Ashok Sonthalia, CFO, Titan, says starting from negative profitability, CaratLane is now firmly profitable, growing by almost 50% plus CAGR for the last five years. Now a stage has come where it felt prudent to increase our stake. At this point of time, the help of the founder and Titan expertise coming together, made this company very strong. We see it as a multi-decadal opportunity going forward. It was only appropriate for us to consider increasing our stake in the entity.”
What was the rationale behind increasing the stake in CaratLane?
We first invested in this company in 2016 and the last seven years have been very exciting. It has emerged as a very strong Omni channel player catering to the young women’s segment in a fashion and casual diamond jewellery space and have been delivering, building up from a negative profitability to now firmly profitable, growing by almost 50% plus CAGR for the last five years. Now a stage has come where it felt prudent to increase our stake. At this point of time, the help of the founder and Titan expertise coming together, made this company very strong. But we see it as a multi-decadal opportunity going forward. It was only appropriate for us to consider increasing our stake in the entity.
Currently, the cash on the book is about Rs 3,500 crore. Do you think you will be able to fund your acquisition by this?
We are considering raising some debt. While we will be able to conclude this transaction and all the regulatory approvals are expected to be in place in the next two months, we are considering raising some debt. We have a healthy cash position and healthy cash generation ability in the business. The rest of the businesses will continue to get their capital share for their growth strategy. For doing this transaction, we may raise part of the consideration as a long-term debt for a few years.
Could we expect a dilution in earnings and FY24 and when will it be EPS neutral?
When you purchase a high-growth company, there is likely to be near-term dilution to EPS, which is the case in this transaction also. I would expect it to normalize in three to four years’ time.
Valuations have increased at a CAGR of 62% since FY16, right? Now for CaratLane, how did you arrive at the valuation?
We had the advantage of being an insider in this company. We have been working with the CaratLane management team for the last six, seven years, building CaratLane where it is today. So we have complete confidence, conviction, and knowledge about various value-creating parameters, what are the growth potentials for this company and of course the valuation has kept doing that, making us see how this company can unfold over the next five, 10, 15 years.
Of course, there are comparables available in the market. Some of the market participants have been valuing this entity separately. So various reference points were there, but for us, I think it is still the value realization opportunity which guided our valuation.
What is the growth outlook for CaratLane in the next two to three years?
We do not guide and do not want to guide but for the jewellery business of Titan, we say from the market share of 7%, we could be 10% by FY27 of the entire jewellery industry. I believe that in the jewellery portfolio, CaratLane which is currently 6%, can go to 10% by FY27. That means they will continue to grow faster than the rest of the jewellery portfolio and that is how we see the growth trajectory of CaratLane.
CaratLane margins are currently below the jewellery margins. Do you expect them to move up over the next three to five years?
Certainly they will inch towards that and they should eventually go slightly higher than that. They have a mostly diamond jewellery portfolio which inherently has better gross margin compared to gold jewellery. We believe they will keep inching up. Five years back, they were minus 9% EBITDA and now they are plus 9%.
So 18% margin expansion in five years has happened. I am not guiding that the next five years will see something similar, but they will have the opportunity to keep expanding their margin and certainly come equal to Titan Tanishq jewellery margin profile and then slightly be better than that.
What changes in CaratLane with this deal? Is there an agreement for the balance 1.7% in the future sometime?
Mithun Sacheti (the founder) of course will step down after closure of the transaction but the current management team will take it forward and there is no plan to change there. As far as 1.7% is concerned, there are many long-term employees and many more employees who have contributed and worked tirelessly to bring CaratLane to where it is. It is natural that there is some liquidity for them, but all these things will be considered after closure of the transaction and the Titan board and CaratLane board will consider a fair outcome for them as well. But it is all after the closure of the transaction.
