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Titan: VRS subdues profits - Views on News from Equitymaster
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  • Jan 30, 2004

    Titan: VRS subdues profits

    Titan, the market leader in the organised watch and jewellery segment, has posted impressive results for the third quarter ended December 2003. But as has been the case in the past, while topline growth is encouraging, higher charges towards voluntary retirement scheme (VRS), higher marketing related costs and low interest coverage continues to have a negative impact on the company's net margins.

    (Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
    Net sales 2,128 2,885 35.6% 4,933 6,249 26.7%
    Other income 6 4 -39.3% 13 14 6.7%
    Expenditure 1,836 2,642 43.9% 4,362 5,663 29.8%
    Operating profit (EBDITA) 291 243 -16.5% 571 585 2.5%
    Operating profit margin (%) 13.7% 8.4%   11.6% 9.4%  
    Interest 112 92 -17.5% 328 303 -7.5%
    Depreciation 121 66 -45.7% 281 196 -30.4%
    Profit before tax 64 89 38.0% (24) 101 -
    Extraordinary items (12) (24) - (34) (72) -
    Tax 7 35 441.5% (23) 12 -
    Profit after tax/(loss) 46 30 -34.6% (36) 17 -
    Net profit margin (%) 2.1% 1.0%   -0.7% 0.3%  
    No. of shares (m) 42.3 42.3   42.3 42.3  
    Diluted earnings per share (Rs)* 4.3 2.8   (1.1) 0.5  
    P/E ratio (x)         210.1  
    (* annualised)            

    Net sales have risen at a faster rate when compared to previous quarter by 36% in 3QFY04. This is primarily on account of the festive season wherein demand for watches and jewellery tends to be on the higher side as compared to the first half of a year. As far as segment-wise performance is concerned, while watches have shown marginal growth in 3QFY04, it is the performance of the jewellery business that has enabled Titan to post higher revenue growth. As we have been maintaining throughout, while the company has a leadership position with a strong brand in the organised watches market, competition is fast rising. The EBIT margin is below our estimate of 9% for FY04.

    Segmental break-upů
    (Rs m) 3QFY03 3QFY04 Change 9mFY02 9mFY03 Change
    Revenues - watches 1,240 1,255 1.2% 3,072 3,503 14.1%
    PBIT margin 10.2% 5.7%   6.6% 4.3%  
    Revenues - jewellery 1,052 1,766 67.9% 2,328 3,217 38.2%
    PBIT margin 3.2% 4.9%   2.7% 5.4%  
    Overall EBIT margin 7.0% 5.2%   4.9% 4.9%  

    As far as margins are concerned, the company's performance at the segmental level is above our expectations, especially on the jewellery side. We have excluded VRS related expenses from the operating expenses and classified under extraordinary items to reflect the actual operating level performance. Overall, while the company's performance at the net sales level is in line with our FY04 estimates, the jewellery division has posted higher EBIT margins. This could be on account of favorable gold prices. Nevertheless, as the contribution from jewellery division is on the rise, so is the raw material cost as a percentage of sales.

    Cost break-upů
    (Rs m) 3QFY03 3QFY04 Change 9mFY02 9mFY03 Change
    Raw material 1,384 1,964 41.9% 2,988 3,887 30.1%
    % sales 65.0% 68.1%   60.6% 62.2%  
    Staff cost 194 224 15.7% 583 620 6.5%
    % sales 9.1% 7.8%   11.8% 9.9%  
    Advertising expenses 134 217 62.2% 314 485 54.5%
    % sales 6.3% 7.5%   6.4% 7.8%  
    Others 125 237 90.0% 478 672 40.4%
    % sales 5.9% 8.2%   9.7% 10.7%  

    At the net profit level, we had not factored in the VRS related expenditure in our estimates. Excluding this impact, our estimates for FY04 are in line with the company's 9mFY04 performance. The stock is currently trading at Rs 112 implying a P/E multiple of 44.6x our FY04 estimated earnings. While valuations seem to be on the higher side, we expect the company to benefit from restructuring of its debt, unlocking of cash from working capital and improvement in margins over the long term. To that extent, there is scope for higher growth in profitability in the next two to three years. However, the risk associated with the same is also on the higher side.



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    Aug 22, 2017 (Close)


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