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Titan: Debt costs hurt profits in Dec quarter - Views on News from Equitymaster

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Titan: Debt costs hurt profits in Dec quarter
Feb 26, 2014

Titan Company Ltd declared its results for the second quarter of financial year 2014 (2QFY14). The company reported 8.3% YoY growth in sales, while net profit fell by 1% YoY during 9mFY14. Here is our analysis of the results.

Performance summary
  • Net sales for the company increased by just 8.3% YoY during 9mFY14. For 3QFY14 sales were down 11% YoY.
  • EBITDA margin for 9mFY14 also shrunk by 0.6% YoY to 7.8%
  • Other income for the company rose by 15.5% YoY in 9mFY14. However, interest expenses too rose by 76.6% YoY as the company had short term debt of Rs 8.2 bn at the end of December quarter.
  • Profit after tax for the company was flat (down 1% YoY) for the nine month period. .

Consolidated financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Total income 29,828 26,505 -11.1% 74,159 80,282 8.3%
Expenditure 27,492 24,462 -11.0% 67,948 74,057 9.0%
Operating profit (EBDITA) 2,336 2,043 -12.5% 6,211 6,225 0.2%
Operating profit margin (%) 7.8% 7.7%   8.4% 7.8%  
Other income 571 513 -10.2% 1,547 1,787 15.5%
Interest 116 274 136.2% 364 643 76.6%
Depreciation 142 156 9.9% 395 451 14.2%
Profit before tax 2,649 2,126 -19.7% 6,999 6,918 -1.2%
Tax 610 471 -22.8% 1,597 1,571 -1.6%
Profit after tax/(loss) 2,039 1,655 -18.8% 5,402 5,347 -1.0%
Net profit margin (%) 6.8% 6.2%   7.3% 6.7%  
No. of shares (m)#         959.2  
Diluted earnings per share (Rs)         8.2  
P/E ratio (x) *         29.8  
*Based on trailing 12 month earnings

What has driven performance in 9mFY14?
  • The moderate growth in sales was a result of subdued performance in 'Watches' and 'Jewellery' segments. Segment wise, jewellery revenue grew by 9% YoY while watches grew by 3% YoY. 'Others' segment which includes precision engineering, eyewear and accessories grew by 24% YoY.

  • Jewellery growth remained staid during the third quarter. The customer and grammage de-growth stood at 10% and 21% respectively. The price of gold at the end of 3QFY14 was Rs 2,825 per gram as against Rs 3,135 per gram in December 2013. De-growth in Watch sales was led by 11% YoY volume decline due to poor customer sentiments and low discretionary spending. 'Others' segment Performed relatively well owing to 21% YoY growth in eyewear business.

  • Segment wise, EBIT margin in Watches division has declined to 11.3% as against 12.1% in 3QFY13. This was on account of high overhead expenses due to poor volumes. EBIT margin for Jewellery improved from 9.8% in 3QFY13 to 10.2%; mainly due to increased contribution of studded jewellery (26% of the total jewellery sales).

  • Due to the ban on gold-on-lease scheme the company had to take additional working capital debt on its books. At the end of December quarter, the company had Rs 8.2 bn of debt on its books.
What to expect?
Due to regulatory hurdles in the jewellery business and a weak economic scenario; Titan's performance continued to remain disappointing so far in FY14. The company has stated that their supplies of gold may also be affected. The steep decline in volumes in 'Watches' segment is the worst ever decline in last 5 years. However, strong brand equity and entry into new businesses is likely to reap rich dividends for the stock once the economy rebounds.

At the current price of Rs 244, the stock is trading at 23 times our estimated FY16 earnings. We believe valuations need to factor in the regulatory and temporary supply side risks for its Jewellery business. We reiterate the view that investors should Buy the stock only at Rs 175 or lower. We will keep reviewing the buy price on the basis of the debt on the books of the company.

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