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Titan: Mixed quarter, robust year

May 23, 2007

Performance summary
Titan Industries reported mixed results for the fourth quarter and full year ended March 2007. For 4QFY07, while the topline grew by 40% YoY led by both its divisions namely time products and jewellery, operating margins contracted by 100 basis points. Further, reduction in other income, higher depreciation charges and more importantly, the impact of the extraordinary items have led to the 18% YoY decline in the bottomline during the quarter. For the full year, however, both the topline and the bottomline recorded strong growth rates at 44% YoY and 30% YoY respectively.

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 4,342 6,058 39.5% 14,814 21,365 44.2%
Expenditure 3,804 5,365 41.0% 13,274 19,380 46.0%
Operating profit (EBDITA) 537 693 29.0% 1,540 1,984 28.9%
EBDITA margin (%) 12.4% 11.4%   10.4% 9.3%  
Other income 10 4 -57.7% 24 32 32.5%
Interest 58 66 13.5% 248 204 -17.8%
Depreciation & amortisation 52 72 38.8% 197 256 30.2%
Profit before tax 438 560 27.9% 1,119 1,557 39.1%
Extraordinary expenses (48) (172) 260.6% (250) (240) -4.0%
Tax 19 85 352.4% 123 373 202.7%
Profit after tax 371 303 -18.3% 746 943 26.5%
Net profit margin (%) 8.6% 5.0%   5.0% 4.4%  
No. of shares (m)*       42 44  
Diluted earnings per share (Rs)**         21.4  
P/E (x)         52.3  
(*post rights issue capital base, **trailing twelve month earnings)

What is the company's business?
Titan is the market leader in the organised watch (37% of FY07 sales) and jewellery (60% of FY07 sales) segments. Watches account for 73% of overall PBIT with the rest being accounted for by the jewellery division. The company also has a presence in the precision engineering segment where it plans to leverage on its engineering expertise (revenues are a part of the watches division). After expanding rapidly in the international markets, Titan has scaled down its presence there and is now focusing on building the export business in a gradual manner (particularly in the Middle East).

What has driven performance in 4QFY07?
Growth across segments drive topline: Typically, the second half of the fiscal year is the peak season for Titan (for both the watches and jewellery divisions). As seen in the table, in 4QFY07 and FY07 respectively, the net sales growth of 40% and 44% YoY respectively was achieved mainly on account of growth across its offerings. As far as the jewellery division is concerned, growth has not been an issue ever since Titan started this initiative. From around 14% of sales in FY98, the jewellery division has indeed come a long way (60% of sales in FY07). In the watches segment, over the next two to three years, growth is expected to be a factor of penetration in the rural markets and higher contribution from premium products. All brands of the company have done well and new introductions in both watches and jewellery, viz. Aviator (watches), Raga (collection for ladies) and the Zoya line (Tanishq jewellery) have had very good response and this augurs well for the company’s future growth prospects.

Segmental break-up…
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Revenues - Time products 1,953 2,478 26.9% 6,548 7,838 19.7%
PBIT margin 17.9% 18.7%   15.9% 13.7%  
Revenues - Jewellery 2,285 3,403 48.9% 7,913 12,920 63.3%
PBIT margin 8.0% 5.3%   5.9% 6.6%  
Other businesses* 109 181 66.4% 370 627 69.4%
PBIT margin -25.1% -20.2%   -18.5% -17.9%  
(*includes precision engineering, licensed products and accessories)

Margins remain under pressure: Over the last one year the company has been investing in two-three new businesses namely the mass-market jewellery business (GoldPlus), the precision engineering business and a wholly new business viz., prescription eyewear, which have impacted the margins of the company. The times products division has witnessed an expansion in PBIT margins in 4QFY07, while the jewellery division has witnessed a sharp fall in the same. The other businesses continue to report losses. However, the loss at the PBIT level for the other businesses is lower in 4QFY07, which is an encouraging sign.

Cost break-up
( % of sales) 4QFY06 4QFY07 FY06 FY07
Raw materials consumed 63.7% 64.4% 61.4% 64.3%
Excise duty 2.6% 1.5% 2.8% 2.2%
Staff cost 6.8% 7.7% 8.0% 7.8%
Advertising 5.0% 4.6% 6.8% 6.3%
Other expenses 9.6% 10.3% 10.6% 10.1%

Further, the company entered into a three-year wage settlement agreement consequently resulting in higher staff costs during the quarter. Besides this, raw material costs (as percentage of sales) were higher during 4QFY07 owing to firm gold prices. All these factors led to the 100 basis points (1%) contraction in operating margins.

The extraordinary impact: The 18% YoY decline in the bottomline during the quarter was largely to the impact of the extraordinary items, which included write off of design rights, interest cost adjustment and valuation adjustments of overseas subsidiaries. Excluding this, the bottomline has registered a 14% YoY growth. Besides this, a reduction in other income and higher depreciation charges also played a part in denting the profitability.

What to expect?
At Rs 1,118, the stock is trading at a price to earnings multiple of 52 times its trailing 12-month earnings, which is expensive. Going forward, the jewellery and the precision engineering division are expected to be the key growth drivers. The fact that Titan has a very successful track record of building new ranges of products, both in the watches as well as in the jewellery segments is expected to augur well for the company in the future. Having said that, while we like the company and its business model, in our view, valuations appear rich at the current levels.

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