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Caratlane Stake: Value-accretive but near-term EPS dilutive

Titan has acquired the balance shareholding in its unlisted subsidiary Caratlane from the latter’s founder Mithun Sacheti and family, and would be paying INR46.2bn for the 27.18% stake. This pegs Caratlane’s valuation at INR170bn (c.$2bn) – lower than our target valuation of c.INR245bn for Caratlane but then, the latter also implicitly included some premium for the ‘Tata/Titan’ co-branding as well – Titan has possibly excluded that aspect from the acquisition price paid by it. Our workings suggest that the transaction could be near-term EPS-dilutive (c.4% - workings in Exhibit 1) but we believe is certainly value-accretive. Caratlane is a high-quality high-growth business built by Mithun Sacheti from scratch – it has a richer gross margin profile (c.35%) vs Tanishq’s and at steady-state could possibly be clocking a higher operating margin than Tanishq. The stake acquisition has been done at 4.5x FY25E sales which is tad lower vs Titan’s own valuation of c.5x sales. Titan remains a solid discretionary consumption play, in our view, and any volatility in stock price should be used as an opportunity to add to positions.

* Contours of the transaction: Titan currently owns 71.09% (fully diluted basis) of Caratlane and has now entered into share purchase agreement to acquire the balance 27.18% held by founder Mithun Sacheti and family, for a cash consideration of INR 46.21bn. Our calculations suggest that Titan had paid a cumulative c.INR5bn for its existing c.71% stake (fully-diluted basis) in Caratlane. The current deal would need an approval from the Competition Commission and is expected to close by end-Oct and would be financed through a combination of cash, internal accruals and debt. Titan’s Mar’23 net cash balance was c.INR16-17bn and a bridge-loan could be required in the interim to pay for the deal. Caratlane had revenue of INR21.7bn in FY23 with EBIT margin of 6.8% and net profit of INR821mn of which c.78% accrued to Titan.

* Valuation and estimated impact on Titan’s financials: The current transaction pegs Caratlane’s valuation at c.INR170bn (US$2bn), which is lower than our target valuation of c.INR245bn (US$3bn) for the business. The valuation differential, at least part thereof, is likely attributable to the premium attributable to the Tata co-branding, in our view, and Titan has possibly excluded that aspect from the acquisition price that it would be paying for the balance stake. From an FY25E financials perspective, we estimate the deal to have a c.4% hit on Titan’s consolidated EPS (Exhibit 1), though there could be some savings from the unabsorbed losses carried in Caratlane’s books. We do not expect the stock to react adversely to the deal, given the medium-term value-accretion from the same. Titan has acquired the balance stake in Caratlane at a valuation of 4.5x FY25 sales vs its own valuation of 5x sales. EV-EBITDA of the deal (44x FY25) is c.10% premium to Titan’s as Caratlane is still in a gestating but hyper-growth phase and its operating margin profile is possibly still not reflective of its steady-state potential. On the flip side, Mithun Sacheti would be exiting from Titan but we reckon that sufficient knowledge-transfer has happened since Titan first bought stake in the business in mid-2016.

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