Future Engineering Stock Hidden in Golden Lustre

The Boeing 787 flights used by Air India have them.

The Pratt & Whitney engines that power IndiGo's (Interglobe Aviation) aircrafts have them.

The light helicopters manufactured by defence aviation major Hindustan Aeronautics have them.

I am referring to very critical components inside the engines of these aircrafts.

Any guesses where they are manufactured?

Well, Titan Engineering and Automation Limited (TEAL), a wholly owned subsidiary of Titan Company makes them at the engineering company's plants at Hosur, Tamil Nadu.

When one thinks of critical engineering components, we hardly think beyond the handful of well-established engineering behemoths.

But it turns out global geopolitical circumstances have opened up opportunities for several niche, smaller but credible players in this domain.

Geopolitical circumstances are pushing most developed economies to de-risk supply chains. There are investments being made in manufacturing all over the world.

And that's where the opportunity lies for entities like TEAL.

Titan group already had precision engineering skillsets thanks to its watch manufacturing unit. TEAL too has well trained manpower and the ability to build precision components at scale.

As automation rises, TEAL can compete not only on the competence of its people and the solutions it can provide, but also on the fact that it can be hugely cost competitive versus global peers.

To keep its talent base growing, skilling-oriented schools such as Tata Institute of Skilling have helped TEAL meet workforce requirements as manufacturing grows in India.

Over its two decades of operations, TEAL has utilised its engineering knowhow to create innovation solutions for new sectors.

The knowhow for micron-level precision, for instance, led to TEAL exploring adjacent opportunities in manufacturing services (a micron is one millionth of a metre, about one-tenth the thickness of one human hair).

TEAL started with making some panels for spacecraft. Today one of its biggest customers is American aviation major Raytheon Technologies.

Under the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), TEAL is in the midst of debt-funded capex of Rs 2.2 bn over four years.

The company plans to establish a unit for manufacturing parts for the semiconductor industry.

Additionally, over the next 3-5 years, TEAL will undertake capacity expansion to grow its Aerospace segment, which is expected to be funded through internal accruals.

TEAL currently accounts for a tiny fraction of parent Titan's revenues and profits. However, the engineering and automation company has enough potential to derisk Titan's gold dependent business in future.

Titan's stock price has demonstrated a strong correlation of 0.9 times with gold prices over the past 20 odd years. This is because the jewellery division (Tanishq) has dominated the sales and profits of the company over the years.

With several listed jewellery stocks, Titan now not only has stiff competition in organised jewellery retailing. But it also needs to consistently outdo its peers in managing tax implications on gold inventory etc.

Titan witnessed margin pressures last financial year due to steep rise in gold prices, and competitive intensity.

However, the company took steps to address the margin pressure, with new product designing, sourcing, pricing, innovation, product mix, and improving operational efficiencies.

The recent cut in import duty on gold to 6% from 15% is expected to boost demand in the short term.

Going ahead, the company plans to focus on the impact of lab-grown diamonds for growth in Tanishq's studded business.

Also, Tanishq has expanded its global footprint by opening new stores in Dubai, Singapore, and Chicago. This expansion enhances brand visibility and provides access to new consumer segments. Currently, the company has 16 jewellery stores globally.

Meanwhile, the watches, eyecare and Indian traditional wear business segment continue to report modest growth. However, none of these have managed to counter the volatilities of the jewellery business.

As India gains credibility in terms of globally competent base of engineering and semiconductor fabrication, subsidiaries like TEAL could offer Titan the much need benefits of diversification.

So, the stock of Titan may continue to remain volatile in the near to medium term. Especially since its valuations continue to remain above long term averages. Also, slower growth in earnings and margin pressures could cloud the stock's near term stock market appeal.

However, long term investors in the stock, could count on the possibility of Titan unlocking value in subsidiaries like TEAL that could go on to contribute one of the highest shares of profits for the group, in the future.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)