy Chawla, CEO of the Jewellery business. So yes, Q4, the marriage dates are good, and the outlook continues to be good, but also volatile. We see opportunities for market share gains continuing in Q4 for us. In terms of outlook for the quarter, we are staying with the earlier guidance that we gave between 11% to 13% is the kind of growth that we are expecting to hit for this quarter. FY '21, we would like to come back to you in May, once we have kind of assessed the market even better. We are still in the process.

The next question is from the line of Avi Mehta from IIFL.

Sir, I had -- first question was on the watch segment. We -- I wanted to just understand, has this weakness that you've seen in the watch segment kind of come off now? And -- because you said something about the trade channel now getting into the base in January. And if that is the case, would you now reiterate that double-digit sales growth guidance that you had shared in the last quarter? And the second is also the expectation of the watch margins? If you could share that as well.

I missed the first line, what is the -- this thing?

What he said was, the retail sales growth was good in Q3.

Yes.

But the trade you've seen is...

Yes. Because of trade channel, but it has come back from that sense. So overall growth in January has been good. See, the trade channel is still under pressure in terms of the liquidity crunch, in terms of stocks with the distributors. So it hasn't eased out completely and it will take, I think, the next 2, 3 months for the trade channel to ease out, and that is the largest channel for us. Retail, as you know, has done pretty well. So overall, January has been a much better month than December. If you look at the last quarter, October/November was very good for us. It was only December, which wasn't that good. So overall, quarter 3 results are -- we're good on the retail front, as we said earlier.

Okay. And the margin side, sir? How should we see that given what the trade weakness that you're kind of alluding to?

Yes. So this quarter is low on account of various reasons, and it's down to 8%. But I think we hope to end the year where we want it to and where it's been so far. So quarter 4 will not be like quarter 3.

So you mean yearly, it should be at least flattish is how it should -- I mean, from an annual basis, that's sort of like quarterly only, but yearly...

We hope -- I mean, we hope it will be comparable or slightly better than last year.

Okay. Okay, sir. And sir, the second bit was on the Jewellery margin, sir. And just if you could help clarify or kind of explain what is this channel mix impact that you alluded to and which you have highlighted? And how should we look at margins as we trend forward, given that the service mix typically kind of improves in the next quarter? That's all from my side.

Yes, and so with regard to channel mix, we have 3 different channels, L1, L2, L3. The L1s are company stores -- company-made stores, the company inventory. L2 are company inventory, but franchisee managed and L3 are inventory and management by franchisee. So we have been seeing higher growth in the L2 as well as L3, which is the franchise stores. Many of these franchise stores are also in smaller towns, and we've also expanded in many towns. So we have been seeing higher growth there. And the management commission that you see is moving directly to the L2 stores, which is showing a higher growth than our overall growth. And therefore, the channel mix is accounted for that difference. In terms of the operating margin. I think quarter 4, yes, traditionally has been a better operating margin, thanks to the studded mix being higher. And we expect that to continue like previous years, and therefore, it should be a better operating margin, hopefully, in the quarter 4.

Sir, if I may just add back, when you said L2 has seen stronger growth, would that also be kind of weighing on working capital or it's only the exchange that would be the reason?

Sorry, bringing on working capital? I didn't understand.

Sir, given that L2 has seen stronger growth rate versus L3, does that in any way result in higher working capital as well for the company, given that we are -- or no, it doesn't?

No. So L2 and L3 both have seen good growth compared to L1. I think working capital, yes, is a function of our inventory in L1 and L2 stores. And that's also a function of both the gold rate as well as the absolute tonnage of gold that we're seeing so far. Because gold rate has been volatile and going up, that has also been taking up our working capital.

Okay, sir. And for the expectation with you said would be continuing to be rapid.

The next question is from the line of Manoj Menon from ICICI Securities.

The first question is actually on the expansion in the Tanishq part of the portfolio. So just trying to understand that given that we have seen a good expansion in -- rather -- and it was a relatively muted 1H and then suddenly we have seen an acceleration. Just sort of a thought process, not for the next quarter, little ahead of that. How do I think about expansion in general? Just not trying to get a number for FY '21, but whether it's number of cities or square feet or kind of any directional comment would be very helpful.

Yes. So expansion has been a good growth driver for us. And we have seen very good results over the last couple of years. So like this year, we are continuing to put pressure on expansion. In fact, we are not letting the foot off the pedal because we see the opportunity continuing and delivering good result. So directionally, like we have pushed hard this year, we will continue to push hard next year in terms of number of stores that we had or square footage or even towns. In fact, we are looking at adding many more towns next year. And that's the thrust of our expansion.

Okay, okay. Understood. And the second question is actually one on the mix and second on the margin levers. The first question is actually -- sub-question is on the mix part of it. Is it fair to say that we've actually seen somewhat a deterioration in the gold mix?

Well, I wouldn't say that. Quarter 3, we saw a better studded ratio. But I cannot say that because even if I look at January month, we are seeing a good resurgence in gold. It's difficult to predict because the 2 segments are kind of behaving independent of each other. They are not kind of linked. So we are seeing a lot more people come into the market despite a studded activation on at this point in time. We're actually seeing a good traction on plain gold both the nonbridal or bridal as well as gold coins. So it's difficult to predict.

The reason I asked this question because -- sorry, you were saying something?

Yes. I was saying, so we are independently targeting the respective segments and the mix and the studded ratio that emerges as an outcome.

No, no. I'm actually not referring to the studded part of it at all, I'm only referring to the gold part of it because the grammage, let's say, for the quarter is minus 5%, revenue is 11% and as per the presentation, Page #51, the price is plus [ 19%, 20% ], so when I add everything together, it does appear that there is a gold mix deterioration. I know it's a quarter 1, but the reason I ask this because there is another trend, which you've seen in the past that when gold prices are essentially higher, your consumer tends to move up from gold to studded itself. So I'm just trying to understand within gold, the mix part of it.

No. Sure. There's a grammage drop, but I think that's a lot to do with customers having a certain budget in mind when they're coming in to buy. So they do tend to downtrade on grammage when gold prices are up.

Okay. So there's basically nothing material to call out in terms of any consumer behavior within gold, which impacts the gold mix without taking the studded at all?

No. Nothing. I wouldn't...

Okay, okay. Understood. And quickly just one last one on the margins. Some statistics would be helpful in terms of, let's say, what's the percentages of exchanges or rather exchange gold, which you have currently? And what are you aspiring that number to be in the medium term? And secondly, one conception question, which has got a sort of a linkage to your margin, says that if in a scenario of some stability in gold prices, and let's say, volumes for the competition comes back, is it fair to assume that because lot of the jewelers actually don't hedge and they're actually sitting on a lot of inventory gain, would increase their ability to actually increase discounts versus you who's a 100% hedged operator?

Okay. So 2 questions. Let me answer the first one. You wanted to understand what is the contribution of exchanged gold. We are seeing continued good response on exchanged gold. We are seeing good growth. Gold exchange now is -- I mean, I'm excluding the Tanishq exchanges, the old gold exchange is now sitting at a 33% contribution for the year. And you can add up another 9%, which comes from the Tanishq exchange. So we are seeing a growing trend of exchanged gold. The second question that you asked was about whether competition because they are sitting on higher value of inventory. See the offers are on continuously even now because the market is really down, single or even high single-digit or double-digit declines. So the market and competitive situation is pretty aggressive. There are constant offers even now as we speak because of the wedding season, et cetera, there are significant offers in the market. So one is unable to make out whether it is because of the gold that they are sitting on or because of the need to clock-in some growth. Having said that, our understanding on the ground is that several local players and regional and smaller unorganized players are facing a significant liquidity crunch, and therefore, freshness of merchandise in their stores is a concern. So to that extent, it has its impact for them in terms of the capital that has gone up, the capital and liquidity crunch that they may be facing.

Understood, understood. That's very helpful. Just to confirm, so if you -- on this comment about exchanges. So that's 33% plus 9%, 42%. So that's the share of exchange gold in the overall portfolio, it's largely the same, right? It's not really gone up or down?

Not significantly in this quarter, maybe a couple -- 1 percentage point jump.

The next question is from the line of Arnab Mitra from Crédit Suisse.

My first question was on the Jewellery margins. Is there any inventory gain or hedging related gains in the quarter, given that the gold prices moved up very sharply towards the end of the quarter?

Not really, Arnab. Hardly anything compared to last year, et cetera. I think within the quarter, there have been some swings, but for the quarter as a whole, it's not been anything material. Yes.

Sure. Just one question on the margins again. So actually, last 2 years -- I mean, before last 2 years, your third quarter margins in Jewellery were always below the second quarter because third quarter has low studded share. Now in the last 2 years, this year and the previous year, we are seeing that trend reverse in the third quarter being much higher than the second quarter. Anything specifically which has led to this, despite the fact that the studded shares are much lower in the third quarter?

No. I think, overall, in this quarter, I can say that we have kind of held a tight control over the discount payout that has helped. And we have also actually held a tight leash on costs. So consequently, we are seeing a better kind of margin performance than quarter 2. Quarter 2 also had a challenge in terms of growth. So that impacted the overall EBIT margin.

Okay, sure. And my last question was on the demand environment, sir you, I think, alluded that December had seen a bit of a softness, was that largely to do with the increase in gold prices towards end of December? And unlike in, let's say, the July period when that softness lasted for a while because gold price moved up. You -- have you seen a better recovery in January after that gold price moved up?

So yes, December was a softer demand if I were to kind of disaggregate growth while we are seeing a 15% growth for the quarter 3, we saw 20% growth, if you look at October/November, and there was a 4% growth in December. Unable to say whether it was due to the gold price surge towards the end. But we did have an offer, which kind of ended on 16th of December. And thereafter, we saw a drop in growth or, in fact, that's how the growth came down. In Jan, per se, the first week, we saw a surge in gold prices. And that did impact walk-ins and overall demand. In Jan itself, demand has clocked back in the moment, our activation -- we started our activation a week later this year. Therefore, in the month of Jan, the first week was soft. Thereafter, it's been quite good.

The next question is from the line of Tejash Shah from Spark Capital.

Sir, last quarter, we were saying that a bulk of custom-duty-related inventory gains will show up in this quarter. So anything you would like to call out in terms of margins?

We did have some custom duty gains. But that's sort of piecing out at this point in time. But yes, between the first -- second quarter and the third quarter, we've had reasonable gains.

Sure. And second question is pertaining to GHS. What was your...

Let me also clarify one other thing. In a way, last year, a year before, we did have a lot of contango gains, which we are not getting now, okay? So in a way, they're comparable, the amounts that we got this time may be comparable to what we otherwise got last year in the contango part because we were able to hedge outside India, which is not happening now. So...

So the gross margins are...

So they are comparable. Therefore, they are comparable from that perspective. Yes.

Okay, okay. Got it. Sir, contribution of GHS this quarter, how much was that?

I don't have the quarter, but I know the GHS contribution for the year is sales through GHS stands at 21%. Yes? I don't have the figure on the quarter right now, but let me see if I can pull it out and share with you later.

Sure. And sir, lastly, what you spoke about demand trend being relatively better in nonurban centers, now if we compare with other consumer sectors' results so far this quarter, the trend is slightly reversed. Basically, urban centers are showing relatively better demand robustness versus the nonurban. So is there any wedding-related uptick which you are seeing in the centers and the nondiscretionary or the discretionary part of the demand is still subdued in -- even in urban and in the centers?

So let me kind of correct that a bit. It's not about urban and nonurban. We are seeing differential performance across different cities and regions, we've seen a higher growth in the east and in the south, whereas demand has been soft in the north and the west. I wouldn't really call it urban or nonurban. Sure. The smaller towns, because the base is low and it's a newer set of stores, will tend to show higher growths, but they also contribute a lesser amount.

Also, one other perspective on this is that more and more of the stores that they are opening each year are L2s. So we when the stores of FY '19 do a full 12 month in FY '20, the L2 channel base gets that additional kick in and therefore, it shows a 22% growth, for example, as opposed to the L1 of the L3.

The next question is from the line of Jay Gandhi from HDFC Securities.

Just wanted to understand this, so if you can help me navigate through the surge in construct. If exchange -- gold exchange goes up, does the capital base also increase? And if it does, is my understanding correct that the upselling opportunity that it presents and it's trickle-down effect on EBITDA, helps you more or less manage your ROC on the product -- on the exchange product. But if your upselling opportunity is significantly lower than you envisaged, the capital base will keep on increasing, but you will not get the throughput value? Is it correct?

So let me just explain this part. The way you have to look at exchange gold akin to buying gold on spot, okay? It means that the capital employed would be higher if we were to buy gold on exchange. But as you know, we have been using exchange as a customer [indiscernible] tool for quite some time. And there is an inherent upsell, which happens, which is very significant, in excess of 50% to 60%, and we then -- we do an exchange. So exchange helps us actually getting customers and while it does increase the denominator, which is the capital employed and possibly, to some extent, the cost of buying gold because the offers that we give are very attractive these days, it's a customer acquisition program. And therefore, while the ROC might be slightly greater, EBIT could be much better if we do better on the margins and profitability. So in a way, we've not really seen much of an impact on ROC because of this. Having said that, if we try to see what happened this last quarter where we've actually reduced gold purchases substantially. And we have most of the gold that we've acquired has been on exchange, then to some extent, you may see some impact on ROC temporarily. But so long as we keep buying gold on lead to the extent of 50% to 60% of the total gold that we buy, I think ROC overall will be in the ballpark that we are now.

No. Fair enough. So basically, you're banking on that cross-selling opportunity being significantly higher, that 50%, 60% upside that we have. But what is the 50%, 60%, a, either structuring comes off or b, just because of the trying external environment comes off, can -- unfortunately, the ROC shrink, maybe for the time being?

So one answer to that is, there is a certain level of attractiveness of the exchange, that makes for customers to come to us and therefore the share to be at 40%. I mean, hypothetically, supposing where it could go to 80%, your question as of the balance sheet will change, the capital employed will increase substantially and the ROC may fall for the same level of sale. Obviously, that 80% won't happen all of a sudden, we're at 40% today. And therefore, we will need to judge the difference between what to do in saying that the EBIT expansion opportunities that is to date and the extra sales that comes with exchange and the consequent bloating of the capital employed and therefore, is it worth doing? So I guess, if it is not worth doing, we can always change the pricing of the exchange and sort of put a -- in a way, a impediment to the people who are more value-seeking to come. That's how we will -- just a thought off the cuffs I'm just saying, but that's how I would look at it if it was happening.

No, fair enough. That really helps. The other thing is you helped us understand how much is the exchange GoldPlus? How much would be Gold on Lease per be, a, for the year or 3Q?

Yes. For the quarter, Gold on Lease has tactically been single digits because we really clamped down on inventory purchase because of our shortfall in sales from our internal target. We were running at a much higher level by September, but we brought down the inventory levels very sharply by December. So from an overall quantity perspective, we are actually well within what it was in the year before or for that matter even what it was in March. So we've done very well on that part. But what it has done is that we've, therefore, not bought any Gold on Lease. That's the impact. But going forward, as we start buying more gold, you'll find more of that coming out.

Sure, sir. Just one last thing, if I could slip in, how much would be the wedding contribution been to our sales number?

Yes. So wedding contribution is 23% for the year currently. And the -- on the other question that you asked about Gold on Lease purchase. For the year, we are at around 36% of our procurement is Gold on Lease.

The next question is from the line of Amit Sachdeva from HSBC.

Very good set of results. So one question, obviously, like Venkat would always talk about how the January has been. So how the studded promotion is tracking till date? I mean if you can give us some guidance how did January sort of shaped out? In case I missed that question, I just got missed out of the call a bit in a minute.

Sure.