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Titan: Subdued performance in jewellery - Views on News from Equitymaster
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Titan: Subdued performance in jewellery
Feb 3, 2012

Titan Industries declared the results for the third quarter of financial year 2012 (3QFY12). The company reported 24.8% YoY growth in sales, while net profit has risen by 19.1% YoY for the quarter. Here is our analysis of the result.

Performance summary
  • Net sales grew by 24.8% YoY for the quarter and by 38.2% for the 9 month period ended December 2011.
  • Operating margins fell by 1.3% from 10% in 3QFY11 to 8.7% in 3QFY12.
  • Interest charges, though negligible, were down by 52% YoY as compared to the same quarter last year.
  • Net Profits increased by 19.1% YoY this quarter. For the 9 month period, net profits rose by 31.5% YoY.


Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 19,548 24,404 24.8% 47,437 65,575 38.2%
Expenditure 17,596 22,272 26.6% 42,635 59,594 39.8%
Operating profit (EBDITA) 1,952 2,132 9.2% 4,802 5,981 24.6%
EBDITA margin (%) 10.0% 8.7%   10.1% 9.1%  
Other income 153 244 60.2% 313 680 117.0%
Interest 20 10 -52.7% 69 23 -67.0%
Depreciation & amortisation 86 119 39.1% 254 324 27.9%
Profit before tax 1,999 2,247 12.4% 4,792 6,315 31.8%
Tax 623 608 -2.4% 1,326 1,756 32.4%
Profit after tax 1,376 1,639 19.1% 3,466 4,559 31.5%
Net profit margin (%) 7.0% 6.7%   7.3% 7.0%  
No. of shares (m)         887.78  
Diluted earnings per share (Rs)*         6.1  
P/E (x)         32.4  
(*trailing twelve month earnings)

What has driven performance in 3QFY12?
  • Titan's sales were up by 24.8% during 3QFY12. Growth in revenues from jewellery business slowed down as a result of volatility in gold prices as also dull economic scenario. Jewellery revenues were up by 25% for the quarter. However, for the 9 month period, these were up by 43.6%. As a percentage of sales, jewellery continued to contribute about 81% like previous year.

  • The company's watches business witnessed sales growth of 17%. The EBIT margins in this segment are down by a significant 6%. Depreciation of rupee raised costs of imported inputs thereby hurting margins.

  • Titan continues to invest in other businesses of accessories and eye wear foreseeing growing demand from the youth of the country. Revenues in this were up by 70% during the quarter. For the 9 month period, revenues increased by 43.5% YoY.

      3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Watches
    Revenue (Rs m) 3,268 3,831 17.2% 9,407 11,159 18.6%
    % of total revenues 16.6% 15.6%   19.7% 16.9%  
    EBIT margin 18.4% 12.5%   19.1% 14.6%  
    Jewellery
    Revenue (Rs m) 15,868 19,859 25.2% 36,656 52,645 43.6%
    % of total revenues 80.6% 80.6%   76.8% 79.6%  
    EBIT margin 9.5% 9.0%   8.8% 9.3%  
    Others
    Revenue (Rs m) 553 942 70.5% 1,651 2,368 43.5%
    % of total revenues 2.8% 3.8%   3.5% 3.6%  
    EBIT margin -9.3% 5.4%   -4.9% 0.1%  

  • Operating profits were up by 9.2% during the quarter. Higher costs of inputs and promotional expenses incurred to increase sales impacted the margins. Operating margins thus were down by 1.3% during the quarter. These fell by nearly 1% for the 9 month period.

  • Net profits registered an increase of 19.1% in 3QFY12 as compared to same period last year.

What to expect?
At the current price of Rs 197, the stock is trading at a high multiple of 19 times our estimated FY14 earnings. Slowdown in the economy adversely impacted consumer spending. Continuously depreciating rupee on the other hand raised input costs further. Purchasing power was down on account of higher interest rates and inflation too. All this had a negative impact on the sales of watches and jewellery during the last couple of quarters. Titan has been getting into newer businesses and looking at manufacturing locally or outsourcing it at reduced rates to maintain profit margins. The promotional expenses especially advertising are expected to still continue exerting pressure on the margins. Since the stock has already gained more than 20% since our Buy recommendation in December 2011, we now have a cautious view based on the current valuations.

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