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Titan: Margins take a hit - Views on News from Equitymaster
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Titan: Margins take a hit
Jan 22, 2008

Performance summary
  • Topline grows by 50% YoY aided by growth across its segments.
  • Operating profits decline by 14% YoY owing to costs growing faster than the topline.

  • Despite an unimpressive performance at the operating level, lower other income, higher depreciation and finance charges, net profits grow by 11% YoY aided by a substantially lower tax outgo and absence of extraordinary expenses (which were present during 3QFY07).

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 5,422 8,135 50.0% 15,306 22,052 44.1%
Expenditure 4,842 7,634 57.7% 14,015 20,386 45.5%
Operating profit (EBDITA) 581 501 -13.7% 1,291 1,666 29.0%
EBDITA margin (%) 10.7% 6.2%   8.4% 7.6%  
Other income 9 5 -48.3% 28 14 -50.5%
Interest 47 51 10.1% 139 139 0.1%
Depreciation & amortisation 70 74 5.2% 184 218 18.2%
Profit before tax 473 381 -19.5% 996 1,323 32.8%
Exceptional item (19) -   (68) -  
Tax 177 72 -59.2% 289 345 19.6%
Profit after tax 277 308 11.3% 640 978 52.8%
Net profit margin (%) 5.1% 3.8%   4.2% 4.4%  
No. of shares (m)       44 44  
Diluted earnings per share (Rs)*         27.1  
P/E (x)         38.8  
(*trailing twelve month earnings)

What has driven performance in 3QFY08?
  • The second half of the fiscal year is the peak season for Titan (for both the watches and jewellery divisions). Further changing lifestyle and attitude coupled with new initiatives such as Goldplus and Eyewear business has given a further fillip to the topline growth (up 50% YoY in 3QFY08). As seen in the table below, the jewellery division has continued to outpace the time products division in absolute terms and is in turn increasing its contribution to total revenues.

    Segmental break-up…
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Revenues - Time products 1,624 1,952 20.1% 5,360 6,409 19.6%
    PBIT margin 11.0% 10.4%   11.4% 11.7%  
    Revenues - Jewellery 3,665 5,914 61.4% 9,517 14,967 57.3%
    PBIT margin 11.0% 3.9%   7.1% 5.5%  
    Other businesses* 141 273 93.8% 446 689 54.5%
    PBIT margin -22.7% -1.2%   -17.0% -9.0%  
    (*includes precision engineering, licensed products and accessories)

  • The company’s second jewellery brand Goldplus crossed Rs 1 bn in sales in 3QFY08 and has opened 20 stores till now. The Eyewear business has opened 8 stores and is planning an aggressive national rollout in coming months.

  • As far as the watches segment is concerned, growth over the next two to three years would be driven by penetration in the rural markets and higher contribution from premium products.

    Cost break-up
    (% of sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Increase / Decrease in stock in trade -4.0% 1.9% -8.4% -11.2%
    Raw materials consumed 63.4% 62.2% 66.7% 74.3%
    Purchase of finished goods 4.3% 9.5% 5.9% 8.5%
    Staff cost 7.5% 5.5% 7.9% 6.6%
    Advertising 6.4% 5.9% 6.9% 5.4%
    Other expenses 9.9% 7.4% 10.5% 7.4%
    Excise duty 1.7% 1.4% 2.0% 1.5%

  • The overall operating margins were squeezed during the quarter as the margins of the jewellery division took a hit. Raw material costs witnessed a sharp rise and could be attributed to the firm gold prices, a key input for the jewellery business. All this has led to 4.5% contraction in operating margins. While operating profits declined by almost 14% YoY, net profits managed to clock 11% YoY growth owing to a substantially lower tax outgo and absence of extraordinary expenses (which were present during 3QFY07).

  • The company has invested considerably in new initiatives, namely the mass-market jewellery business (GoldPlus), the precision engineering business and a wholly new business viz., prescription eyewear, which have pressurised its net margins.

What to expect?
At Rs 1,050, the stock is currently trading at a price to earnings multiple of 38.5 times its trailing 12-month earnings. Going forward, the jewellery and the new initiatives are expected to be the key growth drivers. The fact that Titan has a very successful track record of building new ranges of products, both in the watches as well as in the jewellery segments is expected to augur well for the company in the future. The company is leveraging its well-established retail network and design and marketing capacities to expand businesses and products across geoagraphy.

That said, the pressure on margins cannot be ruled out in future as the company is on an expansion spree (its depreciation costs would continue to be on a higher side) and the volatility in raw material prices (gold prices) is expected to continue in the future. We will soon come out with our forward estimates.

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