Titan: India's LVMH

The Golden retail play of India

Hi reader, we are back with this blog covering another portfolio company of ours which is Titan. This call has a Macro + Micro aspect to it. Recently, we have been looking to invest more to play the consumption theme of India, and Titan came out as one of the best stocks to put our money in, which has been a consistent compounder for years now. Let’s dive into the Macros first, before moving to the Micros of Titan.

How is India’s Macro story shaping up?

India’s structural economic story with strong demographics, increasing infra spent, formal job formation, and the rise of a big middle class is well understood worldwide. That’s the reason why you can find Apple’s CEO Tim Cook mentioning ‘India’ 20+ times in their latest results concall, being bullish on the rise of the middle and high-class families here. So the mid to long-term positive structure is well intact, but the macros even in the short term look extremely positive now, making us bullish to bet on the consumption sector with a ~1-year point of view. Here are a few graphs to discuss:

^ This chart from the recent Jefferies report hints towards the big investment that is about to happen in new projects by India’s corporate sector. This was long awaited and is finally starting to happen. We seem to be on the cusp of the start of an investment cycle led by the private sector that can continue for at least a few years and can fire up the consumption levels in India to record heights

^ India’s debt levels as a ratio to equity have been falling since FY20, the year in which the government announced the corporate tax rate cut, making ‘Debt’ a source of financing fundamentally less lucrative due to a reduction in tax benefit element. Even though this negatively affects the levels of ‘Return on Equity’ from an equity investor’s point of view, low debt levels reduce the default risk in the Economy and leave space open for taking debt to fund future investment/capex plans for corporates.

^ The above graph shows how in the years near to the elections, the ‘Official’ spending of India’s biggest political parties is multifold. The ‘Unofficial’ figures can be multiple times the official figures. With elections lined up for 2024 and the opposition looking to give a tough fight against the ruling party, the big spending in the economy coming and with a strong wave of formalization in the economy visible in the tax buoyancy, the pace of the existing black economy transitioning into white would be the highest in coming next 12 - 24 months. Historical data also points to FMCG stocks outperforming around events like elections.

Titan’s Micro and comparison with LVMH

Titan started as a partnership between the Tamil Nadu governement and the Tata Group ~40 years back with a focus on ‘Watches’ for ~20 years. The next 20 years is when the value creation story actually happened when the transition happened with a primary focus on the ‘Jewellery’ business which today contributes 80% of their revenues today and 90% of their profits. Fast forward to today, it’s a $30+ Bn market cap company with market leader in jewellery business of India with profitability no other jewellars could ever reach.

Here is a link to the podcast with Saurabh Mukherjea - Titan: A Golden Case in Indian Retail (Podcast link); as some of our readers already might know, he is the founder and CIO of Marcellus Investment Managers, a fund which is super bullish on Titan. The level of their research is exceptional and beyond words. You can listen to this podcast where Saurabh explains the past and current business model, comparative analysis, and why it’s hard to replicate the Titan story. Having tracked Titan for a few years now, the level of detail which Saurabh explains with so ease in this podcast is real ‘Gold’ that Titan actually doesn’t even own as they follow the ‘Gold on lease’ model paying 3% to the banks for financing gold. Highly recommended.

In this blog, I wish to focus more on the the Titan’s brand proposition show in the table below taken from their investor presentation:

Their primary brand, Tanishq is the biggest contributor to their revenues and profits. They target various market segments by a group of brands. To name a few successes, their brand Zoya has been perceived pretty well amongst high net-worth people in India. Titan continues to focus on segments other than Jewellery, like Taneira for dress wear segment/sarees, Titan Eye+ for eyewear, and more. Their acquisition of Caratlane in 2016 was a big hit, which gave them entry into the online daily wear jewellery segment. Here is an interesting case study on CaratLane and how it has performed for Titan by ‘A Junior VC’ (Case study link); again, highly recommended!

The aspect of ‘rich becoming richer’ causing a wider gap in income and wealth levels is a real phenomenon worldwide. The reason why Bernard Arnault is the richest man in the world is because of the same fact his company LVMH caters to the rich and ultra-rich through a group of brands like Louis Vuitton, Bvlgari, Christian Dior, DeBeers, etc., which continue to grow at a pace of ~25% in terms global revenues (FY22 over FY21). Here’s a picture containing primary brands of LVMH where Fashion & Leather brands contribute the highest in their revenues (~49%) followed by Watches and Jewellery (~13%), Perfumes (~10%), and Wine Spirits (~9%):

So, to conclude, the primary point I am trying to make here is that as Titan continues to focus on their group of brands strategies to capture the largest chunk of premium consumption in India, with the highest standards of capital optimization to cater to the needs of shareholders, the story of wealth generation shall continue in long run. And with the trigger of a high consumption spree expected in the small to mid-term in India due to the reasons mentioned above, Titan is where we expect a good return in the short to mid-term, along with the fundamental long-term story, which is well intact. Though, one be well aware of certain risks which include rich valuation, possible futile cash burn to build a brand that isn’t perceived well by the customers, etc.

That’s all for this blog, thank you for reading!

Disclaimers- 

Personal & client investment/interest in the shares exist; this isn’t investment advice; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the Decision maker is responsible for any outcome