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Titan: Dragging diversification - Views on News from Equitymaster
 
 
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  • Feb 20, 2001

    Titan: Dragging diversification

    Titan Industries has reported a 35% growth in net profits for the third quarter ended 31st December 2000. Though the company's operating profits declined by 10%, lower interest and depreciation costs have boosted net profits to Rs 35 m.

    (Rs m) 3QFY00 3QFY01 Change
    Sales 1,480 1,603 8.3%
    Other Income 14 3 -76.8%
    Expenditure 1,260 1,405 11.5%
    Operating Profit (EBDIT) 219 197 -10.0%
    Operating Profit Margin (%) 14.8% 12.3%  
    Interest 159 127 -20.4%
    Depreciation 55 48 -11.7%
    Profit before Tax 20 26 30.2%
    Tax 2 2 -4.3%
    Profit after Tax/(Loss) 18 24 34.7%
    Net profit margin (%) 1.2% 1.5%  
    No. of Shares (eoy) (m) 42.3 42.3  
    Diluted number of shares 42.3 42.3  
    Earnings per share* 1.7 2.2  
    *(annualised)      

    Sales for 3QFY01 has gone up marginally by 8% to Rs 1,603 m. But, for the first nine months of the current year, sales have increased by 13% to Rs 4,475 m. Higher raw material (up 8%), staff (up 6%) and advertisement expenditure (up 19%) have resulted in operating margins dropping to 12% from 16% for the first nine months of the current year. The company has redeemed a part of its preference shares during December 2000 (dividend rate of 10.5%) and has re-issued the same at 9.5% in January 2001. Thus, lower cost of funds has resulted in lower interest outflow during first nine months of the current year.

    Considering the first nine months performance of the company, net profit has gone up significantly by 91% to Rs 132 m. However, Titan made profits to the extent Rs 97 m through sale of equity shares of RDI Printing & Publishing Ltd. in June 2000. Excluding this extraordinary income, net profit has actually declined by 50% to Rs 35 m.

    Reportedly, the company has plans to venture into manufacturing of high precision components used in aerospace and medical equipment industries. Though these areas are highly lucrative segments, it is not sure whether Titan has the necessary technical expertise in these fields. High precision component manufacturing also nessessitates substantial capital expenditure for setting up of adequate research laboratories.

    Already the company's venture into branded jewellery segment has been a drag on the company (due to higher raw material and distribution costs). Added to this, the core business of the company i.e. watch manufacturing is a working capital intensive business (net working capital to sales of around 65%). Hence, further diversifications have raised apprehensions about the profitability and viability of these new ventures.

    The stock is trading at Rs 81 at a P/E multiple of 19.5x the annualised nine months earnings. On the annualised sales of Rs 5,967 m, market capitalisation to sales works out to 0.6 times (market capitalisation is Rs 3,424 m). In light of the poor operating performance, the stock's valuation seem to be stuck in a time warp.

     

     

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