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Titan: Profits jump on lower operating expen. - Views on News from Equitymaster

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Titan: Profits jump on lower operating expen.
May 2, 2012

Titan Industries declared the results for the fourth quarter of financial year 2012 (4QFY12). The company reported 28.3% YoY growth in sales, while net profit has risen by 72.2% YoY for the quarter. Here is our analysis of the result.

Performance Summary
  • Net sales grew by 28.3% YoY for the quarter and by 35.5% for the full year FY12.
  • Titan was able to control its expenses and thus its operating profit was up by 83.4% YoY during the fourth quarter. Operating margins increased by nearly 3% to 9.1% in 4QFY12.
  • Interest charges which form a negligible part of total expenses were up by 60.2% YoY during the quarter. In the previous few quarters, it had steadily declined.
  • Net Profits jumped by a whopping 72.2% during March quarter and by 39.4% during FY12.
  • The company has declared dividend of Rs 1.75 per share and which implies a dividend yield of 0.7%.

Financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 17,779 22,818 28.3% 65,216 88,393 35.5%
Expenditure 16,649 20,744 24.6% 59,090 80,054 35.5%
Operating profit (EBDITA) 1,131 2,074 83.4% 6,127 8,338 36.1%
EBDITA margin (%) 6.4% 9.1%   9.4% 9.4%  
Other income 240 252 5.0% 553 932 68.5%
Interest 82 131 60.2% 345 437 26.6%
Depreciation & amortisation 91 125 36.8% 345 449 30.2%
Profit before tax 1,198 2,070 72.8% 5,990 8,384 40.0%
Tax 360 627 74.4% 1,686 2,383 41.4%
Profit after tax 838 1,443 72.2% 4,304 6,002 39.4%
Net profit margin (%) 4.7% 6.3%   6.6% 6.8%  
No. of shares (m)         887.78  
Diluted earnings per share (Rs)*         6.8  
P/E (x)         35.5  
(*trailing twelve month earnings)

What has driven performance in 4QFY12?
  • Titan's sales were up by 28.3% YoY during the last quarter of FY12. This was largely led by 29.5% YoY growth in jewellery business. However, the watches business too performed well with 24.9% YoY growth. The other segment consisting of eyewear, precision engineering and accessories grew by 16.8% YoY.

  • The quarter saw improved consumer sentiments in jewellery buying. As a percentage of total revenues of Titan, jewellery's share is now 78.1%. Operating margins for jewellery business have been maintained at 10% levels.

  • Watches segment has shown considerable improvement in operating margins from 3.6% in quarter ended March 2011 to 12.9% in quarter ended March 2012. The same for others segment is still negative.

      4QFY11 4QFY12 Change FY11 FY12 Change
    Revenue (Rs m) 3,312 4,138 24.9% 12,720 15,298 20.3%
    % of total revenues 18.4% 17.9%   19.4% 17.1%  
    EBIT margin 3.6% 12.9%   15.1% 14.2%  
    Revenue (Rs m) 13,892 17,997 29.5% 50,548 70,642 39.8%
    % of total revenues 77.2% 78.1%   76.9% 79.2%  
    EBIT margin 10.2% 10.1%   9.6% 9.9%  
    Revenue (Rs m) 788 920 16.8% 2,439 3,288 34.8%
    % of total revenues 4.4% 4.0%   3.7% 3.7%  
    EBIT margin -12.6% -5.1%   -7.4% -1.4%  

  • Lower expenses resulted in operating profits jumping by 83.4% YoY during the quarter. The same was up by 36.1% YoY during the full year 2012.

  • Interest charges which form a negligible part of total expenses were up by 60.2% YoY during the quarter. In the previous few quarters, it had steadily declined. The management now includes leasing charges on gold as a part of finance costs. This may have resulted in spurt in this expense head.

  • Net Profits jumped by a whopping 72.2% during March quarter and by 39.4% during the entire fiscal 2011-12 (FY12). Net profit margins expanded by 1.6% during the quarter.

What to expect?
At the current price of Rs 240, the stock of Titan Industries is trading at a high multiple of 23 times our estimated FY14 earnings. As per the latest Union Budget, non branded jewellery will now be subject to excise duty. This could be positive for Titan Industries which is a branded player in the segment. However, there were a few announcements in the budget which could spell trouble for the company. Cash transactions above an amount of Rs 2 lakh will compulsorily require Pan card and will be subject to tax collected at source (TCS).

Having said that, Titan has charted out aggressive expansion plans for the future which may not be achievable in slowing economic scenario. We feel that while Titan will continue to grow its retail footprint, it may not be able to clock the same growth rates that it has in the past. Also, its margins could be impacted adversely on account of above mentioned challenges. We maintain our negative view on the stock.

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