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Titan: Not many surprises - Views on News from Equitymaster
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Titan: Not many surprises
Jun 6, 2006

Performance summary
Titan announced its full year results yesterday. While the topline for FY06 was higher by 31% YoY, net profit grew by 53% YoY (excluding the effect of extraordinary expenses). As has been the case in the last five years, growth at the topline level was led by the jewellery division, which continues to show impressive growth. This is not to say that the watch division of the company is not the focus area, but just that there has been a fundamental shift in gold purchases in India. Except for the provision for advances towards some of its overseas operations, the performance of Titan is very much in line with our estimates.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 3,179 4,230 33.1% 10,967 14,402 31.3%
Expenditure 2,557 3,668 43.5% 9,674 12,761 31.9%
Operating profit (EBDITA) 623 562 -9.7% 1,293 1,641 26.8%
EBDITA margin (%) 19.6% 13.3%   11.8% 11.4%  
Other income 9 10 14.1% 27 24 -11.0%
Interest 75 58 -22.3% 309 248 -19.7%
Depreciation & amortisation 58 52 -11.5% 225 197 -12.6%
Profit before tax 498 463 -7.2% 787 1,220 55.1%
Extraordinary expense (268) (73) -72.7% (463) (351) -24.2%
Tax 84 18 -78.6% 74 133 -
Profit after tax 147 372 152.7% 250 736 195.1%
Net profit margin (%) 4.6% 8.8%   2.3% 5.1%  
No. of shares (m)*       42.3 44.4  
Diluted earnings per share (Rs)         16.6  
P/E (x)         37.8  
(*post rights issue capital base)            

What is the company's business?
Titan is the market leader in the organised watch (46% of FY06 sales) and jewellery (54% of FY06 sales) segments. Watches account for 73% of overall PBIT with the rest being accounted for by the jewellery division. The company also has 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 FY06?
Time products - Mixed show: While the time products division witnessed a 15% YoY growth in topline, in our view, much of it was led by the precision engineering initiative. We estimate the turnover of the new initiative in FY06 at around Rs 200 m (Rs 62 m in FY05). 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. As far as the jewellery division is concerned, growth has not been a issue ever since Titan started this initiative. The shift from unorganised to organised retailing has been a reality and we expect this trend to sustain, albeit at a steady pace. In our view, the jewellery division will continue to remain the growth driver for Titan over the long term.

Segmental break-up…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Revenues - Time products 1,993 1,953 -2.1% 5,702 6,548 14.8%
PBIT margin 24.1% 17.9%   14.9% 15.9%  
Revenues - Jewellery 1,213 2,285 88.4% 5,350 7,913 47.9%
PBIT margin 7.4% 8.0%   4.8% 5.9%  
Overall EBIT margin 17.3% 11.9%   9.5% 9.9%  

Margins - Mixed bag: As compared to our estimates, the company's performance at the PBIT level was slightly lower, largely on account of wider losses in the 'Others' division. That said, the PBIT margins of the core operations, i.e., time products and jewellery were higher. We expect margin expansion in the time products division to continue on the back of faster growth in precision engineering revenues over the next three years (high margin business).

Amortisation effect: While operating profits grew by 27% YoY, despite the fall in other income in FY06, PBT grew by more than 50% YoY on the back of lower interest costs. Like it has been the case, Titan has aggressively reduced its working capital by leveraging technology, which in turn has enabled the company to repay debt. The company incurred amortisation charges to the tune of Rs 28 m in FY05 towards the one-time consultancy payments for long-term strategic initiatives, which was non-existent in FY06. Excluding the same, depreciation charges have increased marginally by around 1%. We had factored in a write-off of Rs 50 m towards VRS-related expenses against which the actual provision was Rs 101 m. Also, the company made additional provisions to the tune of Rs 202 m in respect of certain advances towards its subsidiary companies. Excluding the same, our net profit estimate was 7% higher than the actual performance.

Over the last few quarters: When one analyses Titan, it is pertinent to note that the second half is typically the main revenue contributor (80% of FY06 revenues), which could be attributed to the last six months coinciding with the festive season. The volatility in segmental margins therefore, highlights the same. To give a comparative stand, we have presented the PBIT margins in the fourth quarter over the last four years. Though there has been a decline in 4QFY06 as compared to 4QFY05, we are not unduly concerned about the same.

What to expect?
At Rs 627, the stock is trading at a price to earnings multiple of 15.8 times our estimated FY08 earnings. We have been fairly aggressive as far as the company's topline and profitability are concerned over the next two years. However, there could be some surprises as far as the precision engineering division is concerned and to that extent, there exists an upside to our estimates. We had recommended a Sell on the stock at Rs 791. The price has fallen almost 21% since our recommendation and, as such, we currently have a HOLD view on the stock.

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