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Titan: 'Watch' out!

Apr 18, 2002

Second rung stocks across the board have been witnessing buying interest on the bourses over the last few weeks. One of the notable gainers amongst them is Titan, the market leader in the organised watch segment. After touching its 52-week low of Rs 27 in September 2001, the scrip has gained 130% in the last six months. We look at the first nine months performance of the company and its growth prospects. Titan is India's largest watchmaker (71% of FY01 turnover) with a share of over 50% of the domestic organised watch market. The company has diversified into related areas of jewelry (32% of sales) and table clocks (1.2% of sales). The company has been expanding its presence in the international markets and has three subsidiaries catering to European, Middle East and South Asian countries. While Titan's turnover has grown at a CAGR of 16% over the last four years, operating profits have more or less remained stagnant during the same period. The reasons are multifold.

Though the company has to be given due credit for creating brands like Titan, Tanishq and Raga, competition has been severe in this segment (both from organised as well as unorganised sector). There is a huge presence of the unorganised sector in the watch category. As a result, the company's average realisations have been under pressure (declined 14% in the last four years). While the company's effort to upgrade customers has been good, in the last two years, multinationals have also made significant inroads in the Indian market. As a result, the cream of its consumers are slowly shifting to MNC brands.

(Rs m) 9mFY01 9mFY02 Change
Net sales 4,079 4,078 0.0%
Other Income 9 17 81.7%
Expenditure 3,522 3,568 1.3%
Operating Profit (EBDIT) 556 510 -8.4%
Operating Profit Margin (%) 13.6% 12.5%  
Interest 361 361 0.1%
Depreciation 158 164 3.9%
Profit before Tax 47 1 -97.6%
Extraordinary items 97 -  
Tax 12 (4)  
Profit after Tax/(Loss) 132 5 -96.0%
Net profit margin (%) 3.2% 0.1%  
No. of Shares (m) 42.3 42.3  
Diluted Earnings per share* 4.1 0.2  
P/E Ratio (x)   378.1  

Besides, Titan also has presence in the jewelry segment through its 'Tanishq' showrooms. Though this division has been well received in the international markets, growth prospects in the domestic market remain challenging. The Indian jewelry market till now has been dominated by local jewelers, with whom customers often have personal relations. Titan will require large spending on educating customers on the benefits it offers vis--vis the local jeweler. Then again there is no surety whether the customers will opt for branded jewelry.

Operating margins of the company, therefore, have come down from as high as 21% in FY98 to 13% in FY01. The first nine months performance was no different. After falling for two consecutive quarters, sales recovered by 31% in 3QFY02. But if one were to look at the first nine month performance, topline has remained stagnant. Increased competition and a sluggish demand scenario have resulted in a 110 basis points fall in operating margins. Net profit for 9mFY02 stood at a meager Rs 5 m as compared to Rs 132 m last year. If it was not for a sharp rise in other income (up 81%), the company would have slipped in the red.

However, the company had identified exports as one of the key growth drivers in the future. Titan International (Middle East) recorded a turnover of US$ 8 m in FY01 and sold watches in 14 countries in the region. It is also eyeing presence in Oman, the UAE and Saudi Arabia. The subsidiary also clocked a turnover of US$ 1 m through jewelry sales. Titan International Marketing, the European arm, has made significant inroads in almost all the major markets and clocked a turnover of US$ 6 m. Going forward, exports as a percentage of sales (7% of FY01 turnover) are expected to increase as Titan expands its presence in the international markets.

The stock currently trades at Rs 62 implying a P/E multiple of 378 times annualised nine months earnings. The stock has been moving up recently in light of higher gold prices, which could benefit the company. However, this could also be on account of Tata's raising their stake through open market operations. Indian promoters in FY01 had 26% stake in Titan. We had done a monthly volume and price study on the company and volumes have shown a sharp spurt in the last three months. But on the fundamental aspect, clearly, the road ahead is challenging and it remains to be seen whether the company can overcome this.


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