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As per exchange filing Titan said, the company acquired further 27.18% stake in Caratlane for Rs46.21bn (consolidating to 98.3%) and the deal would be funded by internal accruals and partly by debt assigning EV of Rs170bn (8x price/sales on FY23). We note, Caratlane, started in 2008, which derives ~75% sales from light weight studded jewelry today has reported revenue CAGR of 73.5% in last 2 years reaching at Rs21.0bn in FY23 with improved EBIT margin of 7.6%. Management guided, that journey of Caratlane has just started and have strong faith on Indian consumer story in the long term, yet it holds strong Omnichannel strategy with addition of offline stores (40-50 stores) from current 211. Though on prima-facie the valuation appears to be steep, it holds strong growth potential and business plan as current management would continue to run business (except promotor) in our view. Further, we believe Caratlane generates ~35% gross and ~7.6% EBIT margin, which is expected to increase. As per our estimates, the deal would be EPS dilutive in the near term, however it would turn EPS neutral in next 3 years. We tweaked revenues and our earnings and retain BUY, with a revised DCF-based TP Rs3,530 (implying 65.9x avg. FY25E EPS). Console EPS would be dilutive for short term; poised for long term growth

Titan said, the company acquired further 27.18% stake in Caratlane for Rs46.21bn consolidating its stake to 98.3% from current 71.09%. The deal would be funded by internal accruals and partly by debt ascribing EV of Rs170bn (8x price/sales on FY23). The balance stake (~1.7%) will be held by employees. Caratlane was founded by Mr.Mithun Sacheti as online jewelry platform. In 2016, Titan acquired 62% stake in Caratlane from Tiger Global for Rs.3.6bn and steadily increased to 71.09%. Caratlane reported revenue CAGR of 73.5% in last 2 years reaching to Rs21.0bn with improved EBIT margin of 7.6%. Management guided, that journey of Caratlane has just started and have strong faith on Indian consumer story in the long term, yet it holds strong Omnichannel strategy with addition of offline stores (40-50 stores) from current 211. We believe, Caratlane would grow 30%+ CAGR over next 2-3 years with stable margin profile, as current management would continue to drive the business except the promotor.

Caratlane holds impressive journey - from loss making three years before to profitable path Caratlane remained purely an online jewelry platform until three years before and suffered on its revenues during the Covid phase, but improved its gross margins to ~29%, yet reported EBITDA loss. However with its Omni-channel strategy taking shape and cost control measures it saw strong turnaround in the business. We note the gross margins in FY23 improved to ~35% with ~7.6% EBIT margin. Though Titan paid Rs46.2bn for 27.2% stake, assigning EV of Rs170bn (8x price/sales on FY23) appear to be expensive. However, given 75% sales contribution from high margin studded business we expect the deal would be EPS neutral in 3 years.

Valuation driven by revenue growth potential As argued in our Thematic report, we expect Titan’s growth story would be driven by: (1) strong enrolment under GHS, (2) new buyer growth, and (3) higher ticket size. Besides that, consolidation of Caratlane with strong Omni-channel strategy would lift revenue momentum in our view. Overall, we remain positive on this development while it is margin dilutive for FY24/FY25 by ~5/4% though it would be EPS neutral by FY26 in our view. We modelled revenue CAGR ~30% for next 3 years for Caratlane coupled with stable margin. We cut our earnings by 5%/4% for FY24/25 and retain BUY, with a revised DCF-based TP Rs3,530 (implying 65.9x avg. FY25E EPS). Risks: irrational competition from regional players; prolonged recovery in the economy, leading to lower demand for jewelry and rising gold prices.

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