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Titan: Back to the future!

May 18, 2005

One stock from the mid-cap category that has garnered much attention in the past year is <>Titan, India's largest watchmaker. Notably, the stock has gained over 207% in the past 12 months! In this write-up, we take a look at the company's past performance and chart our reasons for its superlative performance on the bourses. Titan, with a share of over 50% of the domestic organised watch market, earns around 49% of its revenues from the segment. Its brands include 'Titan' catering to the premier segment and 'Sonata', which is a mass- market brand. The company diversified into related areas of organised branded jewelry that now accounts for 51% of sales. It set the stage for organised jewellery retailing in the country through its well-carved niche brand 'Tanishq'. Globally, the company operates through its three subsidiaries catering to the European, Middle East and South Asian countries. However, it has recently scaled down its distribution in Europe.

How the numbers stack up…
(Rs m) FY01 FY02 Change FY03 Change FY04 Change 9mFY05
Net sales 6,388 6,660 4.3% 7,374 10.7% 8,949 21.4% 7,676
Expenditure 5,561 5,805 4.4% 6,755 16.4% 7,989 18.3% 7,093
Operating profit (EBDITA) 827 855 3.4% 619 -27.6% 960 55.1% 583
EBDITA margin (%) 12.9% 12.8% 8.4% 10.7% 7.6%
Other income 20 22 10.0% 104 372.7% 21 -79.8% 19
Interest outgo/(inflow) 478 463 -3.1% 413 -10.8% 376 -9.0% 235
Depreciation 209 233 11.5% 211 -9.4% 215 1.9% 167
Profit before tax 160 181 13.1% 99 -45.3% 390 293.9% 200
Extraordinary items-gain/(loss) 97 - -   (250)   (127)
Tax 21 50 138.1% 19 -62.0% 26 36.8% (30)
Profit after tax/(loss) 236 131 -44.5% 80 -38.9% 114 42.5% 103
Net profit margin (%) 3.7% 2.0%   1.1%   1.3%   1.3%
No. of shares (m) 42.3 42.3   42.3   42.3   42.3
Diluted earnings per share (Rs)* 5.6 3.1   1.9   2.7   3.2
Price to earnings ratio (x)               87.8
(* annualised)                

Performance over the years

In FY02, Titan faced a tough business environment due to depressed market conditions and increased competition. However, it managed to register a 4% YoY growth in its topline, chiefly aided by the jewellery division, which clocked a 29% YoY growth in revenues. Innovative schemes aimed at attracting customers to the brand 'Tanishq' and the launch of new jewellery collections boosted jewellery revenues. The revenues of the time products division fell by 7%, which was attributed to the global downturn and increased competition. Overall, bottomline declined by 45% YoY due to the non-recurrence of extraordinary income received by the company in the previous fiscal and higher taxes. If one were to exclude the extraordinary income, net profit actually declined by 6% YoY.

Segmental breakup
FY02 FY03 Change FY04 Change
Revenues-Time products 4,571 4,529 -0.9% 4,696 3.7%
PBIT margins 10.9% 5.9% 11.6%
Revenues- Jewellery 2,677 3,450 28.9% 4,253 23.3%
PBIT margins 4.7% 3.9% 4.7%

FY03 saw the time products division facing difficulties yet again. Despite a decent 13% YoY growth in revenues in 9mFY03, labour issues at Hosur (Karnataka) resulting in the declaration of a partial lockout in the last quarter of the year, tainted the overall picture of this division. For the full year, the division's revenues declined albeit marginally by 1% YoY. Overall, the company recorded a 11% YoY growth in the topline mainly fuelled by the jewellery division, revenues from which jumped by 29% YoY. Continuing with its slew of initiatives, the company launched two new branded collections of fine jewellery and designed ideas to draw new customers to the 'Tanishq' stores (6 new stores were added during the year). On an overall basis, operating profits fell by 28% YoY on the back of 16% YoY rise in expenses, the impact of which was also reflected in the bottomline (fell 39% YoY).

In FY04, the time products division recorded a 4% YoY rise in revenues driven by key launches, which were well received by the market. The jewellery division posted a 23% YoY growth in its revenues once again on a slew of aggressive marketing and consumer acquisition efforts. During the year, nine 'Tanishq' stores were added to the network, taking the total number to 67 stores in 52 towns. Overall, the topline grew 21% YoY largely driven by the jewellery business, which was reflected in the bottomline (rose by 43% YoY).

As indicated above, the jewellery business has been the key growth driver over the years for Titan. We further believe that it will continue to contribute a significant share to the topline as 'Tanishq' enjoys undisputed leadership in the branded jewellery segment. Keeping in mind the sluggish growth witnessed by watch majors globally over the years and its seasonal nature, the performance of the time products division has been pretty decent as evidenced by the PBIT margins, which significantly improved by 570 basis points in FY04, to 11.6%.

What to expect?

The stock currently trades at Rs 285, implying a price to earnings multiple of 39.3 times annualised 9mFY05 earnings (excluding the effect of an extraordinary expense of Rs 127 m towards VRS). Going forward, Titan will continue to face stiff competition in both its divisions. The time products division will continue to be challenged by the unorganised sector. Also the bulk of the market is polarized towards the lower end, wherein the consumer price is below Rs 1,000. Hence, the performance of the Sonata brand is going to play a crucial role in the future. The company's premium brand – Titan – faces competition from international players who are focussing only on the uppermost niche market. Also, demand for gold jewellery will be subject to volatility in gold prices. However, a balanced product mix of gold and studded jewellery will enable the company to sustain its topline. Increased retail initiatives and marketing efforts in both the divisions will provide an impetus for further growth going forward.

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