Titan Company Limited (500114) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Titan Company Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Venkat, MD of Titan Company Limited. Thank you, and over to you, sir.

Thank you very much. Good evening, everyone, on the call. It was a very satisfying quarter for Titan Company as the presentation reveals. And as usual, the people of Titan Company, the extended Titan organization, from the employees of the subcontractors and carriers and all the retail store staff, all the sales staff of distributors and sales and distribution organization, and of course, all the employees came together to deal with the consequences of the second COVID wave. And in terms of performance and [indiscernible] and profit performance it's being a very encouraging quarter. We're very confident about the balance 9 months of the year. The level of vaccination, I just checked today, we're at, I think, 86 crore people have been vaccinated. And in the 18-plus age group, it's 43% I'm told. And at current rate of vaccination, we expect 75% to 80% vaccinations by end of September. And therefore, from an overall safety perception point of view, it's a good sign and it will open up the door to demand in various categories, including lifestyle categories such as ours. And barring any other unforeseen or the consequence that -- relating to COVID, which is anyway not in our hand, we are pretty upbeat about the balance year. And now I would request Ashok, Ashok Sonthalia, who is here now in the first meeting as the CFO of Titan Company. Welcome, Ashok, to share some thoughts before we start the Q&A.

Thank you, Venkat. Good evening, and hello to all of you. It's really wonderful to be talking to you. My first meeting as Venkat stated. While Venkat gave you some details on our overall performance in the just concluded quarter, I wanted to brief you about some updates on our subsidiaries and on gold hedging approach. You know we had incorporated Titan Commodity Trading Limited, and I'm very happy to inform that TCTL has started operating in this quarter and Titan has started hedging its gold through TCTL [indiscernible]. Titan also established a 100% subsidiary in U.S.A. this quarter to further its business interest, particularly of Tanishq jewelry business in that geography. Now coming to our approach to gold hedging. While there is no change in Titan's philosophy of not taking any price exposure on the gold that we have, we have made a change which is effective from July 1, 2021. Earlier, we used to hedge cash flow arising out of sale of gold inventory and accounted for it under cash flow hedging methodology. With the volatility in cash flow due to sales volatility due to stores closures, et cetera, observed during last year as well as this year, there were mismatches in hedges, which created ineffectiveness of hedges and created volatility in financial performance on a quarter-on-quarter basis. We have now decided to hedge the gold inventory itself instead of cash flow arising out of sale of inventory in the future. And this will -- this shift will minimize and bring in more certainty to our hedging activity and the chances of mismatches in the hedges will get minimized. The gold outstanding contracts that are open as on 30th June 2021 would continue to be under cash flow method until the year closes. And all the new contracts from July 1 are under fair value method. We have included these details on Slide #36 and 37 of the investors presentation uploaded on stock exchanges and on our website. So you can look at them for more details if you could not capture whatever I talk about. Another point before we open the floor for questions, that in view of the stricter regulation on disclosure coming into play in this call, we will not be able to share specific growth -- revenue growth numbers for July. While we will be providing you a qualitative picture of that, but a specific growth number we will not be able to provide. So with that, we can open the floor for questions and answer. Thank you.

[Operator Instructions] The first question is from the line of Percy Panthaki from IIFL.

Sir, a couple of questions from my side. So in terms of store openings over the next 2, 3 years, could you give some idea on what would be the proportion between Metro Tier 1, Tier 2 towns, et cetera? I mean I'm not looking at exact figures. But what I'm trying to understand is that the store split of the current stores that you have now, will the store openings be in roughly the same proportion or it's going to be materially skewed towards any particular pop strata?

Thanks, Percy. I think the opportunity for Titan Company in Middle India and below is very, very high. A lot of stores that we have opened in the last 2, 3 years are certainly smaller and smaller towns, and we expect that to happen.

When you open stores in small -- or over of total store shifts over a period of time, does it have any implications either on your sales per store or on your profit margins?

The sales per store, obviously, is lower in smaller towns, I mean, as we increase in smaller towns. But it is not as if the growth opportunity in large cities is low. For example, our largest jewelry store, which is in Delhi, has grown handsomely in the last few years even when we are opening a store in Ganganagar or [indiscernible] for example. So they have a sort of compensating effect. And the leverage is what we are pushing as opposed to per store state. And the individual store economics in terms of asset turn as well as margin are anyway sort of built into the system through our terms of trade announcement. So there is no worry sitting there.

Okay. So apart from this, I mean for any reason whatsoever, let's say, once the COVID disruption is fully out of the way, your margins for your jewelry business, I think, before COVID, for 2 years, you had averaged somewhere in the region of 12.5% EBIT margins for jewelry. So once the COVID disruption is completely out of the picture, is there any reason why you would not go back to those margin levels in jewelry?

There is no reason why we would not go back to those margin levels.

The next question is from the line of Chirag Shah from CLSA.

At the outset, I also wanted to congratulate Ashok and good to have you, sir, on this call. I wanted to take a step back and understand how we are thinking of the economics [indiscernible] model that you have. But for our franchisees, operating usages work against them in this pandemic period. Given this, is there any change in franchise economics that we are -- that is needed going forward? And last time, you also spoke about how we are institutionalizing management of cash and balance sheet within the company beyond the CEO minus 2 levels. How are we thinking of Institutionalizing the same within the franchisees? And how do we think of improving inventory turns for the franchisees? I'm wondering some of the digital initiatives that you have taken recently would also help them in higher inventory turns for them?

Certainly, the leverage advantage that a corporation like Titan has an independent businessman does not have. And therefore, when the sales fell in FY '21 and even during FY '22 now, there is an impact on the economics -- I mean on the financial performance. But fortunately, over the years, we have built a robust business has been most of the franchises. And last year, as well as to some extent this year, we stepped in with the loans, grants and sort of helped them buffer the situation. And because of the overall cumulative prosperity that they have Titan brands have delivered to them, it was not an issue. They could sort of take it on their chin and move forward. So that is -- therefore, we have not had to make any structural change to the terms of trade of business and, therefore, increase, let's say, our cost of retail and distribution. That's the first point. The second one is, actually, individual businessmen are quite savvy in the management of cash actually. And we don't really need to teach them. We often find [ facility ] business, for example, where we have these 2 different [indiscernible] L2 and L3, which is a [indiscernible] versus company stock, you often find that the stock turns of the franchises who own the stock for comparable turnover brands is actually better because they're on the ground managing it, and it makes so much more -- and the cost of borrowing is much more than for us on the gold on deals and all that. So there is really nothing that we have plans of teaching them as you say. But the principles of stock management, for example, in the watches division, we have taken the whole period of constraints principal all the way down to all the franchisees so that it's a flow system where what sales to get replenished and how long it took to sell is considered before it is reordered and stuff like that to manage the asset turn. And in jewelry, the same principles of what we use in the consignment L2 management system. We have now created a team in head office for the franchisee L3 to help transfer all these best processes to [indiscernible].

Sure, sure. And also, can you touch upon the 2 key growth levers we have? One we speak about the Many Indias program to make the state level relevant. And just on the second part, the Golden Harvest team, enrollments in [ FY '20 ] have been uneven for obvious reasons. And that would understandably result in some volatility in revenues in the current year. But can you just give us a sense of how enrollments are moving in the current year on the Golden Harvest team?

Yes, hi Chirag, Ajoy here. Enrollment, obviously, in the month of May, everything was shut. But June and even later on in July, pickup has been good. So [indiscernible] has kicked in well. And it will -- it is continuing to ramp up. So hopefully, going forward, it should be a good base that we will rebuild. In quarter 1, I must certainly share that since last year, quarter 1 was a disrupted quarter, therefore, enrollments were not there. Therefore, the opening base of matured accounts were limited. So to that extent, that engine was understandably a lower contributor to sale in quarter 1. But going forward, the enrollments look good. On your -- on the part about, let's say, trying to win in different parts of the country, and Tamil Nadu, which has been our strategic market, has continued to fare well. And we have also done a lot, lot more localized activity in what we call are private markets, which is really UP, Bihar, Jharkhand, MP, Orissa. And that has also been working well this year as well with a lot of localized activities. We are also exploring a couple of more markets in the current year. But we're waiting for things to stabilize and see if the momentum is right for us to intervene in those markets going forward. But overall, that approach, what we kind of crystallized a lot more last year, we are continuing with that state-level kind of customized plans. But it's going on well, and it has really helped us a lot in the states where we've done a lot of this work.

Sure. And just one last question, if I may. In the annual report, if you see the -- while the Golden Harvest fixed deposit, which is held as a [ reserve ], as a proportion of Golden Harvest-related liability has gone up materially. Just wondering if that is to do with any regulatory change that has happened?

As per rules 20%, but the [indiscernible] number [indiscernible] ...

Sure. That number -- for FY '21, that number has gone up to 28%, which is why I'm asking the question.

I'll get back to you on [indiscernible]

The next question is from the line of Vivek Maheshwari from Jefferies. As there is response from the current participant, we move to the next question from the line of Avi Mehta from Macquarie.

Hi Venkat Hi Ashok, welcome to the Board. I just had 2 questions just taking up the demand recovery, trying to get a sense. Would you -- Venkat, would you say that gold jewelry kind of would come back as customers have not been able to purchase due to shops being closed? Is this -- is that what you would expect as we go forward into the year? Is that the reason for your related bullishness? And if it is, would you be able to share any guidance on the sales for the 9 months as you go forward?

So hi Avi, Ajoy here. Yes, there has been -- we have seen a certain, what I would call a pent-up demand on account of gold jewelry, even studded jewelry, on account of less milestones in the period of lockdown as well as, let's say, typically people wanting to buy during upset that they were not able to buy. So we have seen evidence of that in June, and it has continued in July. The rest of the quarter will look like, it's kind of difficult to give a guide [indiscernible]. But we have seen -- we're still seeing a good -- at least for us, we are seeing a lot of new customers also walk in. And the contribution of new customers as well as the absolute growth that we are seeing in new customers is also giving us a lot of confidence. And the third piece, which I would like to share here is these milestones I talked about, birthdays and anniversaries, this is now becoming a growing trend for us. It is -- one is, of course, a spike that you see immediately after unlocking. But I think as a process, we have become a little better at managing that. So that is among the repeat customers is also going up. So I think we have more than just the pent-up demand as a basis. And they are waiting demand, which, anyway, people are advancing their purchases because they don't know when Wave 3 may come, if it comes, et cetera. So these are some of the demand drivers.

Okay. No guidance on recovery by when nothing like that, right? You would not be comfortable. That's the [indiscernible]

Yes. Not on this [indiscernible] .

Not on this [indiscernible] . Okay. And sir, secondly, on the margin front. I mean there were -- in the last call, you highlighted towards some discounting pressures from other peers. Is that now behind us? Is that a fair understanding?

See, discounting has always been there, last year this year. And nowhere have we actually slipped down margin on account of that piece. I mean we -- no, so I mean, competitive intensity continues to be high post unlocking. Most players in the market have been on aggressive offers. But we followed whatever we think was right to do and we followed our steady. So it's okay. I mean that will continue.

It's an operating aspect of the industry.

Okay, sir. And lastly, sir, just a bookkeeping on this change in hedging. Does this in a way require us to increase the number of hedges that we keep on book? I mean would that be a right understand or that will self-correct?

No, I don't think that's the right understanding. Because it is just -- I will again repeat that instead of the inventory, which was exposed to price risk, and we were hedging the cash flow in future out of that inventory. Now we are hedging inventory itself, which basically brings in more certainty that what hedges we are doing and tagging to the exposed inventory which is what -- we will kind of bring in through GOL, which are naturally hedged inventory. So that proportion is -- we are not foreseeing meaningful change. If that proportion changed, then in any case, we have to hedge the remaining inventory. Again, this is operating and very tactical month-to-month, week-to-week, quarter-to-quarter. But this system doesn't bring in any structural change into amount of hedges need to be taken.

Okay. It's just still accounting. Got it. Clear. So the unhedged is ineffective as it is now behind us. [indiscernible]

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

My first question is on TCL North America. So 12 years back, you had exited U.S.A. So I want to understand what has changed? And if you could discuss any numbers here in terms of investment or losses? Is there any learning from CaratLane International business, which has increased [ 9x ] Y-o-Y? Is that giving more confidence? Because the U.S. market in 11 years would have become much more competitive now. So if nothing works then, then you had highlighted that you want to [indiscernible] and U.S. the market [indiscernible] higher. So if you could discuss these points.

Yes. Thanks, Abneesh. For various reasons, which were valid in 2006, 2007, we decided to target the mainstream American consumer with Tanishq, okay? And we went into malls. We created a product line, which was totally American global in terms of styling, took an unknown brand into the American market. At that time, we felt that we could make a success because the proposition that we had was differentiated and we felt that there was a decent space in the American market for that. There was a decent space. Everybody who came into the Tanishq store loved the entire value proposition that they had put together from product design, to range, to quality, to the customer experience, to the store design and all that, and we had very good customer feedback. But the biggest challenge that we had not visualized that well was the investments that we needed to make to generate the work things, build the brand and generate traffic into the stores. And even as we were starting to grapple with it, the global financial crisis struck. And we realized that it's going to be a long haul, and many 10s of crores would have had to be sort of lost before we saw light. And Titan Company was in a very different situation in 2008. So that was the reason for closure at that time. Now the incorporation that you are referring to is for making a serious play in the NRI PIO market of North America. And just in 10 years, there has been -- I mean even in NRI IPO market was large. I won't go in [indiscernible] why we chose not to go there them. But I'm telling you why we are choosing to go there now. The per capita GDP of the NRI IPO is USD 100,000 in a country, which is $65,000. And the NRI PIOs are more Indian than Indians living in India. And the connection with the culture of India, the festival to India, even the functions as the [indiscernible] celebrated with the [indiscernible]. The holy Diwali and all that, there's a lot of socializing that happens. And we [indiscernible] India, the NRI traffic during December month and already peaks. So we are now playing in a very different category which is pretty large. Our sense is that it may be $3 billion, $4 billion, at least. And the market is pretty unorganized. And we believe that we can hit the ground running. We can get very decent ticket sizes, very good diamond jewelry share and also a lot of prestige by upping the game in terms of style question. So all in all, the game that we're going to play now is very different. The Tanishq brand is very strong in the NRI PIO consciousness. We have done a fair amount of research to make sure that when we go in, people are welcome -- waiting there to welcome us just like it happened in Dubai after many, many years. So therefore, the market opportunity, very different. The strategy is very different. The competitive advantages, something else compared to unknown brands fighting big global brands at that time, huge desirable brands fighting mostly local players this time. So that's a big difference.

Sure. My second question is on closure of stores. So you have closed 5 stores in different formats, 1 in [indiscernible] and 2 in [indiscernible] which could be the reason? And is this more focus on digital or online you want to try?

Abneesh, we have 1,800 stores plus [indiscernible]. We can't help to not close some of them every year. I mean it's just like that. It's just a regeneration of the system. Nothing particular. It's not a material number from a network size point of view.

And last quick one. So you have pointed that in jewelry last year, you saw a quick turnaround with football recovery. And you have said this time even in watch, you have seen that and the eyewear. So what is driving this? So essentially, is it more of a base effect or there is a faster sentiment improvement?

This is Suparna here. Yes, I think the consumer sentiment has been faster to recover. And we see that across all channels in the watches division. So whether it is multi-brand outlets or the large format stores. And certainly, in our retail stores, consumers have come back faster. And that's such an overall level, it took longer for people to come back to buying after the COVID wave last year. This year has been much better.

And Abneesh, last year, there was no vaccine. This year, there is a vaccine. I mean I was in Punjab last week and so many people on the road, so many people in the famous restaurant [indiscernible]. So the fear of COVID, even though the tragedy of COVID was greater this year. But the fear of COVID is much less because the vaccine is protection shield. And that's what I'm sure is affecting the [ increase ] in the recovery across categories.

Next question is from the line of Kunal Vora from BNP Paribas.

First question [indiscernible] you've seen the excellence over the last [indiscernible]. How strictly are we seen following the large multiples and what are the benefits you expect in the near to medium term?

Yes. So hallmarking is mandated. Yes, we have been compliant right from day one across all our stores, whichever city it is. There is some amount of disruption in the supply chain in terms of production, post-production because there is a new system of, in a way, capturing the hallmarking UID number through some centralized system. That is resulting in some significant bottlenecks, which BIS is trying to address. So that is the main impact currently of hallmarking. Meanwhile, jewelry associations continue to kind of lobby for a certain deferment delay, et cetera. We are carrying on the way it is and we have expanded our operations suitably to cover up for these delays. Now the benefit for us, well, in the long -- I think HUID is a good move because it will really bring transparency and some credibility to the hallmarking piece. So tomorrow, as a customer, if you are able to use that number and check where it was hallmarked, et cetera, it gives a certain -- so you'll prevent any contamination in the hallmarking process. And BIS also seems to be pretty clear that they are going around checking the quality of hallmarking and all of that in the initial months and weeks so that there is no hanky-panky. So we think this will be good for formal organized players who are operating on clear purity, et cetera. And eventually, I think the entire industry will kind of get into that mode, which is good. And if it's good for the customer, it's good for all of us. So it will be beneficial.

Sure. Okay. Second question regarding [indiscernible] what is the foregone potential for this brand? And would it really focus on jewelry alone? Or would you consider expanding it to [indiscernible]?

We have [indiscernible] here who's the Managing Director of CaratLane. It will be wonderful to hear him share his thoughts.

Could you -- the first part, did you ask me the current store count? The current store...

Sir, potential, potential. Like where do you think [indiscernible] to be the potential [indiscernible]?

Yes. So if you consider that the stores are roughly about 1,000 square feet, and we are currently in only 44 towns with depth in about 16 towns only. You could put any multiplier to that and we would find a lot of potential if you look at just India alone. Beyond that, if the second question that you had was around -- sorry, could you repeat the second one?

Yes. I just was wondering whether this brand can be extended to other [ jewelry ] products? Right now, it is only [indiscernible] other luxury products as well?

It could be, but it hasn't crossed our mind yet.

Thank you for bringing this to our notice.

Sure. And one last question, if I can. Like through FY '22, how do we look at jewelry [indiscernible] business revenue compared to FY '20. Would you say that [indiscernible] really [indiscernible] figure over FY '20 is possible or with the [indiscernible] shares? Also in watches, if you can share when do you expect to get to FY '20 level of sales?

Actually, we had reached FY '20 level of sale in Q4 of FY '21. And then we were gunning for a good growth in all the businesses in FY '22 until Wave 2 came. I think in the 9 months, I think we should be gunning for certainly matching and exceeding is what we would gun for, plus do not take it as a guidance.

Are you saying that do a good CAGR, double-digit CAGR or you're saying that FY '20 [indiscernible]?

No, no. Last year was a drop, no? So CAGR will be just a point-to-point growth.

The next question is from the line of Aditya Soman from Goldman Sachs. As there is no response from the current participant, we move to the next question from the line of Krishnan Sambamoorthy from Motilal Oswal.

Last year, particularly the second half, we saw a significant bunching of [indiscernible] demand, also benefits of things like lack of overseas travel, therefore, putting greater income in the hands of the customer. Like do you expect something similar in the current year as well?

The overseas travel part from whatever we are sensing is still a big constraint. While the people's moods have improved [indiscernible] but the governments continue to be strict about visa. And therefore, for example, even for our own launches, stores in Dubai and U.S., we are not able to step out of this country. So I suspect that, that advantage will remain for a while. Weddings are not clear. Maybe Ashok can speak.

Yes. I think wedding demand will be stronger in the second half. It's already there because people are advancing their purchases, not knowing when Wave 3 will hit and, therefore, getting on with it. But having said that, certainly, like last year, we think wedding demand will be stronger in the second half because people have missed out in the first quarter.

Understood. The second point, while you did highlight that you don't want to give supply number. Could you share store operating base data, similar to what you've given for April, May and June?

Sorry, what data?

Store operating base.

Store operational base.

[indiscernible]

No, no, no. Yes, it's about 80%, 90% for jewelry. And it's in around the 80 -- mid-80% kind of number.

[indiscernible]

So watches, it is around -- between 75% and 80%.

Through the malls.

Because of the malls, yes. And there are lots of states where there is alternate days. And so it's certainly much below 80%.

CaratLane [indiscernible] says it's 88%.

Also, I feel that because the public is also now starting to become reasonably well aware of this, the sales must be getting distributed over the days in which stores are open. So you may not be able to use this, frankly, beyond a point for any practical [indiscernible].

Yes, I would strongly suggest not to use that data because the correlation is not standing out. What Venkat said is going out by data. So we should look at total month sale only.

Okay. Just one final question. Sir can you explain what's the role that Titan Commodities Trading Limited [indiscernible] would play in dividend process?

It's the registered broker with MCX in a way. And so earlier, if you remember, we used to deal with other brokers, including [indiscernible] and we had a bad experience there. Some of our money got stuck. And just to avoid that risk, we kind of created our own entity. Titan is a sizable player as far as gold bullion hedging is concerned. So apart from providing that risk, of course, we are saving some [indiscernible] charges, et cetera. So [indiscernible] that was not the motivation. Motivation was to avoid the risk of a counterparty in this kind of transaction.

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

Congratulations on good set numbers in the [indiscernible] quarter, especially in margin, if I may say on the June too. So I just wanted to ask Ashok or Ajoy, if I can get some clarity on jewelry margin. I remember last quarter, there was a one-off expenses or at least write-off on account of the custom duty reduction that had already happened and impacted quite sizable amount in Q4. And if I remember correctly, [indiscernible] has said that part of it would be also affecting this quarter, and if I were to say 2/3, 1/3. I just wanted to know that what kind of custom duty impact would have still hit in this quarter? And can you quantify that in terms of EBIT impact?

So I'll take that, Amit. So we were actually expecting to observe a much larger component of custom duty impact in quarter 1. But because sales itself are much lower, that amount is also much lower. Coincidentally, some of that loss has got set off by what we call as a FIFO gain, which is on account of gold rate valuation. So actually, in this quarter, those 2 amounts are canceling each other out, okay? So you're not seeing any impact of that. And they happen to be the same number, give or take INR 1 crore here and there.

To add to Ajoy, there will be something going into quarter 2 now. But now amount is not significant where we call out specifically what that amount is. But some carryforward to quarter 2 will happen.

Okay. But that would be, I would say, I would guess would be marginal and not really very meaningful, which as in the EBIT margin level? Would it be a safe assumption?

It should not be very, very meaningful, but we will kind of let you know...

It will be meaningful, but not material.

Not material, yes.