Titan, the Tata Group jewellery and accessories company, will have to borrow funds for its additional stake purchase in CaratLane, its online jewellery arm, which will lead to higher interest expenses that have already led to minor cuts in FY24 and FY25 earnings per share (EPS) estimates for the company.
The company has more than Rs 3,000 crore of cash on its books currently.
"At Rs 4,600 crore, Titan is paying quite a bit of money to acquire an additional 27.18 percent stake. It will have to borrow money and this will result in EPS cuts," Amnish Aggarwal, head of research at Prabhudas Lilladher told Moneycontrol.
Foreign broking firm Macquarie has cut FY24/25/26 standalone EPS by 2, 4 and 3 percent, respectively. Aggarwal too has cut estimates by 1.9 percent for FY24 and 3.5 percent for FY25.
Titan's recent stake hike in CaratLane, values the platform at Rs 17,000 crore. Back in 2016, the jewellery maker had acquired a 62 percent stake at a valuation of Rs 563 crore. That begs the question: what prompted Titan to readily give a 30-fold valuation in seven years?
"CaratLane focuses on the lightweight jewellery market, which is growing faster than overall jewellery. For everyday use, consumers prefer 14-carat and 18-carat jewellery, instead of 22-carat," said Aggarwal, underlining one of the reasons that the subsidiary is seen as Titan’s most valuable arm.
Also Read: CaratLane employees poised to strike gold after sale to Titan; to net Rs 340-380 crore from ESOPs
Between FY21 and FY23, CaratLane managed to triple its turnover as consumers' preferences shifted. It also turned profitable in FY21 and has maintained the run since.
Since Titan's acquisition, CaratLane's revenue has compounded over 51 percent every year. For FY24, CaratLane aims at crossing the Rs 4,000 crore-mark.
With the added 27.28 percent stake in CaratLane, Titan will now have even better synergies when it comes to procuring, manufacturing and marketing. On back of this, most analysts believe the EPS cut is only a temporary setback, and the acquisition will be value accretive in the medium term.
Currently, CaratLane's EBIT (earnings before interest and taxes) margin stands at 5-6 percent while Titan's jewellery EBIT margin is around 11-12 percent.
"CaratLane is a high-growth business with opportunity to ensure healthy revenue and margin," analysts at JPMorgan said.
Also Read: No immediate plan to list CaratLane: CFO Ashok Sonthalia
Titan's move to raise its holding in CaratLane highlights its focus on building the subsidiary as an integral component of the jewellery business, noted CLSA. Both the brokerages have an ‘overweight’ rating on the stock with a target of Rs 3,260.
In the quarter ended June, CaratLane added 11 new stores (net) taking the total store count to 233 across 93 cities pan-India.
Minion X CaratLane was also launched in the quarter gone by with 20 designs as a gifting solution targeting kids, teens and tweens. Its new collection Ada was conceptualised, designed and created to celebrate the unique and differentiated woman.
The brand also launched #FirstSalary campaign focused on gifting diamond jewellery to loved ones. Such initiatives have appealed to the young consumer, said analysts. Given all this, the management as well as the Street believe CaratLane is a multi-decadal opportunity.
Also Read: Midas Touch: Inspired by Rakesh Jhunjhunwala, Mithun Sacheti to turn investor after CaratLane sale
On August 21, the stock was closed at Rs 3,078 on the National Stock Exchange, higher by 0.9 percent from its previous close.
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