Icra upgrades Titan's long term rating to 'AAA' with stable outlook

Apart from the growing Titan's store network, a shift towards organised sector will support growth

After showing high resilience to Covid-19-related disruptions in the jewellery segment, Titan’s growth is expected to be supported by store network expansion and huge opportunities in the unorganised sector, according to Icra.

The rating agency upgraded the long-term rating from “AA+” to “AAA” with stable outlook. It also affirmed short-term rating and rating for the fixed deposit programme. Titan stock was trading 1.73 per cent lower at Rs 723.35 per share on BSE.

The rating upgrade reflects expectations that Titan, a Tata group entity, will be able to leverage strong brands and market leadership position in the jewellery segment to drive sustained growth in revenues and accruals. The segment has shown high resilience to Covid-19-related disruptions and reported 16 per cent (year-on-year) growth in Q3FY21 (net of bullion sales).

Titan’s jewellery segment has witnessed a healthy revenue expansion at a compound annual growth rate (CAGR) of 18.7 per cent and margin expansion from FY16 to FY20. This was aided by improvement in market share as well as additions to the store network.

Growth prospects in the jewellery segment are underpinned by large industry size and fragmented market shares. Increasing regulatory restrictions in the jewellery segment have meant greater transparency and higher compliance costs. This has resulted in a sizable churn in the unorganised segment, thus benefiting organised players such as Titan.

The company has a robust financial profile with strong cash accruals, moderate capital expenditure requirements, comfortable leverage metrics and strong liquidity, Icra said.

Titan’s liquidity profile is superior with healthy cash from operations, moderate capital expenditure spend and negligible long term debt repayment obligations. In addition, Titan had cash, bank balances and liquid investments of Rs 877 crore as on September 30, 2020.

Apart from a robust standing in the organised jewellery segment, it has a leadership position in watches and eyewear segments. The ratings factor in strong brands, integrated manufacturing capability, wide distribution and service networks and diversified product portfolio in terms of price points and styles.

The ratings, however, remain exposed to the regulatory risks and the competition in the domestic jewellery retail space, especially from regional players.

Regulatory actions in the jewellery segment have impacted Titan in the past, both on the demand front, through enhanced disclosure norms for customers, limits on cash transactions, etc and on the supply side, with risks like like curbs on imports, restrictions on gold on lease financing.

Referring to credit challenges to Titan, Icra said it is exposed to increase in competitive pressure. Alternatives for time-keeping devices such as mobile phones along with the discounts by competitors and online retailers may potentially constrain revenue growth and margins in the watches segment.