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Titan intend to purchase CaratLane faces a valuation challenge.

Differences have emerged between the Tata Group and the founders of CaratLane over the valuation of the residual stake held by the founders, leading to a months-long deadlock, said people aware of the matter. India’s largest omni-channel jewellery brand is majority owned by Tata Group company Titan.

With the stalemate persisting after talks ended inconclusively, the issue is said to have reached the offices of Tata Sons chairman N Chandrasekaran. The aim is to try and break the deadlock and find a quick resolution, said the people cited above.

Titan and Tata Sons didn’t respond to queries. Mithun Sacheti, CEO and founder of CaratLane, didn’t want to comment.

“It’s an ongoing negotiation — these things take time,” said a senior Tata Group executive. “Titan is a listed company, so it has to follow certain guidelines. On the other hand, entrepreneurs want quick solutions as startups need to be nimble.”

CaratLane had been in a strategic vendor relationship with Tanishq, Titan’s jewellery brand, since 2010. Between 2016 and 2019, Titan bought into the company in tranches, spending a cumulative Rs 440-450 crore, primarily via a secondary purchase of shares from Tiger Global, an early stage backer. Titan also made a primary infusion of Rs 99 crore in the company. Currently, CaratLane is a 72.3% subsidiary of Titan and is considered its most valuable arm by analysts. The residual 27.8% is still held by the three founders as well as employees.

As per the original share purchase agreement, starting 2021, Titan has had an option to call for the remaining 28% stake as per a pre-agreed formula. This formula also gave the remaining shareholders the right to have a put option on Titan for their stake starting from 2023.

To determine the value, both sides could each appoint a banker of their choice for a third-party independent valuation. The average of the two was to be shortlisted but only after both sides approved it. There was no arbitration clause to resolve disputes.

Titan hasn’t acted upon its call option. Earlier in the year, it roped in Bank of America to negotiate for the residual 28% stake. In March, BofA forwarded an offer that valued the entire company at Rs 6,000-7,000 crore, which translated to Rs 1,680 -1,960 crore for the founders’ stake.

The founders are said to have rejected this as being too low. The founders, who have Avendus as their banker, called off the process without initiating a valuation exercise.

Since March, Titan and Tata Group officials have been trying to re-engage with the CaratLane brass. Sources said Titan may make a revised offer closer to a Rs 15,000 crore valuation.

On average, the street considers CaratLane’s equity value to be Rs 23,446 crore, said analysts tracking the company. The company is expected to have ended FY23 at Rs 2,300 crore of sales and Rs 160 crore of ebit. It has been growing at 55% CAGR over a five-year period. It has been making a profit before tax (PBT) for the last three years.

“The Titan valuation exercise was perceived as one done in bad faith by the CaratLane team and thus dismissed,” said a person aware of the development. “Subsequently, even the board agreed that the offer was low.”

Kotak Institutional Equities analyst Jaykumar Doshi said, “We ascribe $2.3 billion valuation to CaratLane.” Margins will take three-five years to hit double digits as it continues to invest in talent, store network and marketing, he said.

The company saw a record 47 new store additions in the March quarter, taking the total to 222 spread in 88 cities.

“Titan’s initiatives on widening customer base (store additions, scale up of CaratLane/Mia), expanding ticket sizes (innovation, studded, wedding mix) and attractive customer propositions (GHS, gold exchange, tactical activations, etc.) continue to support market share gain driven topline momentum for jewellery,” according to Latika Chopra of JP Morgan. GHS refers to the company’s instalment Golden Harvest Scheme to buy jewellery.

If there is no resolution, then the fair valuation discovery will happen only when the company lists, which might be two years down the line, although plans have not yet been finalised yet, said people with knowledge of the matter. Executives close to the startup said it is now in a position to pay dividends to parent Titan and does not depend on capital from its principal shareholder.

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