Titan: A Golden Case in Indian Retail - [Business Breakdowns, EP. 105]

24:29Titan's point is that's not our competitive advantage. Our competitive advantage is to add value to that jewelry. And then one other question that's been lingering in my mind since the beginning is, if the majority of people are buying gold for savings, investment purposes as customers, what's the point in making nice looking jewelry when you could just be selling gold bars in various increments to people? So that's what most jewelers do. If you go to a typical small jewel in India, 50 -60 % of the business is just gold bars. And as you rightly inferred, there's very little value added in that.

25:00But the way the small jeweler sees it is he sort of gets a carry on the price of gold. And historically, there's also some scope to sell 22 carat gold at the price of 24 carat gold. So that's the typical jewelry model. Titan's part of view is we're not here to be bullion sellers. There is no comparative advantage therein. Our skill is design, marketing, inventory management, smart technology around this whole setup. The way you talked about the business and how they're not taking the gold onto their balance sheet makes me think a bit more about the balance sheet more generally. How much debt do they have at this point?

25:32I think you said in the early 2000s, they were significantly in debt. Where do they stand now? And any other financing arrangements with suppliers or franchises that is interesting to know about the business? So in terms of specific numbers, they have around $700 million of debt on their books. So debt equity would be around 0 .3 times. Out of that $700 million of debt on their books, $600 million is gold on loan. Leaving aside gold on loan, they actually have a mere $100 million of gold on loan. So debt equity, if you take the $700 million of debt, which includes primarily gold on loan, that would be a debt equity of around 0 .3 times.

26:07Titan's rivals will operate at one, one and a half times debt equity. and this is a double whammy. Not only is the rival carrying more debt, Titan's interest rate on that debt is 3%, the rival's is 12%. And you can imagine the devastation this causes to the rivals. So one way to look at it is pat to EBITDA conversion. Titan's pat to EBITDA conversion would be around the 60 -70 % mark. Titan's rival's pat to EBITDA conversion would be 30 -40 % because a lot of the EBITDA is getting leached out in paying interest costs. All right, let's get to the good bit of how they've been able to build this wonderful business model, and particularly from the financial perspective.

26:43And let's start at the operational level. So have they been able to build such capital efficient retailing business? It's a huge country. And I think an important piece to note is that Tanishq spans the country, whereas a lot of other their main competitors are in more specific regions of India. So how do they manage inventory? How do they keep costs under control at the store level? As you rightly said, Tom, they have 400 outlets, and genuinely are pan -India, most of the other jewelers tend to have a regional franchise rather than a pan -India franchise. Now, as soon as you say, I want to be pan -India, you have to deal with India's regional variations.

27:17So what gets worn in a Tamil wedding in South India is utterly different from what gets worn in a Punjabi wedding in Delhi. So the way Titan's gone about it actually is fascinating. So let me sort of break the story in three parts. As I said, till 2002, 2003, the jewelry business was on fire. Nobody even knew whether it would survive. 2002 to 2010 was basically just getting the foundations built. And the first layer of foundations they built was they said that unlike other jewelers who get job work done by local artisans, and they pay the artisan very little, the artisan uses old fashioned tools, works in poor lighting, and has high wastage in the process.

27:58Titan inverted that paradigm completely on its head. 2003 to 2010 was putting the artisans in nice air -conditioned halls, modern lighting, modern machinery given by Titan. And Titan focused on those eight years in reducing wastage in the making of jewelry, increasing the design quotient. They have 100 designers. I don't think any other jeweler would have more than 50. These guys have 100 designers from what's called the National Institute of Fashion Technology and the National Institute of Design. So they said, we'll amp up the design quotient, train the, we call them carigars. The artisans are called carigers.

28:30We'll get the modern machinery, reduce wastage, and we'll also reduce cycle time. Most other jewelers, the artisans take 30 -35 days to get the stuff made into the store. In Titan's case, the cycle time is six days. So the first layer of innovating in the back office of a jewelry industry. 2010, they hired Elie Goldratt's firm from Israel. This is the Theory of Constraints People, the famous book called The Goal. They tell the Israelis, can you help us reduce inventory. 2010 through to 2015, they worked with Goldratt and inventory dates are reduced from 125 to 75. And the last six, seven years have been about using technology to manage what goes where in a very smart way.

29:15So I'll try to explain it as best as we understand. This is in a way the secret sauce. They don't give it away. We've spent six, seven years talking to hundreds of store managers to understand this. So at any point in time, Titan has 100 ,000 schools but a given store will only have 7 ,000. And a big part of management skill at the headquarters level and at the regional level is figuring out which 7 ,000 schools will go to which store. As best as we can figure out, roughly 60 % of the schools are common across stores. This is purely by eyeballing going to various parts of India and seeing 60 % of the schools seem to be common to all parts of the country.

29:5230 % of the schools are specific to a region and sometimes dorms, these are specific even to a part of a city. And they seem to be using software to figure out what will sell where. You know, if it's an office district with a working woman, a certain type of design will be made available. And if it's, say, an agricultural area, a different type of design. So 60 % common to all shops, the 30 % specific and 10 % experimental. So at any point in time, 10 % of the schools in a shop seem to be there for experimental purposes. If they sell, they are replenished rapidly. If they don't sell, they are taken out of circulation.

30:29This ability to manage 400 stores, 100 ,000 schools pan India, but 7 ,000 at the shop level, 60 % common, 30 % using software specific to a store, and 10 % experimental, 100 designers working away. This setup is very specific to Titan. I think the last seven, eight years, they've nailed it so thoroughly, it's going to be difficult for other jewelers to catch up with this. Yeah, they seem to have developed serious process power over the years. Logistically, are the artisans based in a specific part of the country? And how do they move the inventory around the country? Is it kind of central hubs that they then move out?

31:07We've talked to this founder of Shiprocket on a previous podcast of ours, and he just talked about just the challenge of generally of moving things around the country. simple things that we take for granted like postcodes often aren't available in India to find the right place for delivery, all that kind of stuff. So how do they do it at such scale? 20, 25 years ago, they used to have one big sort of artisan center. They still have it. It's in the outskirts of Bangalore. This was their first big artisan center where they sort of innovated and created this modern working place for artisans. Subsequently, they seem to have created four different hubs, basically four different regional hubs for artisans to work in.

31:41The second innovation which has I think kicked into very high gear in the last 10 years is getting contract manufacturers. We reckon their contract manufacturers are at it for Titan in their hundreds. We don't have the exact figure. It's certainly north of 200, perhaps even pushing 400. Contract manufacturers who work exclusively for Titan, some of them actually are our clients. So we've got a good amount of insight for them. So Titan gives them the designs and it gives them a delivery time and date and the contract manufacturer design delivers there. And the third innovation which kicked in courtesy Ellie Goldratt and the theory of constraints people is, even through a given day, schools can move from one store in one neighborhood to another store in the neighborhood.

32:21And this seems to be driven by technology. So if they believe that South Bombay stores will need more of a certain type of jewelry, and Central Bombay stores will need less of it, through the day they will transport it. And behind it all, an auto replenishment model from what we've seen, two days of turnaround time for the fastest moving items. And we've talked about moving products into stores and out of stores. What about customers? How are they attracting customers to the stores? Is that centralized or is that on franchise owners, for example, as well to come up with their own marketing campaigns at a local level or is it more national and where are they marketing?

32:54So one of the reasons we think POFO works so well for Titan is effectively your franchise is a bit of a local grandee. In that part of town or in that city in India, this is a person of sort of respect and stature and therefore the affluent people in that neighborhood, trust that person. Plus, because the franchisee owns the store, he has an incentive to do whatever publicity he wants to do in the local media. That is on his own strength, that won't be centrally supported. What Titan does at a Pan India level for its whole business, including Fofo, including Coco for everybody, what Titan is saying is, I'm going to present my proposition around three pillars.

33:32First is purity. So regardless of how affluent you are, whether you one diamond started a gold jewelry they innovated in 1996 with something called the caratometer basically think of it is a small x -ray machine with a blue light which tells you whether the gold is pure or whether it's full of gunk so this was a breakthrough they pioneered it this was i think one of the pivotal moments in tanishk's evolution so every tanishk store has a caratometer and titan has a promise that if you come in with jewelry which is 18 carat or better if it turns out that if it's not 22 carat, at Titan's cost, they will make it 22 carat.

34:07You'll simply pay for the making charge. Even if it wasn't bought from Titan in the first place. So if you bought it from a local independent, you can bring it there and they'll say, we'll make this more pure for you, but only at the incremental cost. That's right. Absolutely. And this was a key breakthrough in 2003. In Titan's renaissance, this was a critical insight. They don't just have the carotometer there and put people off by saying, I'm sorry, your jewelry is in pure. Give them the solution. So this is the first proposition. In a way, purity delivered to you, the Indian customer. The second is around design.

34:37So much of their marketing in mass media is around affluent women spending on jewelry as a part of sort of social stature and prestige. And this piece is heavily around diamond -starred jewelry, which is a high -margin item. We reckon on diamond -starred, they're making 50 % making charges. Because unlike gold, diamonds are not commoditized because there isn't a standard diamond at a certain heritage. So in diamonds, the Titan brand becomes even more powerful. And we reckon the way they monetize it by having a super high making charge on diamond jewelry. And that in turn justifies high glamour, high profile publicity in mass media, at airports, and so on.

35:17So India is leading the film stars and models will be fronting these expensive campaigns. But if you have 70 -80 % ROIs, you can more than justify. So that's the second premise. And the third premise that they've built in this post -2014, post -2015 era, when remember the government came after them in 2013 -14, tighten for your wedding. Till 2014, the local jeweler was the go -to person for the wedding because often the mother would call the shots in the wedding. She would be comfortable with the local jeweler. He would design the trousseau. And these are expensive trousseaus. As India gets more affluent, many middle -class weddings in India, the trousseau can easily be $10 ,000.

35:55So local jeweler had the run of the land there and Titan's chipped away at this over the last six, seven years by coming up with more regional designs. Because wedding jewelry is very region specific, Titan has attacked this piece by regionalizing the designs. And as we get into the wedding season, we have a wedding season in India, which is sort of four months of heavy duty weddings. I think just the month of December, India had the best part of half a million weddings, the month of December alone. So as we approach the wedding season, Titan launches a campaign which shows Marathi weddings, Punjabi weddings, Tamil weddings, and each ethnic community has a specific wedding proposition.

36:31So at the Titan level, this is what you're getting. You're getting purity, carotometer, almost now legendary status in Indian families that this is the place you go to get your jewelry vetted. If you're an Indian woman on the ascent, you're earning more money. You're getting diamond -star jewelry, which film stars are wearing. And thirdly, you're going to get married. Do you really want your mother to make the call? or do you want to make the call yourself and go with Titan? Titan has the best jewelry designs for that year with a refresh cycle every six months. And have they done the diamond piece and the wedding piece both through Tanishq, the main brand, or have they done it through new brands that they've launched?

37:08Last five, six years, we've seen Tanishq sort of splitting the business into sort of much like a wealth manager does on an airline does. So the main Tanishq brand is now basically affluent middle -class women. for the premium jewelry segment, they've got a brand called Zoya. And then for the wedding market, they've got a separate brand called Riva. Zoya stores are completely separate from Tanish stores. Riva is a separate part of the store. So if you go in and you say you want to buy wedding jewelry, you're ushered away to a quieter plant, you're offered nutritious fruit juices, so that you can spend even more on jewelry.

37:43The segmentation of the jewelry market, not just by region, but by economic spending power has been very cleverly done. And in the midst of that, the purchase of Carrot Lane in 2016 has given them a fidgetal proposition. Carrot Lane jewelry is significantly cheaper. It's a quarter of the price of Tanish jewelry. And it's everyday wear for the modern woman. Smaller stores, an online proposition. And Carrot Lane, in a way, is the kind of entry -level product. So my 13 -year -old daughter is very keen on Carrot Lane and keeps dragging me in the direction of that store. So you've got Riva at the extreme elite end, Carrot Lane at the entry level, and in between is the Tanish proposition and one notch above is the Zoya proposition.

38:23Yeah, they're really building a cradle -to -grave proposition for getting young people in a certain brand level and then getting them to go up the brands as they become older and hopefully more affluent. It brings up a really interesting point about e -commerce. You said Carrot Lane is more of an online proposition than maybe some of the other brands. We've talked basically exclusively about physical locations here in terms of distribution. Where does e -commerce figure into this? This is a massive retailer. We haven't touched on e -commerce yet, which I think is just a fascinating anecdote in itself.

38:48When they bought Carolyn in 2017, they bought a 70 % stake. They let the entrepreneur who built it, which one continues to own a third of it. We were a little nonplussed because we couldn't quite understand how will you buy, say, $1 ,000 worth of jewelry online, right? We couldn't quite get their heads around it. And as I've seen with most successful Indian companies, really clever companies tend to be very tight -lipped about what they're doing. What we have seen in the last six years is actually extremely clever evolution of Carrot Lane, where I reckon that's Titan's Sardi strategy, Tanira, is actually now feeding off Carrot Lane.

39:22So just to sort of get some basic numbers off the table, Carrot Lane is only 1 20th the size of Titan's main jewelry business. But it's growing twice as fast. Carrot Lane is growing at 50 % per annum. It's been growing like that for four years now. And where Carrot Lane has nailed e -commerce in a more comprehensive way than almost most other venture capital funded e -commerce companies is, they've got the design and the price absolutely nailed perfectly. So the price point is 20 ,000 rupees. So that would be around $400. designs are for office wear for social evening wear as i said entry -level product there's a 15 day return policy you can buy it wear it you don't like it you can return it which is astonishing than indian jewelry you can imagine right you can get a lot done in 15 days yeah i was gonna say and even more interesting right second area where they've been very clever is you don't have to go to the store if you want you can video purchase live video call with a jewelry advisor at the other end of the line.

40:21You can try at home, you choose online, you watch a video online, you can buy at home, return it in 15 days. Again, this degree of sophistication in online purchase, no other jeweler has been able to offer. And the last bit is again, back to theory of constraints and school counts. They have tidied up their inventory big time. Carrot Lane operates on only 4 ,000 schools. They started with 8 ,000, 9 ,000. But over the last three, four years, we've seen them tightening up their schools as they've figured out using technology, what sells when the school is very tight and inventory day is actually a third less than Tanishq's so the carrot lane inventory cycle is even tighter so the result of all this is you've got a jewelry brand which is at the moment looks small compared to Tanishq because it's only doing 200 million dollars compared to Tanishq say 4 billion but it's making a profit between 15 to 20 million dollars at the EBIT level and that in Indian terms is unheard of we haven't seen Indian e -commerce companies making money.

41:20Titan paid, say, $100 million for this six years ago. If this were listed as a separate company, it would be easily a billion dollars valuation. So in six, seven years, they've got 10x their money by taking a brand which is now growing at 50%, profitable. But most interestingly, Dom, this is the brand which I think gives Titan an ability to tap into the youth of India. The median Indian is 28 years old, currently in feet straight into the heart of that dynamic. Yeah, there are a number of countries in the world that would kill for a 28 -year -old medium average age. It brings up a question about capital allocation more broadly.

41:56How does Taitans management think about the allocation of surplus capital they've got, whether they decide to buy businesses like Carolein or do they pay dividend? Can you talk us through their philosophy on that? So perhaps just worth backing up a little bit to sort of Tata Sons here. So Tata Sons, in a way, is the kind of Indian version of Bakusha Hathaway. This are largest conglomerate. They don't publish their unlisted empire numbers. It's an unlisted empire because they've got over 100 businesses of which less than a fifth are actually listed. But I reckon Tata Sons is easily, overall worth of Tata Sons will be easily in excess of $200 billion.

42:31And what's distinguished this bunch of families, the Tatas are a bunch of different joint families. What's distinguished them is the ability to take very long -term bets. if you think about it from 83 to 2003 titan didn't really make too much money but they kept at it and in the last 20 years they've been rewarded by 1200x this is sort of symptomatic of tata they do this consistently and that philosophy has seeped into titan so titan's capital allocation sort of take it step by step the simplest layer is a dividend payout so you start with a pre -tax rookie of 35 percent you pay a quarter of that as a dividend so quarter of that goes as a dividend So from pre -tax rookie of 35%, you pay taxes, you're down to 27.

43:12You strip out the dividend, you got 21 % of capital employed left. Out of that 21%, ongoing organic growth of the business will take away 17 -18%. So bulk of the retained capital goes in financing organic growth. But you're left with around 2 % and if in some years, 4 % of capital employed as a surplus. This 2 % to 4 % gets used for experimentation. So Carrot Lane was an experiment. I think paying $100 million for it in 2016, they wouldn't tell the market, but I reckon it was an experiment. It's worked out for them. So they have an innovation and incubation philosophy where if they identify a new initiative, a CEO will be chosen.

43:49The CEO will be told to create a business plan. And then whatever monies are required, the titan CFO is supposed to go and get that money. The CEO is told, you build the business plan, you're committed to it, now go forth and build out. So this is how in 2018, they launched the Sadi business. first attempt by any organized player to formalize what I think is a $20 billion sector. So you pay out a quarter as pat, bulk of the rest you use to finance organic growth, between 2 % to 4 % of capital employed each year goes into financing experiments. Some of the experiments don't work. So if you ask me, I don't think that experiment in wallets and sunglasses has really gone anywhere.

44:28But those that work, carrot lane, give you exponential returns. And on the blend, you end up building a business where the profit engine is actually growing year upon year. Fascinating. You see tartare everywhere. There's a steel plant near me in England that is tartare -owned. And so it's kind of amazing to see that they're also big into jewelry in India. You've eloquently described a number of them, but are there any other competitive advantages that you'd point us to within the Titan business? So I think let's discuss three aspects which we haven't touched upon. First is this talent and HR piece.

45:01I think one of their advantages across industries, not just jewelry, across industries is the ability to get premium Indian talents, not just say people from the prestigious IITs and IIMs, but even at the shop floor, at the store level, the sorts of staff they will attract to work at their stores will be a notch above what typical local jeweler will be able to attract. The result is attrition will be 4 -5 % in Titan, whereas other Indian retailers will have 30 -40 -50 % attrition. So the ability to make considered calls on human resources, whether at the senior management level, so bringing in engineers from India as government -owned watchmaking company in the 80s to launch Titan was, I thought, a masterstroke.

45:42Most people would frown upon government -owned company employees. These guys realized the government employees have special skills. They went and lifted a whole team of watchmakers from the government -owned company. And then, as I said, to the modern day, if I go to the carrot lane near my house, I can see that the staff are better trained and they're trained to do rapid sell -throughs of 20 ,000 rupees or $400 per item jewelry. So, the HR piece is, I think, very distinctive to Tata. even TCS their IT services business has this in spade loads the second is I think a commitment to aesthetics so this is where the Steve Jobs figure as success is I deserves a lot of credit so at the very outset Titans advertisements would have say Mozart symphonies as the background score and a focus on putting on the table a product that looked beautiful very visibly beautiful even to someone who wasn't really a watch aficionado so if you go to a Titan store today whether you go to a watch store, Helios is the upper end of the watch stores, or you go to a jewelry store, the retail experience is superior to what you'll get elsewhere in the country.

46:44So there's a commitment to aesthetics at the product level and at the shop level. And the final layer is this ability to melt the traditional and modern. You're taking jewelry, which is an ancient purchase in India, but the technology that's underpinning it is cutting edge. So we talked about theory of constraints. In the last couple of years, we've seen them bring sales force into play. They're not going to give us easy visibility on how Salesforce will help them reduce working capital cycle. But I reckon they would have thought through quite cleverly how Salesforce allows them to ramp up their business.

47:15This whole online jewelry proposition, trying on jewelry by ordering, but also something called the endless aisle. Basically, it's like a fantasy for a jewelry buyer. You can sort of window shop as much jewelry as you want on your phone or on your iPad for years on end. And this ability to take a traditional product, melt modern technology, bring in great people from C -suite to the shop floor, very difficult for other companies to do this on a continent -wide scale as we have to do in India. It's come through this conversation and from my reading beforehand, brand strength and trust just came up time and time again.

47:51And I know India tends to be a pretty low trust society. There are a few brands that they really cling on to, but generally, you're skeptical of most brands and people. How did they, in the early 2000s, build a storied brand in what's generally a pretty short period of time? You know, you look at most of the big brands in the world, they tend to have been around for 50, 60 plus years. The last 20 years, I think is really where the brand story kicks in, where they are very cleverly bringing in, especially in their marketing campaigns, they're very cleverly bringing in traditional Indian themes, such as a mother's love for a daughter, but also they're bringing in a degree of cultural fison.

48:28This can be sometimes controversial. They're bringing a degree of cultural fison, for example, same -sex weddings. And you can imagine, right, in a country like India, when you're experimenting like that, it creates marketing campaigns which are very high profile. They tend to get blowbacks from time to time, but it doesn't seem to thwart them. The Tanish marketing campaigns consistently make a mark. And as we were discussing by, as you rightly put it, by having a jewellery proposition which is cradle to grave. For youngsters like my daughter, they've got Carrot Lane going. And then for older women, they've got Zoya as a premium product and the assault on the wedding market through Riva.

49:03So very cleverly segmented branding strategy, but consistent ability to use traditional themes to create frisson in living rooms of our country. I haven't seen other brands being as experimental or as bold in their advertising as Titan's jewelry proposition has been in the last 20 years. Yeah, it's quite striking. It tends to be the bigger the business gets, the more conservative they become in their branding and their marketing in public. So it's interesting to hear. I guess it won't be too much of a surprise to people listening that this business, given what you've said, is very highly rated by the market.

49:38I think it was on 70 times earnings at the moment. So the question I've got at this point is where does future growth come from? If you're thinking about it from an investor, they've grown up 20 % a year for two decades, which is phenomenal. Can they keep that rate that high? Can it go even higher? And where might it come from? Just to sort of give you a sense of how tough the ask is, and I'll get into the growth drivers, operating cash flow over the last five, six years has compounded at 25%. This is a sort of signature of, again, great Indian compounders that I've seen, that operating cash flow will compound significantly faster than PAT.

50:11PAT in turn will compound significantly faster than revenues. Now, can you sustain 25 % cash compounding, say for the next 20 years. If you can, then obviously the company's worth way more than the current market cap. So let me start with sort of in rank order of where I think the main drivers are. The biggest driver I reckon is the wedding market. As I said, wedding is half of jewelry spent in India. Although Titan's overall share of market is 8%, in weddings there are mere 2%. They are focused on separate designs every wedding season for separate ethnic groups. But I think the biggest driver for their success will be the decision maker on wedding jewelry is changing.

50:49The mother no longer calls the shots. It's the daughter. And the daughter has an affinity for the Titan brand that the mother didn't. So I think the median age of India being 28 and the demographic driver of Titan's ascent in the wedding market, I think will be considerable here. The second driver, in a way, is actually a very interesting macro driver. What we've seen in the last decade, Dom, is that every level of the education ladder, more women are studying than men. So from kindergarten through to university, more women are studying than men and women's pass rates are significantly higher.

51:22So what it looks like to us is a decade hence, Indian women will be dominating the workforce and that cannot be bad news for a brand whose primary consumer is the woman. The third aspect is the diaspora. So if you take the Indian diaspora, the world over, you're looking at an economy, say the size of California, which is the diaspora is the size of California. The Tanishq in the last 20 years has been very successful in the diaspora. So specifically the Middle East is a big market, Southeast Asia, they've done well. Increasingly, they seem to be doing well in the United States as well. So if the diaspora continues to flourish, the Titan brand is the diaspora's way of connecting with jewelry that they like and a brand that they trust.

52:04So our reckoning is if you combine these three drivers, the wedding jewelry, the rise of tighten in the wedding jewelry market, the more general rise of Indian women in the workplace and their earning power. And then thirdly, the diaspora and their desire to buy things from back home in India. You're looking at a business where we reckon revenue growth at the 13 -14 % level should be doable for an extended period of time. Secondly, if you can do 13 -14 % revenue growth, keep your efficiencies going using the sorts of tech innovations we discussed. That compounding around the 20 % mark and then free cash flow compounding at the 25 % mark by squeezing inventory days even further.

52:42Our model very much is focused on that. Keep looking at the efficiencies both at the operating margin level and at the working capital level to understand how long this free cash flow engine can run. Market share isn't a challenge. They only have 8 % of the Indian jewelry markets. 65 % of the market is local mom and pop jewelers who are on the slide because of the formalization of the Indian economy. Yeah, there's plenty of runway there. And it seemed like you mentioned earlier, their Sari business, which is one of the new business lines that they're growing, seems to be doing quite nicely at the moment.

53:13It seems to be a very similar playbook of, it's a very fragmented market of suppliers at the moment, they can come in and kind of run the same playbook that they did with Tanish. That's the bull case for the business. Is that about right? That's right. I think you nailed the bull on the head there. 2016, they did an offsite. And this is a critical offsite. 2016, they did offsite. They'd just come out of that sort of bruising encounter with the Indian authorities through 2013 -14 on tariffs and ban on gold and lease. And they said, what new drivers can we create, which will not be as vulnerable to these sorts of government interventions?

53:45I reckon in that 2016 offsite, Saadis was identified as a big initiative because $20 billion market dominated by mom and pop players. The regional chains in Saadis don't make more than say $10 million a pat. And therefore, they felt this was a business ripe for disruption. They've got 34 stores. They don't reveal profitability. They're saying they don't make money. But we visited a lot of these stores. Our analysts have spent a lot of time. We reckon at the store level, they're already profitable in some of the earlier stores. And there's two sort of drivers here, which is Tanishq -like in their operation.

54:20First is Titan's focusing on hand -woven expensive saris. They're focusing on the most premium saris. So you're looking at price points of $300 and upwards. These handwoven saris are made by artisans. Titan knows how to manage the artisan ecosystem better than anybody else. Secondly, because the supply chain here is complex, you've got 34 stores and you've got, say, 10 ,000 artisans sitting in their homes. You need technology to link up that supply chain. Titan understands how to link up complex supply chains better than most. And thirdly, you need demand prediction. because even within a given city, Saudi demand varies from one part of town to another.

55:00One part of town might want North Indian Saudis, another part might want South Indian Saudis, etc. So Saudi demand varies across geography and across time. So you need demand prediction software and we think they understand that better than most and I think whatever deficiencies they might have had, Carrot Lane would have rectified that. So $20 billion business at its infancy, we reckon this could also be part of the juice up on that 25 % free cash flow compounding. Made me think as you're describing that we shouldn't take for granted that people know what a sari is. Can you just explain exactly what they are selling what the item of clothing is?

55:33I think that's the hardest question. Sari is traditional Indian wear. So what the kimono is to the Japanese, sari is to Indians. At its most basic, it is a highly ornate piece of fabric with lots of handiwork on it. An entry -level saree can be $10 and the sorts of saris Titan is making a $300, $400, $500. They're worn at weddings and festive occasions and other sort of occasions where you want to exhibit happiness and status in class. You did very well. So one of the things that's been a recurring theme in this conversation is the government and regulation generally, which makes me think of the risks.

56:11We've talked about the bull case. Clearly, this is a very impressive business. What risks does the business face? What are you particularly wary about as you sit here today? I think as we've discussed, the first is current accounts deficit problem, rupee under pressure, knee -jerk reaction from the government would be to impose duties on gold, make gold difficult to purchase, etc. So that's something we try to factor into our valuations, that there is a risk involved. All rosy projections have to be discounted appropriately to factor in this regulatory risk. The second element is actually the general prosperity of India.

56:45As we've discussed over the last hour, you're focusing on affluent Indians, I would say upper middle class Indians. So if nominal GDP in India is growing at 10, 11%, Titan is focusing on a strata of Indian society whose incomes are growing at 14, 15%. Now, that strata of Indian society is linked to the global economy. A lot of these people work in, say, banking and financial services, IT services, the export economy. And therefore, if there's a global slowdown, this strata of Indian society, the affluent strata also suffers. So ironically, even though this sounds like a very Indian company, a big growth driver is global GDP growth.

57:23If you go through an extended global downturn, it will unquestionably impact affluent Indians and then onto Titan. The third piece I worry about is the watches business. Honestly, this is the business which has confounded me. They've grown watches volume at 4 -5 % over the last decade. It's incredible. I still scratch my head to understand how on earth can you grow watches volume in this day and age of mobile phones. And they've grown watches revenue at 10%. Now, you could say that's nominal GDP growth, but that itself is remarkable. This piece, it's difficult to see who will go into these. The best part of 3000 World of Titan stores, watch stores and buy watches in the years to come.

58:00Again, young country, 28 median age. I'm not so sure how many youngsters will buy this. So this part of the business, I think will struggle to grow. And at some stage, we'll have to see how Titan deals with the capital employed over there. Can they shift the balance sheet without causing pain to shareholders is something that we lose a little bit of sleep on. Would they ever consider spinning it off or selling it to someone, do you think? It'll be tough to do. Who exactly want to buy it? I'm not so sure. But I'm sure that these are intelligent, thoughtful business people. They would have found a solution.

58:32The most logical reuse would be they have a brand called fast track and accessories brand, the sunglasses and watch wallets and belts and bags and so on. The most logical would be some sort of fusion between getting the fast track business and the watches business together and seeing if you can use the fact that the Indian youth want accessories, fashionable accessories, and can you sort of recycle the watches business around that. This is the part of the business which is struggling not for any fault of Titan. It's struggling because watches in the industry is an industry which is stagnated. But as I said, they've done wonderfully well over the last decade to grow revenues at 10%.

59:09It just feels like they're defying gravity in this part of the business. Yeah, Afain does a pretty good job of telling the time these days. So we always finish these conversations with the same question, which is what have you learned as an investor studying Titan's business? Let me start with the most obvious piece of what we've discussed, right? Everybody says retail is detail in every country that I've lived in. And yet, when I see retailers, especially in India, they seem to try to take one solution and slam it across the country, whether it is foreign retailers who come to India or indeed domestic retailers.

59:40What Titan has done is demonstrated that if you want to succeed on a large scale in India, you have to basically operate 10 different business models for the country. So the jewelry business sounds like one business, but as we've discussed, it's stratified by income group. It's stratified by region. It's got different Cocoa for business models. So if you did a sort of matrix on it, you're actually looking at 30, 40 different businesses being run in a fairly complex operation, glued together by great people and great technology. That is tough to pull off. But unfortunately, that's the ask if you want to succeed in Indian retail.

1:00:15And this is, for me, it's been a sort of living lesson in watching how a great retailer is built, because that allows you to benchmark other retailers who aspire to succeed in India, but won't have anything like this quality of people or technology. The second is the HR piece. Hire bright people, hire good people, hire them young, give them early responsibility, mentor them, and they'll basically let them become great business leaders. So 2014, from what we can gather, they did a board meet and identified 100 leaders for the future. Each of those 100 leaders were mentored by senior people in the Tata Sons empire.

1:00:51The entire leadership of Titan today is part of that initiative of 2014 to groom the next generation leaders. Very difficult for other businesses to do this. You're investing really heavily in talent, identifying those people and mentoring them over, say, a decadal period to become the leader of a business. Titan seems to have done this really well. and other Tata businesses, TCS is similar. And perhaps the biggest lesson from people like me who are building businesses in India is when we see the house of Tata, when we see the sort of Tata son's empire, what they have done over say 100 years now is very interesting.

1:01:24They seem to take initiatives again and again, which involves giving back heavily to society, even though the business might not be firing then. And then in the decades that follow, the giving back to society yields a multifold return to the business. So the example for Titan would be 1988, JRD Tata, the then head of Tata's sons, called in Zerksis Desai to Mumbai for a catch up and told him that, look, you're building a great business here, but what are you doing for the community? So Zerksis said that, look, we are doing a hospital and a school. JRD Tata apparently got very angry and said, you're building this sort of five -star island of prosperity in the midst of poverty.

1:02:03And on JRD Tata's orders, Zuxis went off and built a township outside Bangalore, where the artisans, both the watchmakers and the jewelry makers now sit. There's schools, there's free hospitals, free schooling. And the core of the artisan community that fires up Titan's business operates out of that ecosystem. Now, that was the best part of 40 years ago, Dom. To this day, no other jewelry maker has been able to do anything remotely comparable. And this aspect of how Tata Sons operates intrigues me. And playing this infinite game with this family, this extended group of families has done, I think is the biggest lesson I take away.

1:02:39Give back to society. In a booming country like India, society will repay you handsomely in the decades to come. Yeah, optimized for the long term. That's a wonderful closing story to share with us. And particularly, you know, given this business struggled for 20 years, essentially, and then has really ripped for the last 20 years. Thank you so much for sharing this fascinating company with us. As I said at the outset, it's not a business I come across, but there are so many lessons within it that I've loved learning about, and I'm very excited to share it with the world. So Dom, thank you for inviting me.

1:03:07Just by way of disclaimer for Indian law, I have to give you this. My parents own this stock. I own this stock through Marcellus' portfolios, and Marcellus' 10 ,000 clients also own this stock. And it's a privilege to be on Business Breakdown. Thanks again for this opportunity. It's our pleasure. Thank you so much. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joincolossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S dot com.