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Titan: Banking on jewellery
Sep 24, 2007

Titan Industries forayed into the jewellery sector with the launch of Tanishq stores in 1996. The first branded jewellery player in India who enjoys 70% of the market share, the company is India’s only national jewellery retailer having a network of 87 stores spread across 63 towns and most of these stores are run by franchisee. The story so far…
The jewellery business in India is highly fragmented and ruled over by local players. When Titan forayed into the jewellery business, there was no national jeweler that people could buy from, despite the fact that India is the largest consumer of gold in the world. The company decided to get involved in designing, manufacturing, and selling gold-based jewellery, including jewellery watches. Tanishq had quite a few problems on its hands as the business is highly localised in nature, given the fact that Indian consumers prefer to buy gold and jewellery from family jewellers.

The Tanishq division was set up to focus on export business and earn foreign exchange. This was in the late eighties when the country was facing foreign exchange problems. Branded Tanishq, it had initially been set up as an export-oriented unit to comple-ment the watches division. However, by the time it acquired the skills and set up the plant, foreign currency was no more a problem. Imports were easy to come by that led to slowdown in demand in the global market as supply grew in Asia impacting margins of the company.

Then the Tanishq pilot plant was set up in 1992 as the focus now shifted to Indian markets and launched its first store in 1996.

However, the jewellery market in India was highly fragmented and dominated by family owned jewellers or local players. To compete with the local buyers, while the company incurred huge promotional expenses, advertising and marketing expenditure, it failed to get the customer traffic to the store as customers found it expensive.

To counter the price barrier, the company on its fifth anniversary announced huge discounts to get the customer to the store and positioned the jewellery as a fashion accessory targeting working women. These strategies worked and since then the division graph shows an upward trend in terms of sales and profits. Then it expanded stores on a franchisee basis.

Expertise in building brands: Titan with its brand ‘Tanishq’ positioned jewellery as a luxury brand and not merely as a commodity, which worked in its favour. Historically gold or diamond jewellery purchases were made occasionally and were considered as an investment. However, the brand concept was looked upon as a fashion or adornment rather than an investment.

Earlier the jewellery market was segmented on the basis of materials such as gold, platinum and silver. When Tanishq entered the market to capture a share of the pie, it positioned branded jewellery on the basis of consumer driven perspectives such as everyday wear and special occasions.

Franchisee model: The company adopted the franchisee model primarily for two reasons. Firstly, to do away with the capital costs (franchisee would pump in certain amount of capital) required in setting up stores, which resulted in limiting fixed asset investment costs for the company. Secondly, as the business is localised, the franchisee model helped to build a customer network.

New initiatives: Post the attack on World Trade Center, gold prices declined on account of volatility in the commodity prices. To maintain growth, the company targeted corporate sales as a new route to acquire customers. Recently, the company has also forayed into the mass-market jewellery business (GoldPlus) to increase its market share and penetrate the rural region. To reduce its dependence on its core business and to leverage upon its existing facilities, the company has forayed into the precision engineering business. It has also recently forayed into the prescription eyewear business segment.

What the numbers say: As mentioned earlier, it operates on a franchisee basis, as the jewellery market in India is still very localised. Tying up with the most prominent jewelers has helped the company reduce fixed costs and improve return on capital employed.

The segmental turnover has grown at a CAGR of almost 45% in the past three years and contributes almost 60% to the total revenues of the company.

With the contribution expected to increase from the jewellery division of the company, we expect further escalation in raw material (volatility in gold prices is a concern) related costs in the future. While any increase in gold prices is generally pass-through in nature, it may impact demand to certain extent, going forward. Nevertheless, we believe that the ability to foresee trend, build brand and gain market share over a period of time are few of the core strengths of Titan.

The way forward: The expansion of the retail outlets continues to fuel the growth of the jewellery division (from 87 boutiques in 64 cities, 'Tanishq' is expected to touch the 100 mark by 2008), accompanied by new promotional schemes. The management expects this division to clock revenues of Rs 10 bn in FY07 (Rs 7.9 bn in FY06) and given the 1QFY07 performance, it seems that it is well on its way to achieve the same. The company is planning to utilise the distribution network of the Tata group companies such as Tata Chemicals and Tata Steel, which have extensive reach in rural areas. Moreover, the precision engineering segment that caters to the component, component assembly and automation requirements of the automotive and aerospace industries holds significant growth potential over the next two to three years on account of booming end user sectors.

Going forward, the jewellery and the precision engineering division are expected to be the key growth drivers. The fact that Titan has a very successful track record of building new ranges of products, both in the watches as well as in the jewellery segments is expected to augur well for the company in the future. Having said that, while we like the company and its business model, in our view, valuations appear rich at the current levels.

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