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Titan: On route to pare debt
May 13, 2014

Titan Company Ltd declared its results for the fourth quarter and full year FY14. The company reported 7.3% YoY growth in sales, while net profit increased by 11.6% YoY during 4QFY14. Here is our analysis of the results.

Performance summary
  • Net sales for the company increased by just 7.3% YoY during 4QFY14.
  • EBITDA margin for 4QFY14 increased by 0.4% YoY to 10.6%
  • Interest expense for the quarter increased by 60% YoY as the company resorted to borrowing to fund gold procurement.
  • Profit after tax for the company was up by 11.6% for the quarter.
  • For FY14, Titan's performance has been subdued. The sales increased by 7.9% YoY and operating profit increased by 3.7% YoY. Net profit for the full year increased by just 2.2% YoY.

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Total income 26,132 28,034 7.3% 101,127 109,158 7.9%
Expenditure 23,467 25,068 6.8% 91,020 98,674 8.4%
Operating profit (EBDITA) 2,665 2,966 11.3% 10,106 10,484 3.7%
Operating profit margin (%) 10.2% 10.6%   10.0% 9.6%  
Other income 295.1 255 -13.6% 1,008 1,202 19.2%
Interest 142.1 227.4 60.0% 506 871.1 72.2%
Depreciation 149.5 204.3 36.7% 545 655.9 20.3%
Profit before tax 2,669 2,789 4.5% 10,063 10,159 1.0%
Tax 819 724.7 -11.5% 2,811 2,748 -2.2%
Profit after tax/(loss) 1,850 2,064 11.6% 7,252 7,411 2.2%
Net profit margin (%) 7.1% 7.4%   7.2% 6.8%  
No. of shares (m)#         887.8  
Diluted earnings per share (Rs)         8.3  
P/E ratio (x) *         33.2  
*Based on trailing 12 month earnings

What has driven performance in 4QFY14 and FY14?
  • The growth in sales was aided by good performance of 'Watches' and 'Others' segments.

  • Revenues of 'Watches' segment grew 19.5% YoY led by 11% volume growth. The recovery in 'Watches' segment was on account of several initiatives by the company like distributor consolidation, promotions and portfolio expansion.

  • Others segment grew by 13.5% YoY owing to good growth in eyewear and accessories. Eyewear reported 17% YoY sales growth.

  • Jewellery growth at 3% YoY remained disappointing during the fourth quarter as well. The customer growth stood at 3%; while grammage growth declined by 2%.

  • Segment wise, EBIT margin in Watches division improved to 12.0% as against 10.9% in 4QFY14. EBIT margin for Others segment too improved from 0.9% in 4QFY13 to 2.1% in 4QFY14. Jewellery margin declined to 10.6% from 11.9% in the last corresponding quarter. This was despite increase in sales of high margin studded jewellery. The profits declined due to expenses incurred for promoting diamond jewellery.

  • Due to the ban on gold-on-lease scheme the company resorted to additional working capital debt on its books. At the end of 4QFY14, the company had Rs 8.8 bn of debt on its books.

    Segment wise performance
      4QFY13 4QFY14 Change FY13 FY14 Change
    Watches
    Revenue (Rs m) 4,199 5,018 19.5% 16,759 17,908 6.9%
    % of total revenues 15.9% 17.9%   16.40% 16.4%  
    EBIT margin 10.9% 12.0%   12.0% 10.5%  
    Jewellery
    Revenue (Rs m) 20,933 21,573 3.1% 81,080 86,320 6.5%
    % of total revenues 79.20% 76.9%   79.50% 79.0%  
    EBIT margin 11.9% 10.6%   11.0% 9.9%  
    Others
    Revenue (Rs m) 1,288 1,462 13.5% 4,140 4,998 20.7%
    % of total revenues 4.90% 5.2%   4.10% 4.6%  
    EBIT margin 0.9% 2.1%   -0.8% 0.8%  
    Total revenues 26,420 28,053   101,979 109,226  
What to expect?
Titan's overall performance for FY14 has been lower than our expectations as far as sales and operating profit are concerned. However, net profit growth although flat as compared to last year has been better than our expectations mainly on account of lower interest cost. This proves that the company has been able to manage its gold supplies without straining its balance sheet much. Also, the company has secured approval for international hedging and will start the new hedging scheme very soon. The company believes that this hedging mechanism will be similar to Gold-on-Lease scheme and therefore will have a similar impact on profits.

At the current price of Rs 285, the stock is trading at 24 times our estimated FY16 earnings. The new gold procurement technique through hedging may ally the concerns of high interest cost to a certain extent; there by leading to improvement in profits and reduction of debt on books in the next fiscal. Therefore, our FY17 estimates for the stock will factor in the changes to our estimates. However; as of now, we reiterate the view that investors should Buy the stock only at Rs 175 or lower.

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