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Titan: Profitability under pressure

Jun 28, 2001

Titan Industries has registered a 22% growth in net profits on the back of a 12.5% growth in sales in FY01. However, both margins and realisations seems to have taken a big hit. The growth in profits is higher if one were to exclude the extraordinary income component from both the years (FY00 and FY01).

(Rs m)FY00FY01Change
Sales 5,678 6,388 12.5%
Other Income 26 19 -27.6%
Expenditure 4,881 5,561 13.9%
Operating Profit (EBDIT) 797 827 3.8%
Operating Profit Margin (%)14.0%12.9% 
Interest 509 478 -6.1%
Depreciation 204 209 2.5%
Profit before Tax 110 159 44.0%
Extraordinary income 104 97 -6.5%
Tax 22 21 -2.8%
Profit after Tax/(Loss) 193 235 22.0%
Net profit margin (%)3.4%3.7% 
No. of Shares (eoy) (m) 42.3 42.3  
Diluted number of shares 42.3 42.3  
Earnings per share (Rs) 4.6 5.6  

Though aggregate watch sales have gone up from 5.9 m units in FY00 to 6.6 m units in FY01, average realisation per watch, as per our internal estimates, has come down by at least 7% in FY01. The domestic manufacturers continue to suffer on account of increasing volume of cheaper imports apart from the significant presence of the unorganised segment.

Despite lower excise duty and raw material costs, operating margins have come down from 14.0% in FY00 to 12.9% in FY01. This could be attributed towards increasing pressure on realisation for all its division viz. watches, jewellery and clocks. Nevertheless, the company has managed to improve its margins significantly in 4QFY01 from 10.1% last year to 14.2%. This, when compared with the first nine months performance of the company (operating margins declined by 330 basis points), has certainly prevented the bottomline from taking a huge dip.

Other income for FY01 includes profits made to the extent Rs 97 m through sale of equity shares of RDI Printing & Publishing Ltd. in June 2000. Excluding this extraordinary income, net profits have actually come down by 28.3% in FY01. However, other income in FY00 include profits on sale of investments (divestment of the Timex division and sales of shares of Tata Industries) of Rs 103 m. If one were to exclude the extraordinary income from both the financial years, net profits have actually gone up by 55.3% in FY01. Lower interest and tax outflow have also enabled the company in posting better profitability in FY01. The results are in line with our projections except for lower sales growth. We had projected a net profit of Rs 221 m as against actual profits of Rs 235 m.

The scrip is currently trading at Rs 45 at a P/E multiple of 8.0x the FY01 earnings. We expect the company's margins to remain strained on account of continued pressure on realisations and higher raw material prices (notably gold). Though the company has embarked an aggressive export thrust to boost sales, it is still a minuscule player in the international markets.

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