Tanishq stands to benefit from Hallmarking – Titan

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 0.3% down at 17,076. Top gainers in NIFTY50 were ASIANPAINT (+3.1%), TATAMOTORS (+2.6%), and SBILIFE (+1.9%). The top losers were M&M (-3.0%), CIPLA (-2.7%), and TATASTEEL (-2.7%). The top gaining sectors were REALTY (+5.6%), CONSUMER DURABLES (+2.0%), and PSUBANK (+0.9%), while the top sectoral losers were METAL (-1.8%), IT (-1.3%), and FINANCIAL SERVICES (-0.2%).

Tanishq stands to benefit from Hallmarking – Titan

Edited excerpts of an interview with Mr. Ashok Sonthalia, Chief Financial Officer, Titan with CNBCTV18 on 1^st Sep, 2021:

• At the time when brokers can no longer sell digital gold, Tanishq has launched digital gold.
• While explaining the rationale behind the idea, Mr. Sonthalia informed that digital gold was one of the ways consumers wanted to lock-in the gold price. So, the company decided to experiment with it.
• Digital gold has been launched recently in some pockets, response of which is yet to be seen. Company hopes that digital gold provides another way to consumers who want to invest with Tanishq in gold. They can buy at appropriate time and convert it into physical form.
• Smaller players are facing severe challenge due to Hallmarking and it has led to lot of supply chain challenges.
• Titan has been preparing for gold hallmarking for long time, without expecting any extension from the government. The well advance preparation has helped Tanishq to be 100% hallmarked currently.
• The whole Hallmarking Unique ID (HUID) process is creating some teething trouble, due to which supply chain has gotten elongated by 5-7 days. This leads to having more inventory to that extent. But other than that, Tanishq is going to be fine on hallmarking and the company believes that these teething issues will also be sorted out going forward.
• Government has been flexible regarding hallmarking as it has given a lot of time to the industry. The rule was introduced in Jun-21, no penalties were imposed until the end of Aug-21, so that manufacturers, wholesalers, and retailers of gold jewelry get enough time to comply.
• Hallmarking will be positive for industry as consumers will be confident of buying gold from anywhere.
• According to Mr. Sonthalia, the earlier model of pure gold and low making charges will be challenged now. Tanishq is in a favorable position as it always had pure gold plus making charges.
• Tanishq will gain from hallmarking as it will be challenging for unorganized and small player to correct and re align their model now.
• Mr. Sonthalia commented that the recovery of Tanishq has been pretty good post the second wave of COVID-19. Everyone in the organised sector including Tanishq is doing well.
• According to him, the shift from unorganised to organised was a slightly longer-term story, but some of the elements have given an impetus and to that extent, organised sector is gaining from the unorganised sector and Tanishq is also benefitting.
• His comments on 2QFY22E:
  • Tanishq jewelry and eyewear are in the growth phase.
  • The stores are still not fully operational. They are running between 80%-90%.
  • While Physical stores are operating at a slightly less capacity, digital and omni have supplemented to some extent.
• According to company guidance given earlier, Titan plans to open 35 stores in FY22E. 11 stores have already been opened.
• Company is working on physical and digital sales point aggressively. In 1QFY22, the physical retail stores expansion plan got impacted due to second wave but it is confident of completing the target by Mar-22E.The focus and investment on digital and omni is also going in a big way.
• Many time the enquiry and selection of jewelry starts digital or in video calls but ends in physical stores. So, stores are not going to lose their importance and Titan plans to be very aggressive there too.

Asset Multiplier Comments

• We believe that Mandatory hallmarking will standardize the purity of gold jewelry. It will take the industry towards being more structured and even further push the ongoing shift of business and customers from the unorganised to the organised jewelry segment.
• With re-opening of stores, increasing wedding sentiments and rising vaccination pace, jewelry demand is expected to improve further. Hallmarking will benefit Tanishq as it has competitive edge over other small players who are facing issues.

Consensus Estimate (Source: market screener website)

• The closing price of Titan was ₹ 1,944/- as of 1-Sep-21. It traded at 94x/68x/57x the consensus EPS estimate of ₹ 20.4/28.4/33.8 for FY22E/ FY23E/FY24E respectively.
• The consensus target price of ₹ 1,737/- implies a PE multiple of 51x on FY24E EPS of ₹ 33.8/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”