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Titan: Worth the risk? - Views on News from Equitymaster
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Titan: Worth the risk?
Jun 13, 2005

Performance Summary
Titan announced its results last week. On the back of encouraging sales from the new products and robust growth in jewellery sales, net sales increased by 21% YoY in FY05. Though operating margins were lower on a YoY basis, lower interest and amortisation charges have boosted profit before tax by 73%. As we had mentioned earlier, the company is well on its path to a turnaround.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 2,700 3,124 15.7% 8,949 10,800 20.7%
Expenditure 2,214 2,527 14.1% 7,949 9,619 21.0%
Operating profit (EBDITA) 487 597 22.8% 1,000 1,181 18.1%
EBDITA margin (%) 18.0% 19.1%   11.2% 10.9%  
Other income 7 9 28.8% 21 27 30.6%
Interest 73 75 1.8% 376 309 -17.8%
Depreciation & amortisation 59 58 -0.7% 254 225 -11.5%
Profit before tax 361 473 30.9% 390 674 72.6%
Extraordinary income/(expense) (250) (242) -3.1% (250) (350) 40.0%
Tax 13 80 508.4% 25 50 98.8%
Profit after tax/(loss) 98 151 53.9% 115 274 137.6%
Net profit margin (%) 3.6% 4.8%   1.3% 2.5%  
No. of shares (m) 42.3 42.3   42.3 42.3  
Diluted earnings per share (Rs)       2.7 6.5  
Price to earnings ratio (x)         53.6  

What is the company's business?
Titan is the market leader in the organised watch (53% of FY05 sales) and jewellery (47% of FY05 sales) segments. Watches account for 76% of overall PBIT with the rest being accounted 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 and is focusing on building the export business in a gradual manner.

What has driven performance in FY05?
Jewellery leads growth: Titan has an estimated market share of 20% in watches and if one considers the organised players alone, the market share stands at over 50%. The company dominates the lower-end and the mid-upper segment of the watch market that accounts for over 75% of overall watch sales in the industry. The topline growth in FY05 at 13% is commendable (though it also includes revenues from precision engineering and other accessories), considering the fact that the mid-upper segment of the watch market is growing at around 7% per annum. Our topline growth estimates for the watches division was higher by 4%. As far as the jewellery segment is concerned, the fact that the organised jewellery sales accounts for only 2% of the total segment (Titan being the market leader), indicates the growth potential. This is the key reason behind the 26% growth in sales in FY05. As is evident from the graph above, there has been a drastic shift in revenue mix over the last five years and we expect the trend to continue in the next five years as well.

Segmental break-upů
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Revenues - Time products 1,842 2,108 14.5% 5,345 6,016 12.6%
PBIT margin 21.9% 22.1%   10.4% 13.2%  
Revenues - jewellery 1,040 1,213 16.6% 4,257 5,350 25.7%
PBIT margin 2.9% 7.4%   4.8% 4.8%  
Overall EBIT margin 15.1% 16.7%   7.9% 9.2%  

Margins are seasonally influenced: As is evident from the trend in PBIT margins of the watches and the jewellery division since 2QFY03, there is volatility. But this is on account of the seasonal nature of sales (second half generally is the key season). This is substantiated by the fact that 35% of the total revenues in FY05 for the time products division was accounted by the fourth quarter. But if one were to consider the fourth quarter performance over the last three years, the trend is clear. Our PBIT margin estimated for FY05 was 8.2% as against which the company has reported 9.2% primarily on account higher profitability of the time products division. In time products, we believe that the key profit driver in FY05 was the precision engineering initiative.

Squeeze on working capital: Since FY98, Titan has been reducing its working capital (net working capital to sales in FY04 was 37% as against 77% in FY98) and we expect this to have continued in FY05 as well. Though the magnitude of reduction is likely to be lower, the cash unlocked from the same has enabled Titan to retire its debt and consequently, lower interest charges. The actual growth in net profit, excluding extraordinary expenses in both the fiscal years, is 70%. At the PBT level, our estimates were lower by 11% as compared to the reported numbers, which is because of reasons mentioned earlier i.e. better margins of the time products division.

What to expect?
The stock currently trades at Rs 347, implying a price to earnings multiple of 24.3 times our estimated FY06 net profit and market capitalisation to sales ratio of 1.2 times (based on FY06 sales). Post the FY05 results, we have to re-look at our margins estimated for FY06, where we believe there will be an upgrade.

We had recommended the stock in January 2005 at Rs 173 with a target price of Rs 250 with a two year perspective. Though we expect the company to post robust growth in net profit over the next three years, the fact is that the valuations are on the higher end of the spectrum.

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