Titan: Is the run up justified? - Views on News from Equitymaster

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Titan: Is the run up justified?

Feb 10, 2005

Performance Summary
Titan gained more than 20% yesterday. While the stock markets attribute this rise to the possibility of the government hiking FDI limit in retailing in the forthcoming budget, we suggest investors not to bet on this fact. Fundamentally speaking, the company's turnaround initiative is consistently showing results, as is evident from the 3QFY05 performance. Even taking into account higher extraordinary items, net profit during the quarter increased by more than 90% and more than 5 times for the first nine months of the current fiscal year. Based on the recent presentation by the company's management in an investors conference, it has ambitious plans.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 2,874 2,944 2.4% 6,267 7,676 22.5%
Expenditure 2,642 2,694 2.0% 5,716 7,093 24.1%
Operating profit (EBDITA) 232 250 7.6% 551 583 5.9%
EBDITA margin (%) 8.1% 8.5% 8.8% 7.6%
Other income 4 6 64.9% 14 19 31.5%
Interest 92 75 -18.5% 303 235 -22.5%
Depreciation 66 56 -14.7% 196 167 -14.8%
Profit before tax 78 124 60.5% 66 201 201.5%
Extraordinary income/(expense) (13) (77) - (38) (127) -
Tax 35 (10) - 12 (30) -
Profit after tax/(loss) 30 57 91.9% 17 103 507.7%
Net profit margin (%) 1.0% 1.9% 0.3% 1.3%
No. of shares (m) 42.3 42.3 42.3 42.3
Diluted earnings per share (Rs)* 2.8 5.4 0.5 3.2
Price to earnings ratio (x) 69.5
(* annualised)

What is the company's business?
Titan is the country's market leader in the organised watch (56% of FY04 sales) and jewellery (44% of FY04 sales) segments. Watches account for 73% of overall PBIT while 27% is accounted by the jewellery division. After expanding rapidly in the international markets, Titan has scaled down its presence and is focusing on building the export business in a gradual manner.

What has driven performance in 3QFY05?
Sales growth slows: Net sales during the quarter grew at a slower pace of 2% in 3QFY05. This is on the back of 11% growth in time products division sales during the quarter (the time products division revenues comprise sale of watches, clocks, select accessories and precision engineering services). Besides festive season demand, the supply of watches to select OEMs and faster growth of precision engineering revenues are some reasons, we believe, for this healthy growth in time products. At the same time, jewellery division revenues have declined by 6% during the quarter. Though the company has not specified any reasons for the same, we believe that this is only an aberration and over the next two to three years, the growth rate is likely to be in the range of 20% to 25% (based on the addressable market size of Rs 100 bn). For 9mFY05, the jewellery division has registered a growth rate of 29%, which is broadly in line with our FY05 estimates.

Segmental break-up
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Revenues - Time products 1,255 1,392 10.9% 3,503 3,908 11.5%
PBIT margin 6.7% 7.7% 5.4% 8.4%
Revenues - jewellery 1,766 1,667 -5.6% 3,217 4,138 28.6%
PBIT margin 4.9% 6.5% 5.4% 4.0%
Overall EBIT margin 5.6% 7.0% 5.4% 6.2%

Steady improvement in margin: Despite slower sales growth, operating margins in 3QFY05 expanded by 40 basis points (0.4%) on the back of sharp rise in margins of the jewellery division. The contribution from diamond-studded and platinum has increased in the last two years, which are of higher margin in nature. As far as the time products division is concerned, the improvement in margins could be attributed to better capacity utilisation, savings on employee costs and higher growth of the precision engineering initiative. PBIT margin is volatile, as shown in the graph below, owing to the seasonal nature of the sector and what matters is the long-term trend. We believe that there is further scope for margin improvement, which we have factored in our assumptions.

Over the last few quarters: The improvement in margins at the net level is higher owing to the reduction in interest costs. The company has retired debts to the tune of Rs 210 m in 9mFY05, purely from internal accruals, which is arising out of tighter working capital management. Excluding the impact of extraordinary items (towards VRS), net profit has increased more than 2 times in 3QFY05.

What to expect?
The stock currently trades at Rs 225 implying a price to earnings multiple of 9.5 times our FY06 estimated earnings. In a recent investor meet, the management has outlined its growth plans for the company i.e. 2005 to 2010. Accordingly, there are two growth scenarios i.e. "Normal Growth" and "Aspirational Growth". As per the "Normal Growth" scenario, "Titan Industries will have a turnover of over Rs 18.7 bn by 2009-10 (up from Rs 9.6 bn in 2003-04) and deliver ROCE of over 30% by 2009-10 (up from 8.3% in 2003-04). As per the "Aspirational Growth" scenario, "Titan Industries can have a turnover of almost Rs 40 bn by 2009-10 ( up from Rs 9.6 crores in 2003-04)". While growth prospects are promising, the risk profile of the stock is also on the higher side in light of current high valuations and a competitive environment. Unless the investors' investment horizon is aligned with the long-term plans of the management, there may be disappointments.

We had re-iterated our Buy view on the stock recently at Rs 173 (January 2005) with a target price of Rs 250 (two to three year perspective). But we would like to mention that the stock price has risen much faster than the underlying fundamentals, which is not comforting. If expectations of the government increasing the FDI limit was the key reason behind the stock price rise yesterday, it is far-fetched in our view.

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Dec 3, 2021 (Close)