Jewellery - ICICI - 19th AUgust

Equity Research
August 19, 2016

BSE Sensex: 28123
INDIA
Jewellery
Structural play; better earnings growth momentum ahead
Titan
(Rs398 BUY)
Target Price Rs488
PC Jeweller
(Rs429 BUY)
Target Price Rs576
Reason for report: Sector update

As highlighted in our note on jewellery sector Near term concerns vs medium
term gains dated 29th March 2016 we believe the ongoing albeit silent structural
change in favour of organised jewellers remains one of the best themes to bet on
for long-only investors. We reckon, the street is overly concerned about the nearterm impact of regulatory changes. On the contrary, these changes are acting as a
stimulus for growth of the organised jewellery sector befitting Titan company
(Titan) and PC Jeweller (PCJ). Ahead, apart from macro benefits such as rollouts
of the 7th Pay Commission and normal monsoon, we believe these companies will
benefit from: 1) 50% YoY higher number of wedding days between Oct16 and
Jun17, 2) stimulus to revenues and margins due to higher gold prices, and 3)
favourable base. We expect Titan and PCJ to report earnings CAGRs of 26% and
21.3%, respectively over FY16-FY19 with improving return ratios. Hence, we
reiterate our overweight stance on the organised jewellery sector with BUY rating
on Titan (target price: Rs488) as well as PCJ (target price: Rs576).
Worst is behind: Amidst multiple alterations in government regulations and

fluctuating business outlook with volatile gold prices, jewellery companies reported
modest revenue growth in Q1FY17. The World Gold Council (WGC) has indicated
that gold import demand dropped in H1CY16 due to: 1) strike by jewellers, 2)
expectation of fall in gold prices, 3) increase in recycled gold, and 4) possibility of
higher share of smuggled gold. We also believe shift of wedding season also
postponed jewellery demand. However, gold prices shot up 10% YoY (highest in past
14 quarters). Profit growth was better than revenues as all companies reported EBIT
margin expansion due to rising gold prices.
Regulatory changes Booster for organized players: Major regulatory changes

such as 1) mandatory PAN card on transactions above Rs0.2mn, 2) mandatory
hallmarking and 3) levy of 1% excise duty aim to control illicit trade practices
prevalent in jewellery industry, thus providing easier growth path for organised
jewellers. Recent changes in the Golden Harvest schemes from 25% to 35% of net
worth will stimulate EMI culture in jewellery industry, befitting organized jewellers.
Better earnings growth momentum ahead: Apart from macro drivers such as the
expected revival in urban economy and better growth prospects of rural economy
post normal monsoon in CY16, we believe the jewellery sector will benefit from: 1)
higher wedding days in H2FY17; 2) positive impact of rising gold prices on revenues
as well as margins; history suggests Titans revenue growth as well margin expanded
with higher gold prices; 3) waning impact of regulatory hurdles, and 4) favourable
base.
BUY Titan and PCJ: We expect Titan as well as PCJ to benefit from the shift from
unorganised to organised jewellery retailing. Launches of new designs and
aggressive network expansion will sustain the growth tempo. We believe Titan as
well as PCJ provide good entry points considering high growth momentum in the
quarters ahead, and poised to win from structural shift over long term.
Valuation summary
Research Analysts:
Anand Mour
anand.mour@icicisecurities.com
+91 22 6637 7209
Aniruddha Joshi
anuruddha.joshi@icicisecurities.com
+91 22 6637 7249
EPS (Rs)
P/E (x)
RoE (%)
CMP
TP
Company Reco
(Rs) (Rs) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
Titan
BUY
398
488
9.6
12.3
16.1
41.4
32.3
24.8
22.5
24.7
27.1
PCJ
BUY
429
576
25.0
30.8
36.3
17.1
13.9
11.8
17.2
16.6
17.1
Source: Company data, I-Sec research
Please refer to important disclosures at the end of this report
Jewellery sector, August 19, 2016
ICICI Securities
TABLE OF CONTENTS
Key trends in jewellery sector ........................................................................................ 3
World Gold Council (WGC) indicates drop in gold demand............................................ 4
Highest jump in gold prices in past 14 quarters .............................................................. 4
Better EBIT margins due to higher revenues of studded jewellery ................................. 5
Rising share of diamond jewellery .................................................................................. 5
Regulatory changes to boost organized jewellers ....................................................... 6
Curbs on illegal trade practices ....................................................................................... 6
Interaction with unorganised jewellers ............................................................................ 6
Increase in GHS collections from 25% to 35% of net worth ........................................... 6
GST: Not a major concern .............................................................................................. 7
Strong earnings growth momentum over next 4 quarters .......................................... 8
Higher number of wedding days ..................................................................................... 8
Higher gold prices lead to better revenue growth and margins ...................................... 8
Rollout of 7th Pay Commission in major cities ................................................................. 9
Quarter-wise key growth drivers ................................................................................... 10
A look at key dynamics of jewellery players ............................................................... 11
ICICI Securities
Key trends in jewellery sector

Initiating report
(Aug 28, 2015)
Q1FY17 results for the jewellery sector were of extreme importance considering
various macro and regulatory hurdles amidst volatile gold prices. In spite of all these
chaos, organised jewellery players reported healthy numbers. As indicated in our note
on jewellery sector Near term concerns vs medium term gains dated 29th March
2016 we believe the gradual shift from unorganised to organised jewellers is
underway.
We note down key trends that have played out in the jewellery sector
Modest growth reported by jewellery companies in Q1FY17, while gold import

declined and unorganised jewellers sentiment took a beating.
Sector update
(Mar 29, 2016)
However, we would like to underline that Q1FY17 performance is not strictly

comparable even amongst organised jewellers as the impact of strike was not
uniform across the board.
While gold import data shows decline, again, it is not reflective of gold demand
trend as household gold supply increased, as stated by managements of jewellery
companies on conference calls.
Gold is available in the market at discount to MCX prices. While the discount has
narrowed from Rs2,000/10gm in Q4FY16 to Rs250/10gm currently, it clearly
underlines the flow of non-duty paid gold in the market.
Spurt in gold prices leading to consumers postponing jewellery purchase, in turn

jewellers increasing focus on studded jewellery.
Impact of PAN card is not yet clear. However, the unorganised jewellers suggest
that if the excise rules are complied with, capital employed of the unorganised
jewellers will decline by at least 50%, giving strong room for growth to the
organised jewellers.
Healthy revenue growth in spite of strike in early Apr16

The jewellery sector reported strong revenue growth in Q1FY17 in spite of many
challenges. The major hurdles faced were: 1) closure of stores for ~10 days in Apr16
due to jewelers strike, and 2) impact of mandatory PAN card for jewellery purchases
above Rs0.2mn.
However, we believe 10% higher gold prices and healthy consumer offtake has helped
the companies to report strong revenue growth.
Table 1: Revenues and revenue growth rates of jewellery players
Revenues
Titan
PCJ
TBZ
Source: Company, I-Sec research
Q1FY16
20,729
9,496
4,159
Q1FY17
21,383
10,498
3,260
% growth
3.2
10.6
(21.6)
ICICI Securities
World Gold Council (WGC) indicates drop in gold demand

As per WGC data for Q2CY16, gold demand in India dropped 18% YoY, which
indicates a slowdown in overall consumption of gold in the country.
As per WGC, two trends played out which resulted in slower demand: 1) strike by
jewellers, and 2) rising gold prices. The expectations of drop in gold prices resulted in
consumers postponing jewellery purchases. Managements of jewellery companies
have suggested that the share of recycled gold increased during the quarter and the
trade is abuzz about rise in share of smuggled gold.
We also believe, as the wedding dates have shifted to H2FY17, the demand for
wedding jewellery was also lower in H1CY16.
Titan has indicated jewellery industry revenues were down in Q1FY17. However, we
believe shift from unorganised to organised jewellery is helping the players such as
Titan and PCJ report healthy growth.
Table 2: Quarterly demand in India for gold jewellery and bar & coins
Tonnes
Q1CY15
Bar & coin
40.9
Jewellery
150.8
Total
191.7
Source: WGC, I-Sec research
Q2CY15
Q3CY15
37.7
57.0
122.1
215.1
159.8
272.1
*Q2CY16 over Q2CY15
Q4CY15
60.2
180.4
240.6
Q1CY16
28.0
88.4
116.4
Q2CY16
33.1
97.9
131.0
YoY (%) chg*

(12.2)
(19.8)
(18.0)
Highest jump in gold prices in past 14 quarters

Average gold prices were up 10%, YoY in Q1FY17, highest in the past 14 quarters,
which has contributed to price-led growth of jewellery companies. We also note that
rising gold prices are also driving store rollouts through franchisee routes.
Chart 1: Highest increase in gold prices in 14 quarters
Gold price (Rs/10gram)
YoY Growth (%)
31000
15.0
30000
10.0
29000
5.0
28000
27000
0.0
26000
(5.0)
25000
(10.0)
24000
Source: Taxmann, I-Sec research
Q1FY17
Q4FY16
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
(15.0)
Q1FY14
23000
ICICI Securities
Better EBIT margins due to higher revenues of studded jewellery

EBIT margins for the entire sector expanded in spite of the 10-day strike in Apr16
which resulted in higher fixed costs as percentage of net sales. Major reasons for the
higher margins were: 1) rise in gold prices, 2) favourable base, and 3) higher revenue
share of diamonds.
Table 3: EBIT and EBIT margins
EBIT margin
Titan
PCJ
TBZ
Q1FY16
8.8
12.2
4.5
Q1FY17
10.0
16.5
5.1
Change (bps)
124
429
55
Rising share of diamond jewellery

The share of diamond jewellery was higher for PCJ as well as TBZ, which has helped
drive the EBIT margins upwards. PCJ generally has activation on studded jewellery in
March. However, as the industry was closed in Mar16, PCJ postponed its activation of
diamond jewellery to Apr16.
As Titan started its activation on studded jewellery in Jul16 (compared to Jun15 last
year), the revenue share of studded jewellery has dropped, YoY.
Table 4: Higher share of studded jewellery
Share of studded jewellery (%)
Titan
PCJ
TBZ
Q1FY16
29.0
32.3
20.9
Q1FY17
24.0
37.2
23.8
ICICI Securities
Regulatory changes to boost organized jewellers

Though implementation of various government regulations has been impacting
organised jewellers for the past 1-2 quarters, we believe these regulations will provide
stimulus for shift from unorganised to organised jewellers. Key regulatory changes that
will help drive growth ahead are:
Implementation of PAN card on transactions above Rs0.2mn.
Mandatory hallmarking of jewellery
Imposition of 1% excise duty on gold jewellery
Increase in upfront EMI (like Tanishqs Golden Harvest) scheme collections from
25% to 35% of net worth
Curbs on illegal trade practices

We believe the top-3 reasons listed above will result in curbing illegal trade practices
prevalent in the jewellery market. As the unorganised jewellers will be required to
hallmark all jewellery, it will increase their costs. Imposition of 1% excise duty will force
unorganised jewellers to maintain books of accounts as well as inventory details. We
believe as the governments intention is to keep track of unaccounted money and curb
illegal trade practices, stricter implementation of first three of the above-mentioned
rules will result in higher growth for organised jewellers.
Interaction with unorganised jewellers

We recently interacted with various smaller jewellers across cities regarding demand
outlook and impact of the new regulations. These jewellers expect demand for
jewellery to step up from Sep16 with the onset of wedding and festival season.
Interestingly, these smaller (unorganised) jewellers also believe that business
conditions are getting tougher for them. They have fear of stringent government
regulations may curb their capital employed. Also, inventory levels may reduce due to
fears of excise department checks.
Increase in GHS collections from 25% to 35% of net worth

Jewellery companies had suffered a revenue impact post the government-enforced
closure of Golden Harvest Schemes (GHS) in 2014. However, the government
allowed resumption of the scheme with two regulations: 1) maximum 12% IRR on the
investments for the customers, 2) cap of 25% of net worth on maximum amount
collection.
Now, the government has increased the limit of collectible amount under GHS from
25% of net worth to 35% of net worth. This decision is highly favourable to organised
jewellers as:
It will help ease out the working capital
ICICI Securities
It will also increase revenue contribution from smaller customers, who will also
drive growth in the EMI culture.
As the customers are more likely to invest in GHS schemes of organised jewellers,
rising share of GHS will propel the shift from unorganised jewellers to organised
jewellers.
Impact on jewellery companies

TBZ: TBZ had 14.8% sales from its Kalpavriksha scheme in FY15 whereas the same
was negligible in FY16. The companys revenue contribution from Kalpavriksha
increased to 12.4% in Q1FY17.
Titan: GHS, which used to account for ~30% of domestic jewellery revenues for Titan,
dropped to 0% in Q3FY15. After a gap of four quarters, Titan reported its revenues
under GHS again in Q3FY16.
Chart 2: GHS revenues as percentage of Titans jewellery segment revenues
60.0
50.0
(%)
40.0
30.0
20.0
10.0
Q1FY17
Q4FY16
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
FY14
Source: Company Data, I-Sec research
GST: Not a major concern

Though there will be overhang on the jewellery sector due to uncertainty about the
expected GST rate, we believe the overall tax incidence may not increase ahead.
Currently, jewellery attracts 10% customs duty, 1% excise duty and ~1% VAT. Even if
there is any marginal increase in tax incidence, the shift from unorganised sector to
organised sector will be faster post rollout of GST.
ICICI Securities
Strong earnings growth momentum over next 4

quarters
We believe following trends will be crucial for driving growth of the jewellery sector
ahead.
The wedding days are skewed in H2FY17, which is a key demand driver for
jewellery.
Higher gold prices ahead.
Waning impact of regulatory hurdles.
Higher number of wedding days

The number of wedding days is higher in H2FY17 compared to H2FY16 and this will
lead to higher demand for wedding jewellery in H2FY17. We expect it will boost
revenues of the entire jewellery sector. PCJ will benefit the most due to higher
revenue share of wedding jewellery compared to Titan.
Table 5: Higher number of wedding days in H2FY17
Days
Q1
Q2
Q3
Q4
Source: Drik Panchang, I-Sec research
FY16
22
0
9
23
FY17
9
0
15
22
FY18
26
Table 6: Breakup of overall jewellery market and share of major players

Segment
Share of market (%)
Wedding
60
Non-Wedding
40
-Special Occasion
12
-Casual Wear
28
Titan
1.0
6.5
3.0
8.0
PCJ
2.1
1.4
TBZ
0.8
0.7
Higher gold prices lead to better revenue growth and margins

We believe rising gold prices will be extremely crucial for the growth of jewellery sector
as:
It leads to price-led growth
It also results in higher profit margins
Franchisee operations get a stimulus
We note down revenue growth rates as well as changes in margins of Titan with
changes in gold prices as follows (table 7).
ICICI Securities

Table 7: Change in gold prices and its impact on revenues and margins of Titan
Year
Average gold prices (Rs/10 grams)
Change in gold prices (%)
Titans jewellery segment
Revenue growth (%)
EBIT margin (%)
Change in margin (bps)
FY08
10,003
FY09
12,908
29.0
FY10
15,774
22.2
FY11
19,243
22.0
FY12
25,725
33.7
FY13
30,163
17.3
FY14
29,214
(3.1)
FY15
27,400
(6.2)
FY16
26,555
(3.1)
36.2
5.8
51
26.7
7.3
143
43.3
8.6
128
40.9
9.9
131
13.7
10.1
27
7.4
9.8
(31)
9.2
9.9
8
(7.4)
9.5
(42)
5.3
We also reckon that if gold prices remain at Aug16 levels over the next four quarters,
the YoY change in average gold prices will be upwards by at least 5%.
Chart 3: YoY changes in gold prices if prices remain at Aug 16 levels
25
20
(%)
15
10
0
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Source: Company Data, I-Sec research
Rollout of 7th Pay Commission in major cities

The 7th Pay Commission rollouts are expected to start from Sep16. The ~3mn Central
government employees will get arrears for Jan-Jul16 as well as August salary (as per
revised rates) in Sep16. As the money flow in the hands of consumers coincides with
beginning of festive season in India, we expect healthy demand for products such as
jewellery, consumer durables, premium FMCGs, etc.
We note down the city-wise Pay Commission payments and major jewellers (likely
business beneficiaries of the same in the particular city) operating in that city as
follows. As Titan is a national player, it will benefit from higher demand across
cities.
Table 8: Rollout of 7th Pay Commission payments and major jewellers citywise
City
Expected payments(Rs mn)
New Delhi
41,740
Mumbai
21,830
Kolkata
18,030
Chennai
11,430
Hyderabad
10,680
Lucknow
10,120
Bangalore
6,770
Jaipur
3,570
Ahmedabad
2,940
Source: Company data, Mint, I-Sec research
Major jeweller
PC Jeweller
TBZ
Senco
Joyallukas, GRT
Kalyan
ICICI Securities
Quarter-wise key growth drivers

Apart from the waning impact of regulatory hurdles and macro benefits such as normal
rainfall in CY16, we believe the following trends (table 9) play out in the next four
quarters, which will drive growth of the jewellery sector.
Table 9: Key reasons for growth of jewellery sector in coming quarters
Quarters
Q2FY17
Q3FY17
Q4FY17
Key reasons for better growth

Waning impact of PAN card issue, Higher gold prices, higher activation across retailers
Higher number of wedding days over Q3FY16
Favourable base of Q4FY16 due to strike in March
Favourable base of Q1FY17 due to strike in April, some benefit of increase in GHS limits, higher
Q1FY18
number of wedding days
10
ICICI Securities
A look at key dynamics of jewellery players

PCJ on its way to
becoming the
second- largest panIndia jeweller in
terms of store count.
Table 10: PCJ continues to be aggressive in new store rollouts

Company
FY11
FY12
Titan
151
163
TBZ
14
14
PC Jeweller
17
24
FY13
179
25
30
FY14
198
27
41
FY15
209
28
50
FY16
225
30
61
Q1FY17
227
30
63
FY16
896,000
353,413
98,200
Q1FY17
904,000
365,961
98,200
Table 11: Gap between sq-feet of PCJ and Titan is narrowing

The gap between
sqft of Titan and PCJ
is reducing at a rapid
rate.
Company
FY11
FY12
Titan
343,000
461,000
PC Jeweller
101,188
138,274
TBZ
44,196
47,796
Aggressive rollout of
new stores has
resulted in lower
revenue per sqft.
FY13
Titan
151,126
PCJ
197,305
TBZ
254,807
FY13
602,000
164,572
82,368
FY14
720,000
238,000
88,093
FY15
806,000
313,296
91,058
Table 12: Aggressive store rollouts resulting in lower revenue per sqft
FY14
130,521
198,826
216,709
FY15
123,468
164,656
226,706
FY16
97,333
146,192
168,463
Q1FY17
23,654
28,685
33,199
Table 13: Regulatory and external factors impacted EBIT per sqft in FY16
PCJ continues to
enjoy highest EBIT
per sqft followed by
Titan.
FY11
FY12
Titan
12,510
15,131
PC Jeweller
12,997
16,833
TBZ
18,851
25,741
FY13
15,338
23,269
22,286
FY14
12,843
21,272
15,176
FY15
12,252
22,456
9,039
FY16
8,929
17,821
3,472
Q1FY17
2,255
4,721
1,691
FY13
10.1
11.8
8.7
FY14
9.8
10.7
7.1
FY15
9.9
13.6
4.2
FY16
9.5
12.2
2.1
Q1FY17
10.0
16.5
5.1
Table 14: Improving EBIT margins

EBIT margins of all
the players have
expanded sharply.
FY11
FY12
Titan
8.6
9.9
PC Jeweller
8.3
9.9
TBZ
7.0
8.5
Table 15: Focus on increasing revenue share of studded jewellery

All jewellers are
looking to expand
the revenue share of
studded jewellery.
FY13
Titan
28.0
PC Jeweller
30.8
TBZ
23.0
FY14
30.0
26.4
20.7
FY15
32.0
31.5
22.4
FY16
34.0
28.2
22.4
Q1FY17
24.0
37.2
23.8
11
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12
ICICI Securities
Equity Research
INDIA
August 19, 2016

BSE Sensex: 28123
Titan Company
BUY
Maintained
Rs398
Strong tailwinds
Jewellery
Target price Rs488
Shareholding pattern
Promoters
Institutional
investors
MFs and UTI
Banks, FIs,
Insurance co
FIIs
Others
Source: BSE
Dec
15
53.1
Mar
16
53.1
Jun
16
53.1
25.3
2.8
25.3
3.4
25.3
2.6
1.9
20.6
21.7
2.0
19.9
21.6
1.9
21.7
21.6
Aug-16
Feb-16
Feb-15
Aug-15
Feb-14
Aug-14
500
450
400
350
300
250
200
150
Aug-13
(Rs)
Price chart
Reason for report: Company update

We remain positive on Titan Company (Titan) as we expect it to be a major
beneficiary of consumer shift from unorganised to organised jewellery sector. The
company is focusing on a strategy to expand the share of diamond jewellery as
well as gain market share in wedding jewellery market via steady launch of new
stores. Ahead, there are multiple factors at play, which will drive revenue growth
such as: 1) rising gold prices, which will propel price-led growth, 2) change in the
limits of Golden Harvest Scheme (GHS) from 25% to 35% of net worth, 3) waning
impact of mandatory PAN card on jewellery purchases above Rs0.2mn, 4)
improving consumer sentiment post normal monsoon, and 5) implementation of
7th Pay Commission to drive up urban discretionary demand. Considering these
factors, we expect Titan to report revenue and PAT CAGRs of 18.3% and 26% over
FY16-FY19 with improving RoE, hence we maintain our BUY rating on Titan with a
target price of Rs488.
Jewellery business growth plans: We believe Titan is focusing on four growth
strategies for its jewellery business, viz: 1) expanding share of diamond jewellery, 2)
focus on expanding footprint in the wedding jewellery market, 3) steady rollout of new
stores, and 4) extensive usage of GHS as weapon to acquire customers. We expect
the jewellery segment to report revenue CAGR of 22% over FY16-FY19.
Change in Golden Harvest limits to benefit Titan: The Golden Harvest Scheme
(GHS) limits have been increased from 25% to 35% of net worth. We believe this is
an extremely positive regulatory change for organised jewellers such as Titan as this
will drive revenue growth in FY18-FY19 and will improve working capital.
Rising gold prices to stimulate revenues and margins: We reckon increase in
gold prices has a positive bearing on Titans revenues as well as margins. We expect
strong earnings momentum on the back of better realisation-led growth and boost to
franchisee operations.
Stabilising margins of watch business: EBIT margin of the watch segment
dropped from 15.3% in FY08 to 10.5% in FY14 impacting overall profit margins of the
company. However, we have seen stability in the EBIT margin of watch business at
~10.5% over FY14-FY16. Also, as revenue share of the segment has dropped over
past decade, the companys overall profit margins may remain stable ahead.
Maintain BUY. We expect Titan to report an earnings CAGR of 26% over FY16FY19. Titans RoE is also expected to move upward from 21.6% in FY16 to 27.1% in
FY19. With healthy earnings growth momentum helped by rising gold prices and
improvement in consumer sentiment post normal monsoon, we reiterate our BUY
rating with target price of Rs488 (34.4x Sep18E).
Market Cap
Reuters/Bloomberg
Rs353bn/US$5.3bn
TITN.BO/ TTAN IN
Shares Outstanding (mn)

52-week Range (Rs)
Research Analysts:
Anand Mour
887.8
427/317
Year to March
Net Revenue (Rs mn)
Net Profit (Rs mn)
Dil. EPS (Rs)
Free Float (%)
46.9
% Chg YoY
FII (%)
21.7
P/E (x)
Daily Volume (US$'000)
9,024
+91 22 6637 7209
Absolute Return 3m (%)
9.0
Aniruddha Joshi
19.2
Dividend Yield (%)
Sensex Return 3m (%)
10.4
2.6
aniruddha.joshi@icicisecurities.com
+91 22 6637 7249
CEPS (Rs)
FY16
FY17E
FY18E
FY19E
112,646
137,066
159,544
186,418
7,132
8,542
10,952
14,276
8.0
9.6
12.3
16.1
(13.4)
19.8
28.2
30.3
49.5
41.4
32.3
24.8
9.1
11.0
13.8
17.7
37.3
27.5
21.6
16.7
0.6
0.7
0.9
1.1
RoCE (%)
22.1
23.1
25.3
27.7
RoE (%)
21.6
22.5
24.7
27.1
EV/EBITDA (x)
13
ICICI Securities
Titan Company, August 19, 2016
I-Sec vs consensus estimates

Table 1: Our estimates vs consensus
(Rs mn)
Revenues
FY17E
FY18E
PAT
FY17E
FY18E
Source: Bloomberg data, I-Sec research
I-Sec
Consensus
Variance (%)
137,066
159,544
131,140
152,154
4.5
4.9
8,542
10,952
8,601
10,457
(0.7)
4.7
Our FY17-FY18 revenue estimates are higher than consensus by 4.5-4.9% as we

factor higher gold prices. Our FY18 PAT estimates are also higher than consensus
estimates by 4.7% in line with higher revenue estimates.
Valuations and risks

We expect Titans earnings to grow at a CAGR of 26% over FY16-FY19 supported by
revenue CAGR of 18.3%.
We value Titan on a triangulated average of P/E (Rs483: 34x Sep18E EPS), DCF
(Rs494: assuming WACC of 12.5% and terminal growth of 4%) and MCap/Sales
(Rs487: 2.5x Sep18E Sales) at Rs488/share, derived P/E of 34.4x Sep18E earnings.
We maintain our BUY rating on the stock.
P/E based valuation

The stock has traded at 34x 1-year forward earnings over the past five years. We
expect it to trade near its historical multiple.
Chart 1: Mean P/E(x) and standard deviations
14
Jun-16
Nov-15
May-15
Nov-14
Apr-14
Oct-13
+1 Std Dev.
Mar-13
Sep-12
Feb-12
Mean
Aug-11
Jan-11
Jul-10
Jan-10
Jun-09
-1 Std Dev.
Dec-08
May-08
Nov-07
Apr-07
Oct-06
Apr-06
(x)
TTAN P/E
50
45
40
35
30
25
20
15
10
5
ICICI Securities
MCap/Sales -based valuation

The stock has traded at 2.2x 1-year forward MCap/Sales over the past five years. With
an expected revenue CAGR of 18.3% over FY16-FY19, we expect Titan to trade near
its mean MCap/Sales multiple.
DCF-based valuation
Valuing Titan on DCF methodology involves three stages.
Stage 1 (FY16-FY19): During this period, we expect the company to grow its
revenue and PAT at CAGRs of 18.3% and 26% respectively. We expect RoE to
increase from 21.6% at the start of this stage to 27.1% by the end of the stage.
Stage 2 (FY19-FY30): During this period, we expect the company to post revenue
and PAT CAGRs of 18% each.
Stage 3 (FY30 onwards): We assume a perpetual growth rate of 4% for the

period.
To arrive at the WACC of 12.5%, we have assumed the cost of equity at 12.5% and
the cost of debt post tax at 8.8%. Based on these assumptions, we arrive at a
valuation of Rs494/share for Titan.
Chart 2: Cashflow performance
Table 2: DCF calculations
Free cash flow to the firn (Rs mn)
ROE (RHS)
Rs mn unless stated otherwise
14,000
60%
PV of FCF for forecasting period (FY18 FY30)
188,590
9,000
50%
Terminal value
243,787
40%
Fair value of investments
30%
Enterprise value
20%
Less: net debt/ (cash) at March 31, 2017
(6,000)
10%
Implied equity value
(11,000)
0%
Fully diluted equity shares (mn)
888
Implied equity value (Rs/share)
494
4,000
740
433,117
FY19E
FY18E
FY16
FY17E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
(1,000)
(5,661)
438,778
Risks
Volatility in gold and diamond prices
Any material change in prices of gold and diamond will impact the profitability of the
company.
Delay in store rollout plans

Any delay in setting up new stores will make it difficult for the company to meet our
revenue and earnings estimates.
15
ICICI Securities
Financial summary
Table 3: Profit & Loss statement
Table 6: Cashflow statement
(Rs mn, year ending March 31)
FY16
Net Sales
112,646
Operating Expenses
103,179
EBITDA
9,467
8.4
% margins
Depreciation & Amortisation
971
Gross Interest
423
Other Income
736
Recurring PBT
8,809
Less: Taxes
1,678
Less: Minority Interest
Net Income (Reported)
7,081
Extraordinaries (Net)
(51)
Recurring Net Income
7,132
FY17E
137,066
124,306
12,759
9.3
1,215
587
744
11,702
3,159
8,542
8,542
FY18E
159,544
143,479
16,065
10.1
1,316
692
946
15,003
4,051
10,952
10,952
FY19E
186,418
165,837
20,582
11.0
1,433
817
1,225
19,557
5,280
14,276
14,276
Table 4: Balance sheet
FY18E
8,708
(3,559)
(1,842)
6,866
FY19E
11,380
(4,329)
(1,988)
9,393
(5,290)
(2,930)
(1,842)
(3,729)
(1,988)
(4,794)
2,537
3,138
4,598
(Year ending March 31)

FY16
FY17E
FY18E
FY19E
54,040
1,117
62,636
3,654
75,441
6,791
91,597
11,390
27,489
26,551
740
7,686
1,061
36,037
34,549
28,087
740
11,762
1,061
41,650
40,657
34,784
740
12,288
1,061
48,873
47,885
43,712
740
12,843
1,061
58,355
Liabilities
Borrowings
1,131
Deferred Tax Liability
(239)
Minority Interest
Equity Share Capital
888
1
Face Value per share (Rs)
Reserves & Surplus*
34,258
Less: Misc. Exp. n.w.o.
Net Worth
35,146
Total Liabilities
36,037
1,131
(239)
888
1
39,871
40,758
41,650
1,131
(239)
888
1
47,094
47,982
48,873
1,131
(239)
888
1
56,576
57,464
58,355
Table 5: Quarterly trend

Sep-15
Net sales
26,735
% growth (QoQ)
(1.3)
EBITDA
2,028
Margin (%)
7.6
Other income
114
Net profit
1,454
16
FY17E
10,757
1,001
(5,290)
5,467
Table 7: Key ratios

Assets
Total Current Assets
of which cash & cash eqv.
Total Current Liabilities &
Provisions
Net Current Assets
Investments
Net Fixed Assets
Capital Work-in-Progress
Total Assets
FY16
Operating Cashflow
4,537
Working Capital Changes
(3,523)
Capital Commitments
(2,336)
Free Cashflow
2,201
Cashflow from Investing
Activities
(2,750)
Issue of Share Capital
Inc (Dec) in Borrowings
133
Dividend paid
(2,351)
Change in Deferred Tax
Liability
(43)
Chg. in Cash & Bank
balance
(985)
Dec-15
34,262
28.2
3,099
9.0
137
2,253
Mar-16
24,563
(28.3)
2,150
8.8
260
(51)
1,896
Jun-16
27,988
13.9
2,922
10.4
134
(707)
1,974
FY16 FY17E FY18E FY19E

Per Share Data (Rs)
EPS
Cash EPS
Dividend per share (DPS)
Book Value per share (BV)
8.0
9.1
2.2
39.6
9.6
11.0
2.8
45.9
12.3
13.8
3.5
54.0
16.1
17.7
4.5
64.7
(5.4)
(17.9)
(13.4)
(11.0)
21.7
34.8
19.8
20.4
16.4
25.9
28.2
25.7
16.8
28.1
30.3
28.0
49.5
43.6
10.1
37.3
3.1
41.4
36.2
8.7
27.5
2.6
32.3
28.8
7.4
21.6
2.2
24.8
22.5
6.1
16.7
1.8
72.7
6.0
12.9
8.4
19.0
84.9
142.0
6.2
84.9
0.0
73.5
5.5
11.7
6.4
27.0
73.8
127.8
6.2
73.8
0.0
73.5
5.3
11.2
6.3
27.0
78.5
127.8
6.2
78.5
0.0
73.3
5.1
10.6
6.3
27.0
84.4
127.8
6.2
84.4
0.0
Profitability Ratios (%)

Net Income Margins
6.3
RoACE
22.1
RoAE
21.6
Dividend Payout
27.4
Dividend Yield
0.6
EBITDA Margins
8.4
6.2
23.1
22.5
28.6
0.7
9.3
6.9
25.3
24.7
28.4
0.9
10.1
7.7
27.7
27.1
28.0
1.1
11.0
Growth (%)
Net Sales
EBITDA
PAT
Cash EPS
Valuation Ratios (x)
P/E
P/CEPS
P/BV
EV / EBITDA
EV / Sales
Operating Ratios
Raw Material / Sales (%)
Employee cost / Sales (%)
SG&A / Sales (%)
Other Income / PBT (%)
Effective Tax Rate (%)
Working Capital (days)
Inventory Turnover (days)
Receivables (days)
Payables (days)
Net D/E (x)
Equity Research
August 19, 2016
BSE Sensex: 28123
INDIA
PC Jeweller
BUY
Maintained
Poised to win
Rs429
Reason for report: Company update
Jewellery
Target price Rs576
Shareholding pattern
Promoters
Institutional
investors
MFs and UTI
Banks, FIs,
Insurance co
FIIs
Others
Source: BSE
Dec
15
70.6
Mar
16
70.6
Jun
16
70.6
19.4
0.0
20.3
0.0
21.2
0.0
0.0
19.4
10.1
0.0
20.3
9.1
0.1
21.1
8.2
PC Jeweller (PCJ) is on its way to be one of the top-3 pan-India jewellers by an

aggressive rollout of stores planned for the next three years. The company has
strengthened the balance sheet after fund-raising from DVI Mauritius and Fidelity.
We like the companys strategy of launching different types of stores (lounge,
large format, small format, franchisee, and online platform) for consumers across
income classes. We have confidence in the companys strategy as: 1) it has
successfully prototyped these stores in FY16, and 2) it has a strong balance sheet
to execute the strategy. Ahead, we believe improving macro environment post:
1) normal monsoon, 2) 7th Pay Commission rollouts, and 3) improving consumer
sentiment in urban India will provide enough stimuli to PCJs aggressive store
rollout plan. The company is expected to report PAT CAGR of 21.3% over FY16FY19 and also improve its RoCE over the same timeframe. Hence, we reiterate our
BUY rating on the stock with a target price of Rs576 (17.2x Sept18E EPS).
Fund-raising by the company: PCJ has completed its fund-raising plans after
raising: 1) Rs4.3bn from DVI Mauritius by issuing 4.3mn compulsorily convertible
debentures at price of Rs380 per debenture, and 2) Rs2.6bn from Fidelity by issue of
compulsorily convertible preference shares. We believe the funds raised will help the
company further strengthen its balance sheet.
Aggressive rollout of new stores: PCJ has upped the ante post fund-raising and
has aggressive plans to roll out new stores ahead. It has indicated plans to set up
20-25 stores in FY17 and add another 75 over the next three years. The company
plans to start 5-7 small format stores, five franchisee stores and 13-15 large stores.
Multi-pronged growth strategy in place: PCJ is focusing on launching different

store formats across different cities of India to attract consumers across income
levels 1) lounges in metros for the ultra-rich, 2) large format stores in tier-1 and tier2 cities for the rich and the upper middle class, 3) franchisee stores in tier-2 and tier3 for the rich and the upper middle class, 4) small format stores for the middle class
and the lower middle class, and 5) Flexia and online portal for casual wear catering
to the young consumers and working women.
Reiterate BUY: We expect PCJ to report PAT CAGR of 21.3% over FY16-FY19 and
also expect it to expand its RoCE from 19% in FY16 to 22.7% in FY19. We strongly
believe the regulatory changes may impact the business in short term, but we are
extremely positive about long-term growth of organised jewellery players such as
PCJ. Hence, we reiterate our BUY rating on PCJ with a target price of Rs576 (17.2x
Sep18E EPS).
Price chart
500
(Rs)
400
300
200
100
Aug-16
Feb-16
Feb-15
Aug-15
Feb-14
Aug-14
Aug-13
Market Cap
Reuters/Bloomberg
Rs77bn/US$1.2bn
PCJE.BO/ PCJE IN
Shares Outstanding (mn)

52-week Range (Rs)
Research Analysts:
Anand Mour
179.1
467/312
Net Profit (Rs mn)

Dil. EPS (Rs)
FY16
FY17E
FY18E
FY19E
72,591
88,389
105,955
123,864
4,009
4,936
6,070
7,157
22.4
25.0
30.8
36.3
29.4
% Chg YoY
6.0
23.1
23.0
17.9
FII (%)
21.1
P/E (x)
19.1
17.1
13.9
11.8
CEPS (Rs)
23.6
26.3
32.1
37.8
EV/EBITDA (x)
11.5
8.8
7.2
6.1
2,229
+91 22 6637 7209
23.9
Aniruddha Joshi
aniruddha.joshi@icicisecurities.com
10.4
2.6
+91 22 6637 7249
Net Revenue (Rs mn)
Free Float (%)

Daily Volume (US$'000)
Year to March
5.7
Dividend Yield (%)
0.8
0.9
1.2
1.4
RoCE (%)
19.0
20.0
22.2
22.7
RoE (%)
18.6
17.2
16.6
17.1
17
ICICI Securities
PC Jeweller, August 19, 2016
I-Sec vs consensus estimates

Table 1: Our estimates vs consensus
(Rs mn)
I-Sec
Consensus
Variance (%)
88,389
105,955
86,753
99,279
1.9
6.7
4,936
6,070
5,210
6,157
(5.3)
(1.4)
Revenues
FY17E
FY18E
PAT
FY17E
FY18E
Source: Bloomberg data, I-Sec research
Our revenue earnings for FY17E are in line with consensus estimates. However, our
FY17-FY18 PAT estimates are lower by 1.4-5.3% as we factor interest costs as well
as increase in depreciation due to rollout of new stores in FY17 and FY18.
Valuations and risks

We expect earnings (PAT) to grow at a CAGR of 21.3% over FY16-FY19 supported by
revenue CAGR of 19.5% and EBITDA margin expansion of 88bps over the same
period.
We value the stock on a triangulated average of P/E (Rs570: 17x Sep18E EPS), DCF
(Rs575: assuming WACC of 14.5% and terminal growth of 4%) and EV/Sales (Rs583:
1x Sep18E sales) at Rs576/share, derived P/E of 17.2x Sep18E earnings. We retain
our BUY rating on PC Jeweller.
P/E based valuation

The stock has traded at an average P/E of 10x 1-year forward earnings over the past
three years. With an improving earnings growth trajectory led by strong revenue
growth and improving margins, we believe the stock deserves to trade at a premium to
its historical multiple.
18
Jul-16
Mar-16
Dec-15
+1 Std Dev.
Aug-15
May-15
Mean
Jan-15
Sep-14
-1 Std Dev.
Feb-14
Nov-13
Jul-13
Apr-13
PCJ P/E
Jun-14
20
18
16
14
12
10
8
6
4
2
0
Dec-12
(x)
Chart 1: Mean P/E(x) and standard deviations
ICICI Securities
EV/sales -based valuation

The stock has traded at 0.6x 1-year forward EV/Sales multiple over the past two
years. With drop in revenue contribution of exports and strong growth momentum in
the domestic business, we believe the stock will trade at a premium to its historical
multiple at 1x 1-year forward EV/Sales.
DCF-based valuation
Valuing PC Jeweller on the DCF methodology involves three stages:
Stage 1 (FY16-FY19): During this period, we expect the company to grow its
revenue and PAT at CAGRs of 19.5% and 21.3% respectively. We expect RoE to
decline from 18.6% at the start of this stage to 17.1% by the end of the stage.
Stage 2 (FY19-FY30): During this period, we expect the company to post revenue
and PAT CAGRs of 15% each.
Stage 3 (FY30 onwards): We assume a perpetual growth rate of 4% for the

period.
To arrive at the WACC of 14.5%, we have assumed the cost of equity at 14.5% and
the cost of debt (post tax) at 17.7%. Based on these assumptions, we arrive at a
valuation of Rs575/share for PC Jeweller.
Chart 2: Cashflow performance and RoE
(Rs mn)
Free cashflow to the firm
Table 2: DCF calculations

Rs mn unless stated otherwise
RoE (RHS)
8,000
80%
6,000
70%
4,000
60%
2,000
0
(2,000)
40,840
Terminal value
70,146
50%
Fair value of investments
40%
Enterprise value
30%
(4,000)
PV of FCF for forecasting period (FY18 FY30)
Less: net debt/ (cash) at March 31, 2017
75
111,061
-2,239
FY19E
FY18E
575
FY16
Implied equity value (Rs/share)
FY17E
197
FY15
Fully diluted equity shares (mn)
FY14
0%
FY13
(10,000)
FY12
Implied equity value
FY11
10%
FY10
(8,000)
FY09
20%
FY08
(6,000)
113,300
Risks
Volatility in gold and diamond prices
Any material change in gold and diamond prices will impact the companys revenue
growth and profitability.
Delay in store rollout plans

Any delay in setting up new stores will make it difficult for the company to meet our
revenue and earnings estimates.
19
ICICI Securities
Financial summary
Table 3: Profit & Loss statement
Table 6: Cashflow statement
FY16
Net Revenues
72,591
Operating Expenses
65,327
EBITDA
7,264
10.0%
% margins
Depreciation & Amortisation
226
Gross Interest
2,147
Other Income
496
Recurring PBT
5,387
Less: Taxes
1,378
Less: Minority Interest
Net Income (Reported)
4,009
Recurring Net Income
4,009
FY17E
88,389
79,052
9,337
10.6%
244
2,524
743
7,312
2,377
4,936
4,936
FY18E
105,955
94,517
11,438
10.8%
264
2,963
781
8,992
2,922
6,070
6,070
FY19E
123,864
110,386
13,478
10.9%
285
3,410
820
10,602
3,446
7,157
7,157
Table 4: Balance sheet
Table 7: Key ratios
(Year ending March 31)

FY16
Assets
Total Current Assets
of which cash & cash eqv.
Total Current Liabilities &
Provisions
Net Current Assets
Investments
Net Fixed Assets
Capital Work-in-Progress
Goodwill
Total Assets
FY16 FY17E FY18E FY19E

Operating Cashflow
4,235
5,180
6,333
7,441
Working Capital Changes
(5,850)
(1) (4,616) (4,711)
Capital Commitments
(229) (2,128)
(691)
(760)
Free Cashflow
(1,844)
3,051
1,026
1,970
Cashflow from Investing
Activities
57
Issue of Share Capital
87 6,844
(0)
(0)
Inc (Dec) in Borrowings
2,588 (9,401)
Dividend paid
(726)
(953) (1,191) (1,430)
Change in Deferred Tax
Liability
(39)
Chg. in Cash & Bank
balance
123
(460)
(165)
540
FY17E
FY18E
FY19E
56,345
2,864
65,539
2,404
76,377
2,239
88,136
2,779
24,807
31,538
75
899
32,511
34,460
31,079
75
2,783
33,936
40,847
35,530
75
3,210
38,815
47,355
40,781
75
3,685
44,541
Liabilities
Borrowings
9,401
Deferred Tax Liability
(164)
Minority Interest
Equity Share Capital
1,791
10
Face Value per share (Rs)
Reserves & Surplus*
21,483
Less: Misc. Exp. n.w.o.
Net Worth
23,274
Total Liabilities
32,511
(164)
1,971
10
32,130
34,100
33,936
(164)
1,971
10
37,008
38,978
38,815
(164)
1,971
10
42,735
44,705
44,541
Dec-15
21,805
0.2
2,043
9.4
362
155
1,461
Mar-16
18,983
-0.1
1,597
8.4
126
791
Jun-16
16,645
0.1
2,057
12.4
101
1,066
Table 5: Quarterly trends

Sep-15
Net revenues
16,696
% growth (YoY)
0.4
EBITDA
1,886
Margin (%)
11.3
Other income
49
Net profit
932
FY16
FY17E
FY18E
FY19E
22.4
23.6
3.4
129.9
25.0
26.3
4.0
190.4
30.8
32.1
5.0
217.6
36.3
37.8
6.0
249.6
Growth (%)
Net Sales
EBITDA
PAT
Cash EPS
14.3
0.3
6.0
5.5
21.8
28.5
23.1
11.2
19.9
22.5
23.0
22.3
16.9
17.8
17.9
17.5
Valuation Ratios (x)

P/E
P/CEPS
P/BV
EV / EBITDA
EV / Sales
19.1
18.1
3.3
11.5
1.1
17.1
16.3
2.2
8.8
0.9
13.9
13.3
2.0
7.2
0.8
11.8
11.3
1.7
6.1
0.7
86.0
1.0
3.0
9.2
25.6
142.2
192.0
45.0
107.6
0.4
84.6
1.0
3.9
10.2
32.5
116.8
192.2
37.0
124.7
0.0
84.4
1.0
3.8
8.7
32.5
113.1
193.3
30.9
123.0
0.0
84.3
1.0
3.9
7.7
32.5
110.4
194.1
26.4
121.7
0.0
Profitability Ratios (%)

Net Income Margins
5.5
RoACE
19.0
RoAE
18.6
Dividend Payout
15.0
Dividend Yield
0.8
EBITDA Margins
10.0
5.6
20.0
17.2
16.0
0.9
10.6
5.7
22.2
16.6
16.2
1.2
10.8
5.8
22.7
17.1
16.5
1.4
10.9
Per Share Data (Rs)

EPS
Cash EPS
Dividend per share (DPS)
Book Value per share (BV)
Operating Ratios
Raw Material / Sales (%)
Employee cost / Sales (%)
SG&A / Sales (%)
Other Income / PBT (%)
Effective Tax Rate (%)
Working Capital (days)
Inventory Turnover (days)
Receivables (days)
Payables (days)
Net D/E Ratio (x)
20
ICICI Securities
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Jewellery - ICICI - 19th AUgust

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Equity Research

August 19, 2016

Reason for report: Sector update

Worst is behind: Amidst multiple alterations in government regulations and

Regulatory changes Booster for organized players: Major regulatory changes

+91 22 6637 7209

+91 22 6637 7249

Jewellery sector, August 19, 2016

Jewellery sector, August 19, 2016

Key trends in jewellery sector

Modest growth reported by jewellery companies in Q1FY17, while gold import

However, we would like to underline that Q1FY17 performance is not strictly

Spurt in gold prices leading to consumers postponing jewellery purchase, in turn

Healthy revenue growth in spite of strike in early Apr16

Jewellery sector, August 19, 2016

World Gold Council (WGC) indicates drop in gold demand

YoY (%) chg*

Highest jump in gold prices in past 14 quarters

YoY Growth (%)

Source: Taxmann, I-Sec research

Jewellery sector, August 19, 2016

Better EBIT margins due to higher revenues of studded jewellery

Rising share of diamond jewellery

Jewellery sector, August 19, 2016

Regulatory changes to boost organized jewellers

Implementation of PAN card on transactions above Rs0.2mn.

Mandatory hallmarking of jewellery

Imposition of 1% excise duty on gold jewellery

Curbs on illegal trade practices

Interaction with unorganised jewellers

Increase in GHS collections from 25% to 35% of net worth

It will help ease out the working capital

Jewellery sector, August 19, 2016

Impact on jewellery companies

Source: Company Data, I-Sec research

GST: Not a major concern

Jewellery sector, August 19, 2016

Strong earnings growth momentum over next 4

Higher gold prices ahead.

Waning impact of regulatory hurdles.

Higher number of wedding days

Table 6: Breakup of overall jewellery market and share of major players

Higher gold prices lead to better revenue growth and margins

It leads to price-led growth

It also results in higher profit margins

Franchisee operations get a stimulus

Jewellery sector, August 19, 2016

Source: Company Data, I-Sec research

Rollout of 7th Pay Commission in major cities

Jewellery sector, August 19, 2016

Quarter-wise key growth drivers

Key reasons for better growth

Jewellery sector, August 19, 2016

A look at key dynamics of jewellery players

Table 10: PCJ continues to be aggressive in new store rollouts

Table 11: Gap between sq-feet of PCJ and Titan is narrowing

Table 14: Improving EBIT margins

Table 15: Focus on increasing revenue share of studded jewellery

Jewellery sector, August 19, 2016

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August 19, 2016

Reason for report: Company update

Shares Outstanding (mn)

Free Float (%)