Caratlane another jewel in Titan's crown; analysts positive on prospects

Although the Rs 4,621 crore deal may weigh on Titan's earnings in the short-term, analysts are positive on the long-term prospects

The announcement that Titan Company was increasing its stake in Caratlane to over 98 per cent for a consideration of Rs 4,621 crore seems to have met with the market’s approval even though analysts warned that this would pull down earnings in the near term.

Full control of the largest omnichannel light jewellery segment with 233 stores across India is considered positive. Caratlane had a turnaround in the 2022-23 financial year (FY23) with profit before tax (PBT) of Rs 48 crore and sales growth of 33 per cent, and an Ebit (earnings before interest and tax) margin of 5.5 per cent. Titan may be able to leverage the strong growth prospects in light jewellery.

Titan is a play on discretionary consumption with its strong presence in jewellery with Tanishq, Mia, Zoya and Caratlane, as well as watches (Titan, Fastrack and Helios), eyewear (Titan Eye+) and a push into wearables, dress material (Taneira) and other accessories. July showed demand remained strong across segments.

Post-acquisition of 27.1 per cent stake of the founding promoter, Titan will hold 98.28 per cent stake in Caratlane with the balance held by employees under an employee stock ownership plan (ESOP) scheme. A merger with Titan may also be on the cards. The payout implies a current valuation of Rs 17,000 crore for Caratlane. Titan acquired 62 per cent stake in the firm in FY17 for a consideration of Rs 357 crore, then valuing the company at Rs 576 crore.

Caratlane targets youth and daily wear jewellery in 14/18 carat range. Apart from online presence, it has 233 stores (retail area of 0.293 million sq ft). Sales amounted to Rs 640 crore and Ebit to Rs 35 crore in first quarter (Q1) of FY24.

Titan will probably part-fund this via debt of Rs 2,000 crore –Rs 2,500 crore – cash flows should be strong enough to retire this debt in two or three years, assuming revenue growth for Caratlane remains in the 30 per cent or better range (the five-year compound annual growth rate or CAGR is 49 per cent) and earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins continue to improve till around the 9 per cent level (from 5.5 per cent in FY23). The online jewellery segment is expected to hit 9 per cent of the total market (from the current 5-6 per cent) and Caratlane should be a dominant player.

There are some obvious benefits for Titan. Caratlane gives it a big presence in the lower price ranges where there’s a mass market. Also designing, sourcing, and manufacturing synergies are evident. The improvement in gross margin for Caratlane since Titan took the majority stake is from 19 per cent in FY18 to 35 per cent in FY23. Also, Titan’s backing guarantees easy access to cheaper debt if necessary.

Despite the cut in Titan’s EPS estimates for FY24, most analysts are positive on the increase in stake in Caratlane.

According to Bloomberg, 18 out of 28 analysts polled in August have ‘buy’/’add’/’outperform’ rating on the stock; four are bearish and the rest are ‘neutral’. Their average target price is Rs 3,148. Titan ended a per cent higher on Monday at Rs 3,078.60.