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Titan: Times are changing - Views on News from Equitymaster
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  • Jun 28, 2002

    Titan: Times are changing

    Titan Industries, which has a commanding market share in the organised watch and jewellery segments, has posted a lacklustre performance for the full year ended March 2002. While topline growth for the full year fails to enthuse, the company has benefited from the sharp spurt in gold prices in 4QFY02. This has resulted in robust turnover growth in the same period.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Net sales 1,913 2,582 35.0% 6,388 6,559 2.7%
    Other Income 10 6 -45.5% 19 22 17.9%
    Expenditure 1,642 2,237 36.2% 5,561 5,705 2.6%
    Operating Profit (EBDIT) 271 345 27.4% 827 855 3.3%
    Operating Profit Margin (%) 14.2% 13.4%   12.9% 13.0%  
    Interest 117 101 -13.6% 478 463 -3.2%
    Depreciation 51 69 34.8% 209 233 11.4%
    Profit before Tax 113 181 60.2% 159 182 14.2%
    Extraordinary items - -   97 -  
    Tax 9 55 483.0% 21 51 141.4%
    Profit after Tax/(Loss) 103 126 21.7% 235 131 -44.3%
    Net profit margin (%) 5.4% 4.9%   3.7% 2.0%  
    No. of Shares (m) 42.3 42.3   42.3 42.3  
    Diluted Earnings per share 9.8 11.9   5.6 3.1  
    P/E Ratio (x)         24.9  

    The company derives close to 70% of revenues from sale of watches and around 20% from its jewelery division. While volume growth of both the divisions has been impressive in the past few years but Titan has been facing a continuous fall in realisations. This is on account of competition from both cheaper imports and the unorganised segment. The company has posted a 2.7% rise in sales in FY02, which is lower than our estimates of 5.5%. But for a sharp rise in revenues of its jewellery division in 4QFY02, turnover growth for the full year would have been even lower. The company's press release states that the jewellery division has posted a net profit for FY02. While higher gold prices have had a favorable effect, the company has been steadily increasing its international presence over the years. It seems, that this strategy has slowly started contributing to higher revenue growth of the company, despite a challenging global environment. Other income has also increased notably for FY02, which is also in line with our estimates.

    Tightening the beltů
    (% of sales) FY98 FY99 FY00 FY01 FY02
    Raw material 40.8% 49.8% 55.2% 53.4% 60.7%
    Staff costs 12.1% 12.3% 12.7% 11.6% 11.6%
    Others 26.1% 17.7% 18.1% 17.6% 16.2%

    But operating margins have surprisingly increased in FY02. As mentioned above, there is considerable pricing pressure from imports. With the entry of international majors in the domestic market, more notably in the metros, Titan faces competition in the higher-end segment. Moreover, total raw material costs as a percentage of sales has been on the rise over the years for Titan, which has adversely affected margins. The graph below highlights this trend and FY02 was no exception. Though raw material costs, as a percentage of sales increased significantly from 53.4% in FY01 to 60.7% in FY02, the rise in margins in FY02 was primarily led by a 8.9% reduction in advertising expenses (34.5% of other expenses). We had estimated operating margins at around 9.4% as against which Titan has managed to increase margins slightly.

    The company has taken advantage of an lower interest rate regime (average interest rate in FY01 was at 11.5%) and consequently interest costs has also reduced. Though on the first look, net profits seem to have fallen drastically by 44.3% in FY02, after adjusting for the extraordinary item (i.e. profit from the sale of its stake in RDI Publishing in FY01 to the tune of Rs 97 m), net profits have actually declined by 5.1%.

    The stock currently trades at Rs 77 implying a P/E multiple of 24.9x FY02 earnings, which seem to be on the higher end of the spectrum. Going forward, the company would continue to benefit from higher gold prices. Besides, organised gold retailing is slowly gaining acceptance (atleast in the metros in India), which augurs well for Titan. But at the same time, its core business still faces pressure on prices as a result of which profit growth might be suppressed. We expect revenue growth of the company in FY03 to be in line with FY02 with a marginal fall in operating margins. Overall, it is a challenging environment for the retailing major.



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