In today’s Finshots, we dive into CaratLane’s journey and whether Titan might have just overpaid for the brand.

Also, if you are looking to beat inflation, we have a very nice video for you this week explaining how you should deal with your finances in a high inflationary environment. You can find the link here.

The Story

Last week, Tata-owned Titan made an all-out acquisition of CaratLane. They paid over ₹4,600 crores and picked up the remainder of the 27% stake still held by the founder. And what was CaratLane’s valuation, you ask?

A cool ₹17,000 crores!

Almost immediately, two camps emerged.

One set of folks wondered: “Did Titan pay too much?”

Because Titan’s going to shell out a whopping 7.8 times the FY23 sales figure for CaratLane. For context, this is a higher valuation than what public market investors pay for Titan’s entire business itself. And if you consider that CaratLane actually has lower EBITDA margins than Titan’s own jewellery brand Tanishq, you can see why some eyebrows are raised.

Also, it doesn’t seem like analysts ascribe a very high value to the CaratLane business either. The number crunchers at Kotak Institutional Equities broke down Titan’s business into what’s called a Sum Of The Parts (SOTP) valuation — where each business division is considered to be a separate entity and then added together to get the big picture — CaratLane just accounts for 6% of Titan’s share value.

But then, there’s the other set who thought: “Maybe Titan is smart to buy it out completely before the revenues rise exponentially?”

See, the analysts at JM Financials estimate that CaratLane should be valued at ₹20,000 crores. Sure, that includes the value of goodwill of its existing association with Titan. But even if you strip that out, they feel the acquisition works out quite cheap. And that’s simply because CaratLane has actually been on a bit of a rocketship. For starters, its revenue is growing at a fast clip — in FY23, while CaratLane grew by 73% over the previous year, Titan’s standalone jewellery revenue grew at just 37%. And that has been the trend for a while.

Also, the gross margin of 35% is higher than Titan’s Tanishq.

And not to forget that despite having some rivals, CaratLane has 3 times higher revenue than its second biggest competitor. It’s a proper market leader in its space — lifestyle jewellery for everyday wear.

And what are investors doing after hearing these contradictory opinions?

Well, looks like they’re puzzled. They don’t seem to know what to do. In the week since the news broke, guess what the stock has done…

Nothing!

That’s right. The returns have been a big fat zero.

So we pored through media articles. We scanned research reports from all the way back to 2016. And we figured that the only way to make sense of this is if we tell you a story. A story of CaratLane’s journey. Because only then will we pick up nuggets of Titan’s investment thought process over the years too.

The year was 2000. Mithun Sacheti had just wrapped up his gemology study in California and made his way back to the family business in Mumbai. But Sacheti didn’t want to just continue building what was already running smoothly. He wanted a piece of South India too. So he packed his bags and moved to Chennai to set up shop there. The idea worked. Within a few years, the store churned out a few crores of profits.

But Sacheti wanted scale. He wanted to reach more people. And he didn’t think continuing with the family business was going to help. He wanted to take a risk. He wanted to sell jewellery online.

And back then, this was a crazy idea because e-commerce itself hadn’t taken off in a big way. Now imagine selling jewellery, a product built solely on trust, online. It was impossible to imagine that anyone would knowingly hand over money to a random online platform and wait for jewellery to be delivered.

But he went ahead, raised money from his father, found a business partner and began operations with ₹1 crore in the bank.

Now before you think “the rest is history”, it wasn’t.

The company struggled. Losses were mounting. VCs ignored them. For nearly 4 years, they trudged on while trying to make use of whatever money they had.

Finally, there was a ray of hope when Tiger Global handed over cash in 2011. But even that quickly disappeared. The company apparently didn’t use the money well. They were burning through it quickly and the revenue wasn’t growing fast enough.

That’s when Titan entered the picture. They saw ‘something’ in the business in 2016 and came on board. They’d buy out Tiger Global and wanted it to be a business run by just the founders and Titan.

So now you have to wonder, why on earth did Titan buy a stake in the company back then in the first place? It was still a time before D2C (direct-to-consumer) became a cool thing.

Well, maybe Titan knew that big things were in store. Maybe they knew that people would definitely warm up to the idea of jewellery e-commerce in a big way. And they realised that rather than building out their own tech stack, they might as well pick up a potential rival. See back in 2016, Titan’s online jewellery business was negligible. Or as the division’s CEO put it back then, “Revenues from the online medium is not even a decimal point for Tanishq, while Carat Lane is an online company.”

So they wanted a slice of the online pie. And with just ₹360 crores, Titan snagged a nice chunk of the company — 62% of it.

But even then, maybe no one thought that CaratLane would amount to much for Titan. Because when Credit Suisse published an in-depth analysis of Titan a year after the acquisition, CaratLane didn’t find a single mention in the 14-page report.

And maybe Titan realised that it needed to tighten the screws too.

So when CaratLane needed more money in 2019, Sacheti was in for a rude surprise. He expected Titan to give him the cash at a multiple similar to the previous round — 5 times his sales figure. But nope that didn’t happen. Titan turned around and asked, “So, what about the profits?” As if that wasn’t enough, the legendary Rakesh Jhunjhunwala, who was also an investor in Titan, asked — “Where is your cashflow?”

And looks like that was the wake up call CaratLane needed.

They tweaked their strategy. Instead of spending heavily on opening new stores, they went the franchise route. They snagged working capital funding at a low cost by leveraging the Titan partnership too.

And finally, in FY21, CaratLane reported its first profits. Things were falling into place. The company nearly doubled its store size within the next year. And the profits swelled even further.

Titan got what it was looking for — a sustainable bottom line.

So, did they still pay too much for it?

Well, when BQPrime asked this same question to the CFO of Titan, his answer was:

“We have done a fair valuation share with the founder who has equally and more contributed in creating the company and bringing it to this stage…I think it is only fair that valuations are shared equally with the founder.”

Now that’s a nice sentiment to have. But businesses don’t like to overpay for stuff. And not to forget that Titan will take on a loan to fund 50% of this acquisition too. That means there’s an added interest cost as well.

So there’s something else at play here beyond the sentiment. And frankly, it’s business. Because here’s something else he said in the interview.

“We have been insiders to the company. That gives comfort and confidence about what can be done in the future. When you do an outright acquisition, you have a certain level of information. Here, we were deep inside this company. And that made us comfortable to take this kind of valuation.

Basically, Titan is confident that in the past 7 years, it has learnt the ins and outs of omnichannel jewellery retailing. And they’re sure there are no skeletons in the closet. So it’s easier for them to pay a premium.

But there’s one more thing.

“They are certainly going to grow faster than the rest of the jewellery portfolio of Titan.”

Titan actually seems to believe that CaratLane’s focus on lifestyle jewellery will be the big driver — and this includes diamond studded jewellery. And their bet isn’t just on the “India consumer story” but on more women becoming financially independent and making their own purchase decisions. That’s the big value unlocking catalyst they see.

So yeah, now you know why Titan was willing to shell out all that cash for 100% control of CaratLane.

But what do you think about this deal now? Tell us.

Until then…

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