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Titan: It's a question of valuations! - Views on News from Equitymaster
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Titan: It's a question of valuations!
Jan 24, 2006

Performance Summary
Even as we may sound repetitive, Titan's performance at the topline was not surprising and the company is well poised to improve profitability and margins going forward. Though PBIT margins for the jewellery division fell in 3QFY06, overall margins were maintained. Excluding the extraordinary items, the net profit growth in 3QFY06 stands at 13% YoY. For the first nine months of the fiscal year, net profit has more than doubled on account of improved profit margins and lower fixed charges.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 2,944 3,649 23.9% 7,676 10,000 30.3%
Expenditure 2,669 3,325 24.6% 7,005 8,922 27.4%
Operating profit (EBDITA) 275 324 17.8% 671 1,078 60.7%
EBDITA margin (%) 9.3% 8.9%   8.7% 10.8%  
Other income 6 4 -37.7% 19 15 -22.3%
Interest 75 73 -3.2% 235 191 -18.8%
Depreciation 56 49 -13.0% 167 145 -13.0%
Profit before tax 150 206 37.6% 288 757 162.7%
Extraordinary income/(expense) (83) (50) -39.4% (195) (278) 42.3%
Tax 10 48 404.2% (10) 115 -
Profit after tax/(loss) 57 108 88.5% 103 364 254.5%
Net profit margin (%) 1.9% 3.0%   1.3% 3.6%  
No. of shares (m) 42.3 42.3   42.3 42.3  
Diluted earnings per share (Rs)*         12.2  
P/E (x)         58.8  
(*trailing twelve months)            

What is the company's business?
Titan is the market leader in the organised watch (53% of FY05 sales) and jewellery (47% of FY05 sales) segments. Watches account for 76% of overall PBIT with the rest being accounted for by the jewellery division. The company also has presence in the precision engineering segment where it plans to leverage on its engineering expertise (revenues are a part of the watches division). After expanding rapidly in the international markets, Titan has scaled down its presence there and is now focusing on building the export business in a gradual manner.

What has driven performance in 3QFY06?
Jewellery shows the way - again!: As is evident from the segmental table below, the growth in jewellery sales in 3QFY06 was at a healthy 34% YoY largely on account of the festive and marriage season. Typically, the second half of the fiscal year is the peak season for Titan (for both the watches and jewellery divisions). In our view, the growth driver is the gaining significance of the organised players in the jewellery market, albeit on a smaller base. As far as the time products division is concerned, revenues not only include watch sales but also income from sale of accessories and more importantly, precision engineering sales (this division caters to the component, component assembly and automation requirements of the automotive and aerospace industries). We expect revenues from this division to touch Rs 200 m in FY06 as compared to Rs 60 m in FY05.

Segmental break-up…
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Revenues - Time products 1,392 1,578 13.4% 3,908 4,857 24.3%
PBIT margin 7.7% 11.1%   8.4% 13.4%  
Revenues - Jewellery 1,667 2,240 34.4% 4,138 5,628 36.0%
PBIT margin 6.5% 4.0%   4.0% 5.0%  
Overall EBIT margin 7.0% 6.9%   6.2% 8.9%  

Margins - no surprises here: Even as PBIT margins of the jewellery division fell in 3QFY06, PBIT margins of the time products division increased significantly in 3QFY06 led by higher contribution from the precision engineering sales. For FY06, we have factored in PBIT margins of 15% and 5% respectively for the two divisions and we do not see any reason to change our estimates. So, there are no surprises here.

Provisions impact net margins: While extraordinary items, including VRS related expenses, were lower in 3QFY06, the company has provided for Rs 202 m towards provision for doubtful loans and advances in 9mFY06. This, in our view, was the money lent to its overseas subsidiaries in Europe that have been bleeding for a while. Excluding the write-offs in both the years, net profit in 9mFY06 has risen by 111% YoY, which is a commendable show. We have not factored in the provisions in our estimates and to that extent, there will be a need to revise our numbers downwards. Excluding the same, our estimates are well in line.

Volatile margins: As is evident from the graphs above, the PBIT margin trend of the time products and the watches divisions have been fairly volatile but this is the nature of the business. To put things in perspective, we have compared the third quarter margins over the last four years, which clearly highlights the secular trend in margin improvement.

What to expect?
The stock currently trades at Rs 716 implying a price to earnings multiple of 18 times our estimated FY08 earnings. We had recommended a Sell on the stock at Rs 791 about a month back and we maintain our view. While we like the company and its business model, in our view, valuations are rich (even after taking into consideration the upsides from the usage of the proceeds from the rights issue).

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