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Titan Industries: What's ticking in? - Views on News from Equitymaster
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  • May 27, 2008

    Titan Industries: What's ticking in?

    In our previous articles we have looked at the different business segments of Titan Industries and the rationale behind the new initiatives. In this article, we take a look the company's past performance and how it has improved over a period of time.

    The company started its operations in 1984 and became one of the largest watch company in 1992 on account of its efforts to strengthen the brand, increase product range and focus on its ability to understand the consumer. The company forayed into the branded jewellery segment in 1992 and after struggling in international markets it marked entry into domestic markets in 1996. Further, in FY04 the company started curtailing its international unprofitable businesses and also writing off losses of European operations. The company did set up a precision engineering division (PED) in 2003 to sweat existing manufacturing facilities and reduce costs. All these moves worked in the company's favour.

    Revenue mix
    The jewellery segment that contributes over 60% to the total revenues has grown at a CAGR of over 35% during the FY02 and FY07 and this has led to the almost 26% compounded annual growth in net sales. Following the theory of product life cycle, watches division is a mature product and faces stiff competition from unorganised market. Thus, the 12% CAGR achieved during the same period is the result of well established brands, loyal customer base and ability to innovate the product features and styles. The other initiatives have reported 33% CAGR during FY02 to FY07. The new initiatives are being ramped up currently. To reduce its dependence on its core business and to leverage upon its existing facilities, the company has forayed into the precision engineering business. It has also recently forayed into the prescription eyewear business segment. Thus, going forward these new initiatives are expected to give a further fillip to the topline growth.

    Titan continued to sustain its growth momentum clocking 42% YoY growth in revenues on the back of 17% YoY growth in time products segment, 57% YoY growth in the jewellery segment and 53% YoY in other business in FY08.

  • Titan's FY08 result analysis

    What do numbers have to say?
    Titan Industries a speciality retailer operating in the luxury segment has is the only player in the retail industry, which has been able to generate ROIC of average 27% in the last three years. The reason behind this is its smart move to adopt the franchisee route rather than experimenting lease and buyout property to set up retail outlets. The model not only reduces its cost drastically but also in case of localised business like jewellery purchases, helps to build a customer network.

    Financial performance snapshot
    Particulars FY02 FY03 FY04 FY05 FY06 FY07 FY08
    EBITDA margin 12.8% 9.8% 10.7% 10.7% 11.4% 9.5% 8.2%
    Net margin 2.0% 0.8% 1.2% 2.3% 5.1% 4.5% 4.9%
    Current Ratio (x) 4.3 3.3 3.2 2.1 1.8 1.5 NA
    Total Debt/Equity (x) 2.8 4.0 3.1 2.1 1.2 0.8 NA
    RONW (%) 8.3% 5.3% 8.5% 16.3% 33.7% 29.1% NA
    ROA (%) 1.7% 0.8% 1.5% 3.3% 8.5% 8.0% NA
    ROIC(%) 8.3% 9.6% 14.7% 21.9% 31.1% 27.1% NA
    EPS (Rs) 3.1 1.5 2.6 5.9 17.4 21.2 33.9

    The company's operations fall under lifestyle segment where the purchases are not made on daily basis, i.e it is not a volume driven business. Thus, margin expansion on account of volumes will come in only with increased penetration across geographies and customer profiles. The company owing to its moves to continuously focus on introducing new brands, foraying into new related businesses and sweat its assets has resulted in margin expansion.

    Titan has finally exited the European markets after suffering losses of almost Rs 1.1 bn. The company had provided for these losses since FY03 and made the final provision during FY07. The same has exerted pressure on net margins in FY07. As expected margins improved in FY08, but marginally as volatility in the prices of yellow metal restricted expansion. Further the competition is also increasing in this segment.

    In the past one of the key factors weighing on Titan's profitability is that a larger portion of operating profit was channeled towards meeting interest obligations. However, with improved working capital, its move to exit non-profitable European operations and optimum utilisation of its assets has unlocked cash for new initiatives to expand business, which otherwise was utilised to service capital. The same is reflected by lower debt to equity ratio, improving working capital to sales ratio and improved return ratios.

  • Rationale for Titan's ventures into the businesses of prescription eyewear, precision engineering, and jewellery

    What to expect?
    Going forward, we expect the initiatives such as foray into prescription eyewear market, mass jewellery and precision engineering to drive the growth of the company. Our view is not only based on the fact that with these moves the company will be able to sweat its assets and reduce costs, expand reach and penetrate more but also owing to its first mover advantage.

    Having said that, volatility in raw material prices, intensifying competition coupled with huge expansion plans outlined by the company may continue to pressurise margins, till the new initiatives break-even. At Rs 1,184, the stock is trading at a price to earnings multiple of 35 times its trailing 12-month earnings. We shall soon update our research report on the company.



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