A typical high-income or high-net worth household in India spends upwards of 40 per cent of its total annual expenditure on products and services that are priced on a dollar basis. It might be denominated in rupee terms, but the price fluctuates with the exchange rate, hence the dollar-based pricing.
For HNWIs (high-net worth individuals), more than 60 per cent of their total annual expenditure is dollar-based and a large part of that is on luxury brands. As a consumer of a brand, you trust it and prefer it over other lower brands, which might be priced cheaper. Also, brands are social constructs and you trust them because others in a similar socio-economic strata trust them and have been doing so for decades.
The natural question is that if I trust a brand as a consumer why not consider becoming an owner and benefit from the other side of the trade? With higher prices it is natural to assume that the profits are probably good and hence you could be a part-owner and benefit from that. Of course, you have to research as to whether brands actually enjoy high profitability and the kind of persistent competitive advantages they might have. Are there structural tailwinds or headwinds that they face? Is the balance sheet strong or weak? Is the valuation right?
Considering luxury brand-owning companies as potential investments is definitely something worth exploring.
If you wanted to do that in the Indian listed space, there is are very few companies, such as Titan and a few other smaller jewellers. And you might not even be a large consumer of these products.
The idea here is to show the kind of companies available in the luxury brands space (or premium brands—sometimes what is luxury for one person is only premium for another). This will broaden your investment horizon beyond the few India-based companies and allow you to be more selective with your investments.
What if you owned brands, such as, Givenchy, Fendi, Christian Dior, Louis Vuitton, Bvlgari, Hublot, Tag Heuer, Moet & Chandon and Dom Perignon? These brands span segments such as fashion, perfumes, wines, watches and jewellery and much more (75 brands). Interestingly, all these and many more are owned by LVMH. LVMH is listed on the Euronext Paris exchange and is part of a number of European indices including CAC40, MSCI Europe etc.
LVMH is ranked as the top luxury brand across the globe with 10-12 per cent annual growth rate in revenues. Further, persistent competitive advantage is obvious, with most HNWIs preferring LVMH brands for its long legacy. Such long legacy becomes very hard to dislodge.
It sports an ROE of 20 per cent, which compares well with Titan’s 22 per cent. Similarly, the EBIT margin for LVMH is around 21 per cent, while that of Titan is around 11 per cent. Growth rates LVMH (10-12 per cent in euro terms) and Titan (14-15 per cent in rupee terms) are also similar, adjusted for exchange rates.
However, on one key point there is a huge difference. The Titan shares trade at a PE (price earning multiple) of 80 while LVMH trades at a PE of 29. Further, Titan’s principal market and all the revenues are dependent on the Indian markets, while LVMH’s is spread across the globe and hence is geographically well diversified. Also, the existing millionaires and newly-minted ones, growing at the rate of 7 per cent CAGR (compounded annual growth rate), are all likely to be LVMH customers and these are recession-proof or recession-resilient consumers.
Of course, you can be the judge as to what you like better. But it is important to understand that just like there is a large market for consumer goods worldwide compared to what only Indian producers make. Similarly, the market for listed equities is also much larger outside compared to only Indian companies. Whether you choose to own what you buy is entirely your choice.
Disclaimer: Our mentioning the name of any Indian or global company should not be construed as a recommendation to buy, sell, hold or carry out any other action related to those companies. Also, keep in mind that we might have those companies in our or client portfolio(s) already, or might be about to add those or might be selling those or might not have them at all. Further, there is a time lag between when we write the article and when you see the published article. Our suggestion is that you completely ignore the names as far as your actual investment decisions are concerned and carry out your own analysis, or rely on your advisor, before buying any stock.(The writer is CEO & Chief Investment Strategist OmniScience Capital)