Titan Company Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Jewellery demand defies gold price spike: January saw very good demand, with a 3-year CAGR even better than Q3’s, as consumers who deferred purchases in Nov-Dec re-entered the market.
• Growth investment deliberately compressed margins: Jewellery EBIT margin dipped YoY because the company chose to invest aggressively in competitive offers, marketing, digital and talent while the market was active.
• Market share gains accelerated: Internal estimates point to a 1% share improvement, driven by expansion in low-share markets, mega stores, high-value studded, and a revival in gold exchange and Golden Harvest enrolments.
• Watches and wearables show broad-based momentum: January was good not only against last year’s Omicron-hit base but also on a Jan 2020 base, with new product contribution now above 20% across all channels.
• What to watch next quarter: Whether the wedding demand uptick already visible in January sustains through Q4, the pace of jewellery margin recovery toward the 12–13% band, and any update on the US and GCC store rollout.

Jewellery: Demand, Margins & Competitive Intensity

• January demand surprised positively: Despite gold prices shooting up since December, demand was very healthy, partly because a weaker Omicron-hit base flatters the YoY number, but the 3-year CAGR was even better than Q3’s.
• Deferred-purchase hypothesis: Management’s personal view is that consumers deferred purchases in November and December due to gold price volatility, then decided to enter the market in January as the outlook for continued high or climbing gold prices combined with wedding season urgency.
• Buyer growth leads, ticket size adjusts: At the overall 15% jewellery growth level, buyer growth was the larger contributor, with new buyers contributing 49%. Ticket size growth may not equal the gold rate increase because consumers adjust grammage to stay within budget.
• Lower-end and studded saw some softness in Q3: Lower price points and studded slowed during the quarter while plain gold was positive, driven by festive demand. In January, the lower-end concern came back strongly, though it remains volatile.
• Wedding demand was muted in Q3: Wedding contribution was a percentage point lower at ~19% versus ~20% last year. Management personally expects it to become better in Q4, and some of that is already showing up in January.
• Margin contraction was a deliberate growth bet: Jewellery EBIT margin showed a slight downward sense YoY because the company invested aggressively in growth through competitive offers, higher marketing investments, and ramped-up investments in digital and talent. Last year also had significant one-offs.
• Gross margin decline at company level: Driven by the jewellery business: pricing, growth offers, the absence of a ~1% one-off that sat in last Q3, and tapering of benefits like diamond pricing gains and customs duty that were significant in Q2.
• Gold exchange surged on aggressive offers: Contribution rose to ~30% this quarter versus the same quarter last year, partly driven by aggressive gold-exchange-related offers, especially as gold prices rose. Unit economics differ and break even at a certain upsell level.
• Competitive intensity remains elevated: Gold rate and price competitive intensity was very high in Q3 from both national and local jewellers. The market discount versus MCX was more pronounced in January than in November-December. Management noted the competitive situation in 2022–23 is at a much higher, more intense level than in 2017–18.
• Market share improved ~1%: Internal estimate driven by expansion of existing retail stores, inventory infusion in low-share markets (some south and east markets), aggressive growth in mega stores, more work on high-value studded and solitaires, and strong traction in gold exchange and Golden Harvest enrolments, which are back to pre-COVID contribution levels.
• Regional performance mixed: Metros did particularly well. Share was gained in the south, across metros, and in certain western markets. The east was more muted overall; Titan sustained share there.
• High-value studded and solitaires gained: High-value studded gained a percentage point and is back to pre-COVID levels. Solitaires also did well.
• Primary vs. UCP sales gap is a timing artefact: The difference between 15% UCP growth and 10% primary growth is entirely due to the timing of stocking and downstocking of the L3 channel between Q2 and Q3.

Ajoy Chawla: “We knew that the market is volatile and choppy and therefore, when the going is good and customers in the market, we said we will go aggressively after growth. And if that meant that we needed to invest in growth by way of competitive offers, by way of higher marketing investments and overall, in general, a higher growth-oriented approach to the market, we have gone ahead and done that.”

Watches, Wearables & Emerging Businesses

• Watches margin dipped on mix: Q3 margin was lower because of product, channel and category mix issues, but YTD margin stands at ~13%.
• January watches demand broad-based: Good performance not only on last year’s retail base but also on the Jan 2020 base.
• New product contribution now structural: ~20–22% of watches revenue comes from new products, and this is now seen across all channels including multi-brand outlets at over 20%.
• Wearables targeting triple-digit growth: Strategy will involve customer propositions beyond the mere device play.
• IRTH bags launch off to a strong start: The women’s bags brand launched in October, available on Shoppers Stop, Nykaa, Tata CLiQ and Myntra, with ~25% coverage of Shoppers Stop. Response in the first 60 days has been very good.
• Emerging business ambition: The bags and accessories business has an FY27 target of ₹1,000 crore; the business is confident and preparing to reach that.
• TEAL automation struggled on profit but won record orders: The quarter saw the highest order inflow, though profit was impacted. On a full-year basis, TEAL is still expected to be profitable. The last two years were impacted by airline industry churn.

International Expansion

• US store now operational: The New Jersey store is open, and over the next 6–12 months the company plans to expand across another ~4 locations in the US, targeting cities with significant Indian populations.
• GCC expansion plans are fairly aggressive: Having established themselves quite well in the UAE, management is looking at other GCC countries that are Oman, Saudi is possible.
• International store count ambition: The intent is to get as high as 20 stores, in response to a question about moving from 7-8 stores to doubling or tripling that count over the next 12-13 months.
• UAE stores performing well: All launched stores are doing quite well and growing strongly, though store rollout has been slower than planned due to operating complexities in new markets.
• Lab-grown diamonds investment is exploratory: The company invested ~7–8 months ago in US-based Great Heights (brand: Clean Origin) purely to understand the US market. Management is not in a position to share any other plans.

Consumer Advantage & Demand Outlook

• Titan’s consumer base is structurally insulated: The bulk of the business emanates from consumer segments in the top half of the income class pyramid, substantially removed from the effects of inflation.
• Encircle database is a proprietary demand engine: The 2 crore-plus Encircle membership provides deep understanding of preferences and purchase history, with many millions of members personally known to staff, making a sale “a telephone call away.”
• Management is quite positive on calendar ’23 and FY24: The combination of an affluent consumer base and deep relationship data gives confidence in sustained demand.
• Same-store growth ambition: Every store has a business plan and a same-store growth plan; management hopes to do better than 8–9% in the medium to long term.
• Franchisee expansion not expected to slow: Despite higher gold prices, enough franchisees remain keen. The L3 format is sometimes preferred over L2 because margins are sweeter.
• Gold-coated silver jewellery is not on the table: Titan will not enter this segment; Tanishq will stick to authentic gold.

C K Venkataraman: “The biggest advantage that Titan and other companies like Titan have is the consumer segments from which the bulk of the business emanates. And those consumer segments are sitting in the top half of the income class pyramid in the country. And they are much at the time substantially removed from effects of inflation.” [19–20]

Margins, Operating Leverage & Capital Efficiency

• Jewellery EBIT margin band maintained at 12–13%: Management is targeting that range for the next 12 to 18 months while achieving industry-leading growth. It is too premature to comment on the higher or lower end.
• Operating leverage should provide a positive bias: There should be some amount of operating leverage coming in with sustained growth, and a positive bias towards improving margin, but the market is dynamic and competitive. Choices around growth, profitability and ROCE will be discussed at an upcoming Board meeting for the next four years.
• Watches margin outlook remains ~13%: The outlook stays in the 13% ballpark range.
• Inventory expected to rise, but capital employed may not: Inventory is expected to go up, but capital employed may not rise to the same extent due to gold-on-lease and efficiency plays. Over the medium to long term, some improvement in inventory efficiency can be expected.
• Gold exchange offers to continue near-term: The aggressive offers will continue at least for the next couple of months; January has been part of that.

C K Venkataraman: “Finally, the sales growth coming at the sale gross margin levels in a business helps you deliver expanded EBIT margins and the competitive situation in 2017 and 2018 was of a certain level, the competitive situation in the jewellery industry in 2022, 2023 is at a much higher, more intense level.”

Guidance & Commitments

Key Metrics