March 13, 2023
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TITAN COMPANY, Competition chipping away Tanishq’s gold ratepremium (~20% of Titan’s fair value at risk)
Call & Research Report by ICICI Securities
Sector: Diamond & Jewellery
CMP Rs. 2368, Target Rs. 2600 (10% upside potential)
Target Period: 12 Months
The rise in (relative) competitive intensity in jewellery retailing led to melting-away of gold-rate premium charged by category leaders (vs historically) compared to competition. We observe that in key cities (top 9 cities which contribute ~30-35% of Tanishq’s total retail area), (1) premium charged by Tanishq has declined by ~50% (to 1-3%) from historical levels; (2) Tanishq is aggressively competing with retailers like Kalyan, Senco, GRT, Malabar; in 50% of its key markets (the top 9 cities), gold rate charged by Tanishq has been 0.2-0.8% lower than Senco; (3) key national competitors (Kalyan, Malabar) have moved to one nation one-gold price; (4) gold price charged (under one-nation one-gold) is similar across companies, as per market rate set in Kerala (generally lowest compared to other markets; 1- 1.5% premium vs bank rate); (5) amongst all key markets, gold-price premium (charged by Tanishq) in Kolkata is the highest (6% higher than Kalyan, Malabar).
While one-nation one-gold policy adopted by competitors may benefit them in customer acquisition, we believe the operating leverage benefit enjoyed by Tanishq (50% higher EBIT margin vs competition lead by ~>2x revenue vs closest competition) could enable the company to combat the rise in competitive intensity more aggressively. Having said that, Tanishq’s ability to drive operating margin expansion (which doubled over the last 15 years from 6% to 12%) may be constricted in the near term. We estimate ~20% of Titan’s fair value in DCF is contributed by gold price premium, which is at risk now. ADD retained.
● Competition impacts gold-rate premium charged by category leaders: We believe, gold price premium charged by Tanishq in top 9 cities (~30-35% of total retail area for Tanishq as per our estimate) has reduced by ~50% (to 1-3%) due to the rise in competitive intensity from national and local jewellery retailers as –
► Hike in custom duty on gold has likely resulted in higher profit pool for players accessing gold through informal channels. We observe that large regional players have become aggressive on gold-rates (in a few cases, selling below the bank rate). This has created higher competitive pressure on national retailers like Titan, Kalyan and Senco. We expect implementation of hallmarking to help reduce this pressure going forward. However, in the near term, we expect gold-rate premium, as charged by Tanishq in different geographies, to be constricted;
► Many national retailers (including Kalyan, Joyalukkas, Malabar) moved to one- nation one-gold-price policy under which gold-rate charged by them has been the lowest (as per Kerala market) and uniform (inter-company/inter-cities). However, we understand to offset the impact of lower gross margin, retailers/brands have hiked making charges. Despite that, overall gross margin is likely to remain impacted (lower) by ~100bps as companies have chosen to pass on 1/3rd benefit to customers while retaining 2/3rd through higher making charges.
● Pressure on gross margin to sustain; operating leverage advantage aids Tanishq’s ability to compete: We note gross margins of Titan and Kalyan during FY17-21 contracted by >115bps during FY22 and 9MFY23 [chart:1] due to the impact of rise in competitive intensity (especially on gold-rates). However, being a leader (>2x revenue compared to second player), Tanishq enjoys operating leverage benefits (~50% higher operating margin). Hence, we believe, while Tanishq has superior ability to combat competition, its ability for margin expansion may be constricted.
● Valuation and risks: We maintain our FY23-24E earnings estimates, modelling revenue / EBITDA / PAT CAGR of 23 / 29 / 31 (%) over FY22-24E. Maintain ADD with DCF-based target price of Rs2,600. Key downside risks: Irrational competitive environment and sustained weakness or worsening of macro environment leading to demand slowdown.
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