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Titan: Tax axes profits - Views on News from Equitymaster
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Titan: Tax axes profits
Jan 30, 2009

Performance summary
  • During 3QFY09, topline grows by nearly 28% YoY backed by growth in jewellery segment.
  • Operating costs outpace growth in net sales leading to contraction in EBITDA margins from 6.2% in 3QFY08 to 5.8% in 3QFY09.
  • While profit before tax grows by 23% YoY, net tumbles down by 62% YoY. Higher tax outgo eats into profits.
  • Tax includes amount of approximately Rs 176 m towards income tax and interest thereon of earlier years.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 8,024 10,238 27.6% 21,712 29,227 34.6%
Expenditure 7,523 9,647 28.2% 20,046 26,811 33.7%
Operating profit (EBDITA) 501 591 18.1% 1,666 2,415 45.0%
EBDITA margin (%) 6.2% 5.8%   7.7% 8.3%  
Other income 5 12 168.9% 14 33 136.0%
Interest 51 56 9.4% 139 173 24.5%
Depreciation & amortisation 74 79 7.3% 218 235 7.7%
Profit before tax 381 468 23.1% 1,323 2,041 54.2%
Tax 72 351 385.7% 425 729 71.5%
Profit after tax 308 118 -61.8% 898 1,311 46.1%
Net profit margin (%) 3.8% 1.1%   4.1% 4.5%  
No. of shares (m)       44 44  
Diluted earnings per share (Rs)*         43.2  
P/E (x)         21.3  
(*trailing twelve month earnings)

What has driven performance in 3QFY09?
  • The company reported nearly 28% YoY growth in topline during 3QFY09 mainly aided by growth in the jewellery segment. Despite being a festive season, the growth came in at a slower pace on account of economic slowdown that forced consumers to curtail expenses.

  • Jewellery segment grew by 33% YoY, while the watches segment reported muted growth of 4% YoY. While customers continued the momentum of purchasing jewellery (Tanishq and Gold Plus continue to grow at a robust pace), sales of watches were not upto expectations on account of lower walk-ins in malls and large format stores in big cities. The ‘other’ business segment that includes new initiatives such as eyewear business, precision engineering and licensed products and accessories reported an impressive 68% YoY growth in 3QFY09.

    Segmental break-up…
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Revenues - Time products 1,857 1,931 4.0% 6,099 6,685 9.6%
    PBIT margin 10.9% 7.5%   12.3% 13.8%  
    Revenues - Jewellery 5,914 7,887 33.4% 14,967 21,566 44.1%
    PBIT margin 3.9% 6.4%   5.5% 7.1%  
    Other businesses* 256 432 68.4% 659 1,008 53.0%
    PBIT margin -1.3% -16.0%   -9.4% -13.9%  


  • The operating profits grew at a slower 18% YoY during 3QFY09 as costs grew at a faster pace compared to the topline. Except for raw material costs and employee costs, the company was able to contain other cost heads as a percentage of sales. While the company has not divulged details, raw material costs could have been higher on account of expansion plans necessitating increased inventory on the books. The employee cost was higher on account of reduction in discount rate for actuarial valuation of Gratuity and Leave salary. The same shored up expenses by approximately Rs 128 m.

  • The profitability was also adversely impacted by the poor performance of the watches segment which witnessed nearly 3.4% YoY contraction in PBIT margins in 3QFY09. On the other hand, the jewellery segment was able to expand PBIT margins by 2.5% YoY during the same period under consideration. In case of new initiatives, the company is on an expansion spree and they are yet to turn profitable.

  • Despite the 18% YoY growth in operating profits and the more than two-fold growth in other income, net profits tumbled by 62% YoY. The high incidence of tax hurt the profitability of the company. Tax included an amount of approximately Rs 176 m towards income tax and interest thereon of earlier years and the same exerted pressure on the profitability of the company.

What to expect?
The company’s new initiatives (prescription eyewear and precision engineering) initiated with a view to sweat assets and sustain profitability are expected to improve shareholder returns in the future. While these two segments are not expected to contribute significantly to the topline in the coming two to three years, it will help the company sustain profitability going forward.

Having said that, the volatility in gold prices, if they were to continue in the future as well, might increase risks on the sustainability of jewellery business’ margins going forward. However, since gold prices in jewellery business are pass-through in nature, there is no real concern in case these were to rise gradually in the future. As for the risks, the management has indicated that a prolonged economic slowdown is what can impact its growth in the future.

At the current price of Rs 887, the stock is trading at a multiple of 12.3 times our estimated FY11 earnings. We expect the company to end the year nearly in line with our estimates. We maintain our positive view on the stock from a 2 to 3 years perspective.

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