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Titan: Exits the US market - Views on News from Equitymaster

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Titan: Exits the US market
Apr 30, 2009

Performance summary
  • On a standalone basis, topline grows by 27% YoY in FY09 supported by growth in jewellery segment.
  • Operating profits grow at a slower pace of 18% YoY as costs continue to grow at a faster pace as compared to growth in net sales.
  • At the PBT level growth stands at 14% YoY, while net profits report subdued growth of 6% YoY. This is mainly on account of higher tax outgo.
  • For the full year, the board of the company recommends a dividend of Rs 10 per equity share that includes a special Silver Jubilee dividend of Rs 2 per share.
  • The company closes two Tanishq stores opened in the US and with that exits the US market.
  • The company completes the merger of its three subsidiaries. On a consolidated basis topline growth stands at 28% YoY.


Financial performance snapshot
  Standalone Consolidated
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change FY08 FY09 Change
Net sales 8,225 8,807 7.1% 29,937 38,034 27.0% 29,969 38,326 27.9%
Expenditure 7,387 8,258 11.8% 27,433 35,069 27.8% 27,570 35,288 28.0%
Operating profit (EBDITA) 838 550 -34.4% 2,504 2,965 18.4% 2,399 3,039 26.7%
EBDITA margin (%) 10.2% 6.2%   8.4% 7.8%   8.0% 7.9%  
Other income 4 20 421.1% 18 53 197.2% 34 53 56.6%
Interest 63 122 93.9% 201 294 46.1% 208 288 38.4%
Depreciation & amortisation 79 183 130.5% 297 418 40.5% 333 424 27.1%
Profit before tax 700 265 -62.1% 2,023 2,306 14.0% 1,892 2,381 25.8%
Tax 95 (13) -114.0% 520 716 37.6% 526 741 40.9%
Share of associates profit - -   - -   110 -  
Profit after tax 605 278 -54.0% 1,503 1,590 5.8% 1,476 1,639 11.1%
Net profit margin (%) 7.4% 3.2%   5.0% 4.2%   4.9% 4.3%  
No. of shares (m)       44 44        
Diluted earnings per share (Rs)*         35.8        
P/E (x)         20.9        
(*trailing twelve month earnings)

What has driven performance in FY09?
  • The jewellery segment of Titan Industries continued to drive growth in topline that increased by 27% YoY in FY09. Titan Industries is a specialty retailer. The growth of the business is linked to consumer spending behavior that is primarily dictated by discretionary spending. In times of economic slowdown, discretionary spending is the first one to take a hit. Despite being in such a business which is vulnerable to economic cycles and spending behavior, the company continues to grow over 25% on account of its ability to understand changing consumer preferences and ability to accordingly streamline its products.

  • The jewellery segment grew by 36% YoY, while the watches segment reported a muted growth of 4% YoY. The performance of the watches segment continued to disappoint as there was heavy up-stocking of Sonata brand by the retail trade. As a result, the company was not able to go ahead with its schemes of bringing down the retail stock. This move impacted the sales. The management’s decision to streamline the pipeline is based from a long term standpoint as the same leads to greater efficiency. The ‘other’ business segment that includes new initiatives such as eyewear business, precision engineering and licensed products and accessories reported an impressive 49% YoY growth in FY09.

    Segmental break-up…
      Standalone Consolidated
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change FY08 FY09 Change
    Revenues - Time products 2,671 2,400 -10.1% 8,770 9,085 3.6% 8,817 9,109 3.3%
    PBIT margin 22.5% 19.1%   15.4% 15.2%   15.5% 15.3%  
    Revenues - Jewellery 5,301 6,066 14.4% 20,268 27,632 36.3% 20,268 27,632 36.3%
    PBIT margin 5.1% 1.8%   5.4% 5.9%   5.4% 5.9%  
    Other businesses* 257 355 38.0% 916 1,363 48.8% 916 1,363 48.8%
    PBIT margin -31.6% -28.4%   -15.7% -17.7%   -15.7% -17.7%  
    (*includes precision engineering, licensed products and accessories)

  • The operating profits grew at a slower pace of 18% YoY in FY09 as costs continued to grow at a faster pace as compared to the topline. As a percentage of sales, the company was able to restrict expansion in all the cost heads except raw materials. While the company has not divulged details, raw material costs could have been higher on account of expansion plans necessitating increased inventory on the books. In this Silver Jubilee year, the company witnessed largest expansion in its retail network adding 135 new stores across business segments.

  • At the PBT level, the company reported 14% YoY growth, while growth in net profits stood at 5.8% YoY. Higher tax outgo apart from rising depreciation and interest costs continue to exert pressure on the bottomline. The company’s decision to exit US markets has resulted in a charge of Rs 290 m to the profit and loss account. All of this restricted growth in the bottomline.

What to expect?
The company’s new initiatives (prescription eyewear and precision engineering) initiated with a view to sweat assets and sustain profitability are expected to improve shareholder returns in the future. While these two segments are not expected to contribute significantly to the topline in the coming two to three years, it will help the company sustain profitability going forward.

Having said that, the volatility in gold prices, if they were to continue in the future as well, might increase risks on the sustainability of jewellery business’ margins going forward. However, since gold prices in jewellery business are pass-through in nature, there is no real concern in case these were to rise gradually in the future. As for the risks, the management has indicated that a prolonged economic slowdown is what can impact its growth in the future.

At the current price of Rs 748, the stock is trading at a multiple of 10.4 times our estimated FY11 earnings. The company’s sales in FY09 have grown in line with our expectations but at the net level the performance has come in much lower than our expectations. Overall, we maintain our view on the stock from a 2 to 3 years perspective and shall soon update our research report on the company.

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