Titan Company Limited (500114) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Titan Company Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C. K. Venkataraman, MD, Titan Company Limited. Thank you, and over to you, sir.

Thank you very much, and good evening to everyone on the call. I'm joined here by my colleagues: Suparna; Rajeshwari; Manish; Dinesh; Nandu; Saumen; Ajoy; and Subbu; and a new colleague who has joined us, who is Ashok Sonthalia, CFO Designate. Welcome, Ashok. I'm also happy to share that we had our first in-person board meeting after 1 year. The last board meeting -- the meeting of the Board in-person was in February on the same day in 2020, were an eventful year. And it was wonderful to meet with the Board members in Chennai and share results of such significance. It was also great to talk through calendar '20 on a high note like this. And I would like to thank all of you on the call for the great encouragement, support, pushing that you keep doing on us all the time. And I would also like to thank all the workers of our vendor partners, Titan Company's own employees in factories, in offices, in stores and all our retail partners and their staff, who braved, particularly the first few months of COVID and even thereafter, and continued putting themselves at some risk or the other, helped the company deliver a performance, which is very, very encouraging, gratifying and points to a very solid 2021 as well -- and FY '22 as well. The presentation has anyway been uploaded, so I have nothing particular to share. We're all feeling very, very happy and pleased with the results. And I would like the questions to begin.

[Operator Instructions] The first question is from the line of Manoj Menon from ICICI Securities.

I have only 1 question, actually. So it's essentially, when I look at the recovery in discretionary consumption, in general, it appears to be extremely strong, so when I look at, let's say, paints as a basket, consumer durables as a basket, et cetera, versus jewelry. Now it appears that the jewelery demand recovery going, of course, what Titan has reported because we really don't have any peers currently, it appears to be a little underwhelming versus the other discretionary consumption. So just wanted to understand. Is it more to do with, let's say, your revenue mix, the store mix? Which can't be because you're largely national, more national than anyone, actually, wedding exposure. Or it could be just a case of, let's say, any other player outperforming because of a higher wedding exposure. Or just that the postponed demand for jewelry is said to materialize. Just wanted your thoughts on this because it's really not a 1 quarter thing because it probably could have some implications for the next 12 to 18 months.

Could you just elaborate a little on that, Manoj? .

Yes. Venkat, actually, what I'm just saying is, let's say -- okay. Now, I think I'll take 30 seconds to say this. So take a step 9 months back. When we looked at, let's say, all of discretionary consumption, the assumption was that, let's say, paint is more of a postponed demand, whereas, let's say, an airline seat is a perishable commodity. So you kind of had some views saying that, okay, there are certain demand, which will come back at some point in time, but there are certain lost demand. Now when I look at an Asian Paints reporting a 33% volume growth in the current quarter, the only thing which I had to do was look at the 9 months growth rather than 1 quarter. But 33% tells me that some of the postponed demand has actually -- pent-up demand or postponed demand, whichever word we use, appears to have materialized. But when I look at jewelry, I know I can't generalize jewelry because I don't really have a peer group to compare here. The 16% revenue growth appears a little underwhelming in my observation. Honestly speaking, if you think this observation is wrong, happy to take that because my comparison is not just with paints. So when you look at, let's say, Havells' results or a Crompton results or paints as a basket, let's say, what Berger reported. So it is across discretionary consumption, in general, appears to have had a much faster recovery versus jewelry is -- was my generic observation.

Yes, sure. I have no particular comment because it's very, very difficult to compare a jewelry recovery with paints or fans, for example. All I can say is that we had a certain recovery target in mind, which we have been sharing quarter-after-quarter, which is certainly to reach 100% levels by Q4. That was, if you recollect, in fact, start delivering growth by Q4. And we are ahead of our own recovery rate targets, and that's what is satisfying to us without really getting into across category comparison because it's a very complex subject. I don't know if anyone will have a handle on that kind of a thing, especially categories which are that widely different from a category like jewelry.

Fair enough. Fair enough, Venkat. Actually, only 1 -- because I don't have a second question, just 1 follow-up on this. Is it -- in your view, is it anything to do with the revenue mix, which you have with a relatively lesser wedding exposure, let's say, versus other players, which would essentially mean that the actual -- that perishable commodities/lost demand possibly for you could be a little higher than some of your larger competitors. Is that even a right hypothesis for me to even think about?

I'm not really sure, Manoj. It's a very complex sort of scenarios that you are building for which I have no easy answer.

Okay. No problems. I'll touch base with Pulkit separately on this. And I just also wanted to thank Subbu for all the help all these years and wanted to wish him all the best for the next phase in career. And also wanted to congratulate Ashok and all the best to Ashok as well.

The next question is from the line of Abneesh Roy from Edelweiss.

Congrats on good numbers. My first question is on Eyewear. Last many years, Eyewear margins have been either negative or hardly any profit. But Q2, Q3 significant improvement you have called out this quarter, better product mix, lower discounts. So what is driving this better product mix? And second, lower discounts. Is it because Lenskart has reduced its activities both from advertising and promotion significantly? And do you see that as structural or just 1 or 2 quarter phenomenon?

This is Saumen here, Abneesh. I handle the Eyewear business. Our observation is that we have been consciously driving consumer discount down, right, from the Q2 onwards, ever since we have reopened the business. That's factor one. And we have been also looking at channels which are not really productive. So we have either marginalized some of the channels or even exited some channels. So therefore, you look at it, our overall payout has significantly come down. Second thing, we have managed by focusing more on house brands. We have been able to contain our material cost to about below 21% compared to last year, say, about 24%, 25%. These are the 2 factors, which has significantly increased our GC and, consequently, the final PBT.

And any comment on Lenskart because they have been the disruptive player in the segment for many years? Any change you are seeing there?

Frankly, their facts and figures are not so transparent. So we don't really look at their facts and figures. We look after our customers. We do what we think we are good at, and that's about it. No comments on Lenskart.

My question was more on the market, not on the numbers, but I got the message. The company has been focusing on the core. So you did divest some of the non-core. So this INR 137 crore write-off, which has been taken in Favre Leuba. Does it mean that medium, long term, you would look at divesting even this part of the business?

So I think the INR 137 crore we discussed that -- I mean, we at least talked about it in the press report that we made when we took that decision to scale down our Favre Leuba. Then from our perspective, at this point, it didn't make sense investing further. And I think it was just a question of saying not now. We will continue with Favre Leuba in India. But as far as the global ambition at this point is concerned, we said it didn't make sense, particularly with the pandemic hitting us so hard. So it was just that. Nothing else.

Yes. And one last one, sir. On Studded share, 26%, so high gold prices in general and the gold doing well. So beyond 30%, is it looking tough next 1 year to touch in the Studded?

Ajoy here. No, I think we are beginning to see very good recovery in Studded as well. I think when you're looking at ratios, it's a weighted average effect of plain, coins and Studded. So coins and plain continue to do very well for various reasons. So we are happy because Studded has shown a good growth in quarter 3 and at -- seeing a 9% growth is good. We are into growth from recovery. So -- and we are seeing better growth now as well. In fact, in Jan it's even better. So the ratio is certainly going to be higher as we go forward. Quarter 4, already because we have started activation, the ratio will be certainly much higher. Quarter 3 is a low Studded ratio quarter in any case.

Next question is from the line of Avi Mehta from Macquarie.

I just had 2 questions. One on the franchisee health in the Watch segment. We've seen like a significant amount of closures for some time. Just wanted if there is any measures that we are taking? Or how is the general franchisee health over there? And B, I wanted to kind of just get a comment on the -- just build on the comment that Ajoy said about Jan being healthy. Any idea of how we are trending in terms of growth rate? Has the strength of 16% continued or kind of gone up given this activation?

Ajoy, you could do that and then...

Yes. So I'll take it first, Avi. The growth of -- retail growth was actually 13% in quarter 3. The primary NSV showing up at 16%, including exports. We are seeing about a 28% growth in retail in the month of January.

Okay. Sorry. The activation part you said Studded share is also -- is the reason for -- is the driver, right? I just wanted to reconfirm that.

Yes. So Studded is also growing pretty well. Studded has climbed from 9% growth in retail of quarter 3 to 16% growth in Jan. The ratio is sitting at 39% in the month of Jan. But that's typical. 43% was the figure last year in January.

Okay. And the franchisee health?

Yes, yes. So we have actually closed a few Fastrack stores because their turnover was anyway a little low. And due to COVID, they became unsustainable. But otherwise, franchisees are on track. We had given them a lot of support in terms of not giving them extra stock and helping them liquidate stock before we build them for the stock and, overall, a lot of support in getting more consumer demand back. So franchisees, as such, a lot of stores are now in the growth path and the others are also recovering well. Better news from the smaller towns and better news in High Street than on malls. But overall, the franchisee community has [Technical Difficulty] storm, and they are now geared up for growth, both in this quarter and in the year ahead.

The next question is from the line of Percy Panthaki from IIFL.

But I just wanted to ask from a different angle. Basically, I think in Q3, we would have seen a lot of sort of pent-up weddings. Those people probably would not get married in the first 6 months of the fiscal, all of them had their functions, et cetera, in the third quarter and maybe to some extent that continues in the fourth quarter. And therefore, there is probably, and correct me if I'm wrong, some kind of sort of temporary support to the top line coming from this. And let's say, by March, if the pent-up demand of weddings is sort of exploited already and then we go into a normalized period from April onward, do you see any risk to the top line from this phenomenon?

Yes. So weddings have been good in quarter 3 and quarter 4. Wedding growth was 10% in quarter 3 for us, and its trending upwards at 16% in Jan. We expect wedding demand to continue to be double-digit growth in quarter 4. And in fact, we also expect -- our expectation is quarter 1 next year, we'll also see a lot of weddings. So next 5 to 6 months, we are very bullish on wedding. So I don't think that's going to impact on top line. In fact, it should benefit us.

So one of the views that we had, theories we had, way back in April, May, and it's turning out to be great, is that both because of the substantial -- in fact total absence of travel as well as substantial pruning down of the pomp and splendor in the celebration of weddings, the jewelry purchases in families will get a boost because of share of overall wallet increasing. And more and more franchisees have been talking to -- have been actually talking about this phenomenon. And '21 is going to be no different from this point of view, certainly travel. To some extent, the celebrations may improve a little bit, but nothing like what they were. There is -- I'm sure there are not going to be 5 cuisine dinners and stuff like that, which we used to have. So therefore, apart from the weddings of 2021, I think the share of the wedding jewelry within the overall wedding expenditure is going to benefit the industry and Tanishq as well.

So in Q3, wedding jewelry grew by 10% versus a 16% overall growth. So actually wedding grew slower than the overall growth despite the sudden pent up sort of number of weddings coming up in Q3. I would have thought that actually, the wedding jewelry growth in Q3 would have been much higher than your overall growth. So where -- what am I missing? What is the lack of understanding on my part here? Why is this not happening?

So first of all, 16% is a primary NSV sale, including exports. Retail growth is 13% -- value growth. Okay, against 13%, it's 10% growth in wedding. We are seeing a -- we saw a good jump in coins as well and high-value Studded during quarter 3, which were ahead of the growth. Coins, of course, continues to do very well over the last several quarters because of bullishness on gold. But high-value Studded has come into play in a big way. And we are seeing that growth also jump up.

And some of it could be for wedding also.

Yes. Some of it could be wedding because we tend to classify only the plain jewelry into wedding. Difficult to kind of re-categorize that.

Okay. Okay. Got it. My second question is on the...

Sorry. To conclude, contribution of wedding is 20% to the overall sales this year as well as last year. So what I would like to say is that the overall wedding contribution has now picked up to same levels as last year.

Okay. Got it. Second question is on the Eyewear and, to some extent, even the Watches margins, which have clearly surprised, at least me, on the upside. And I understand that you've done a lot of cost engineering here, but I'm sure that some of the cost engineering is sort of not permanent in nature. I mean, some of these costs will get restored as the business improves. So just from that point of view, can you give some idea on what part of the cost engineering is permanent in nature? And therefore, what kind of sustainable margins we can see in these segments once the demand is restored and we're actually seeing growth in sales? Because your Eyewear margins have been 0 to minus 2% in the last few years. Watches also has been close to what you've reported now, whereas your sales are actually 12% down. So if they were, let's say, growing at 10%, 12%, it would have been much higher than 10% also. So just some flavor you can give on the sustainable margins of these 2 segments, given the cost-cutting initiatives that you've done.

On the gross margin level, as I said, our overall payout has been controlled quite a lot, and this -- not all of which will be sustainable. Let's say, in the quarter 3, if our overall payout is 37% this year compared to, I think, it was 41% -- 42%, I think, last year, it would probably go to a level of about 40% because house brand contribution has significantly risen in the last several months and especially quarter 3. I think other brands, other non-Titan brand contribution could drive as we go forward. So therefore, payout would probably go up. And consequently, it will also influence our mat cost. So therefore, our -- we estimate that next year, that is FY '22, probably we'll see a gross contribution of somewhere around 64%, 65%. But it will be higher than before.

On the -- I think overhead is a -- question is also on overhead. Yes, we do have 2 types of savings this year. One is what we call internally sustainable savings. And this is part of the War on Waste program that we ran. These savings will continue into 2021, '22 also. This today, as a ballpark, would be roughly 50% of the total savings that we achieved in '19 -- sorry, 2021. Because the biggest cut that we are actually taking this year is advertising in 2021 because of the level of activity that we are having. Having said that, I think, by quarter 4, we are very close to the normal ad spend. But the overall spend so far has been lower. Of course, we did get rental waivers due to the pandemic as well and a few things like that. But sustainable savings are still a fairly material part and will continue to deliver higher margins from the next year.

The next question is from the line of Aditya Soman from Goldman Sachs.

So firstly, I just wanted to check on the status of Golden Harvest. What -- how has the recruitment trended in the quarter? And where do you expect recruitment to be over the next 6 months or so?

We've seen a good recovery in the Golden Harvest enrollment. Quarter 3 are still below what we would have wanted. Internally, we are targeting higher. So -- but it's picked up pretty well. And in fact, quarter 4 on also it's been a very good pickup. So we are now very, very confident of the enrollment going up considerably over the next couple of quarters. So I think the recovery has moved into growth mode even there, and it's directly linked to a number of buyers. So far, just to clarify, even in quarter 3, while our total retail growth was 13%, it was on the back of ticket value growth. We were still -- in terms of number of buyers still at a 97% recovery on retail. So -- and Golden Harvest enrollment kind of followed that pattern in terms of buyer recovery. So we are now seeing growth in buyer and, therefore, also Golden Harvest in a stronger manner in quarter 4. So outlook is positive -- very positive.

No, understand. Very clear. And just following up on that. I mean, in terms of your growth in Jan, the 28% growth, you mentioned that the footfalls have also now improved. But what has been the main reason for the acceleration in growth, say, from 3Q to January? And especially given that the base for gold prices will also start normalizing, I guess, at some point in Jan and Feb.

So in the month of Jan, we have seen growth both in walk-ins as well as number of buyers itself. We're seeing a very healthy 13%, that's a double-digit growth, in the month of Jan in terms of number of buyers itself. And yes, ticket prices will start kind of normalizing downwards but yes, that's how we're getting the 28% overall value growth.

All right. No, I think that's very clear. I think that partly also answers the first question on sort of why growth has been somewhat different for your category compared with say some of the other categories, but I think that application answered.

[Operator Instructions] The next question is from the line of Prasad Deshmukh from Bank of America.

So 2 questions. Firstly, in the first 3 quarters, how much of the purchase in gold jewelry for Tanishq was initiated by the consumer online? And also, do you believe, if at all, this was a big number, it's a lasting trend here on?

Well, online plus joint closures, if you look at it this way, they may complete the transaction online itself or might finally come and buy it at the store with a conversation with the store. So overall, that has been close to -- yes, 3.5x -- 3.5x of last year. So we are seeing a huge jump in online and omni, if I would call it. The other bit related to digital is we are also seeing a huge jump in video calling, that is remote selling, remote shopping, both video calling and endless aisle. So all these put together, we are clubbing under the digital engine, which is seeing a very good jump this year. As a proportion, it is still quite small. I would say the omni plus online piece is still 2%, 3% kind of number, but we are seeing that climb quickly. And total digital, including remote shopping, is trending around 7.5% to 8% of the total sale, which is including remote shopping and endless aisles.

Got it. And the second question is, there are the stocks of gold exchange regulated by SEBI. So I just wanted to get your thoughts on how this will impact the industry's pricing of gold and if there are any cost implications for Titan, especially in terms of the way you hedge the gold?

I'm not aware of any -- anything that come under this. So you may have to wait until we get some clarity on what this is about. I don't know.

The next question is from Amit Sachdeva from HSBC.

Congratulations for a good set of momentum in January and also good numbers in Q3. So given the jewelry has been discrete and plenty, I just wanted to sort of ask you something about Taneira, and we are at the 14 stores and perhaps COVID has been a disruption year for apparel and in general. But if not for COVID, are you really happy with the KPIs per store now? And in that context, if you could share some thoughts on the Taneira business plan? When this format will be ready for, say, capital-light expansion? Are there any supply side challenges in scaling up? And we noticed kurtis has been launched. So prêt-à-porter kind of proposition is being added. So where are we on the expansion journey? And are we in the same phase where jewelry was in late '90s? And how basically large do you think this opportunity could be? Is it a safe assumption to make that it could be a potentially very large new business?

So Amit, I'm requesting Rajeshwari, our COO for the ethnic business division, to speak about it.

Thank you, Amit. Very interesting question. One of the biggest growth that we've seen -- we've got about 14 stores now across 6 cities. One of the biggest growth we've seen is in Tier 1, Tier 2, Tier 3 towns. And we've been addressing it very differently this year despite COVID. In the last 2 months, we've started a concept called Trunk. These are largely pop-up stores, 3-day events, across many of our sister brands, mostly Tanishq stores, which brings in a different set of customers in, many of them new to Taneira, some of them new to Tanishq itself. So we've seen a ramp-up growth across. We've had about 12 Trunks so far in the last 2 months, since we could start moving out. So we see a lot of growth between Tier 1, Tier 2, Tier 3. We plan to have over 75 Trunks following the trend in FY '22. So that's one -- that's where the growth will come from. The second one is, as Ajoy has already mentioned, which is on remote shopping [Technical Difficulty] customer. We have a concept called try-at-home. So we show them on a video what the products are all about. We take them across to their place and sell the products to them there. So try-at-home, video calling, have been 2 notable ways of reaching out to customers. We've also just launched our omni aisle project just gone live a couple of weeks ago, wherein all our products are available online for customers to shop from anywhere. So we see the growth coming in from Tier 1, 2, 3. And as far as existing stores individuals are concerned, we see a lot of increase. We've got about 17% growth in the ticket size, which is driven by wedding shopping. And it is -- so the discretionary shopping is slowly coming back. We're seeing signs of it in January. But wedding shopping has been holding us in good stead. So many more Tier 1, 2, 3 Trunks coming up, a few more stores saturating the existing 6 cities is what we are looking at.

Sure. So is the e-commerce be a big driver? My question was that your ready-to-wear or prêt-à-porter kind of proposition is being added with kurtis, is this the play going to change like from a product profile point of view because that could create a very different kind of consumer coming to store? The reason I'm asking this question is that we are at 14 stores, and we have around 350-odd Tanishq plus stores. And are these the natural owners of even Taneira franchise nearby? Or how do you see the scale-up in 5 years? Should we assume that it will be like 300 stores in 5 to 7 years, or maybe like a very slow build? How we should like think about this business?

So we are looking at it in 2 different ways. One is bringing it closer and ramping up the customer experience. As you know, Taneira is a very different format from your existing saree stores. So we are looking at expanding and exploring our browsing format and larger number of customers experiencing our product. And as we go along, certainly, a larger number of stores, we are still crafting out 5-year strategy. And going forward, I think we will see a lot more mirroring of the Tanishq play. Certainly, the customer is almost 90% common. So as we get [Technical Difficulty]

To share concrete stuff in our May investor conference.

[Operator Instructions] The next question is from the line of Richard Liu from JM Financial.

Subbu, I just wanted to check this with you. If I look at the segment EBIT growth for the quarter, it is something like 11.5% for the stand-alone business, all the segments together. But then if I look at the EBIT growth in the P&L, that is about 17.5%. And I guess the only difference between the segment EBIT growth and the PBIT growth in the P&L is the unallocable line. So what has really happened in that unallocable line to have driven growth -- profit growth of the company by 5 percentage point higher?