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Titan: Recuperating steadily

Jul 27, 2004

Introduction to results
The 1QFY05 performance of Titan Industries indicates that the much-expected turnaround in beginning to take a concrete shape. Though operating margins are lower, at the PBIT level, margins are in the positive zone as compared to a loss in 1QFY04. The results are in line with our FY05 estimates.

(Rs m) 1QFY04 1QFY05 Change
Net sales 1,347 2,003 48.8%
Other income 6 5 -5.4%
Expenditure 1,310 1,955 49.2%
Operating profit (EBDITA) 36 48 31.4%
Operating profit margin (%) 2.7% 2.4%  
Interest 102 77 -24.3%
Depreciation 65 55 -14.6%
Profit before tax (125) (79) -36.3%
Extraordinary items - - -
Tax (50) (22) -56.5%
Profit after tax/(loss) (75) (58) -23.0%
Net profit margin (%) -5.6% -2.9%  
No. of shares (m) 42.3 42.3  
Diluted earnings per share (Rs)* (7.1) (5.5)  
(* annualised)      

What is the company's business?
Titan is the country's market leader in the organised watch (56% of FY04 sales) and jewellery (44% of FY04 sales) segments. Watches account for 73% of overall PBIT while 27% is accounted by the jewellery 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 1QFY05?
Sales: Looking at the segmental performance table, much of the topline growth has accrued on account of the jewellery division. At the same time, this performance has to be viewed in the context of a poor show in 1QFY04 due to the restructuring exercise. Usually, first quarter is a weak one for the company, as this period is off-season. Titan has ventured into the eye-ware segment and to that extent, the growth in topline from this quarter is likely to be on the higher side.

Segmental break-up
(Rs m) 1QFY04 1QFY05 Change
Revenues - watches 910 955 5.0%
PBIT margin -3.3% -0.4%  
Revenues - jewellery 561 1,141 103.6%
PBIT margin 0.6% 1.9%  
Overall EBIT margin -1.8% 0.9%  

EBIT margins: Though operating margins are lower by 30 basis points, what is impressive to note is that overall EBIT margins has turned positive as compared to a loss in 1QFY04. This is partially on account of lower amortisation charges (down 27% YoY). Though the first quarter is generally not representative of the full year performance, we have factored in a 50 basis points decline in the overall EBIT margins for FY05 in light of high competition in the watches segment. Considering the marketing cost incurred for the eye-ware segment, margins are likely to be depressed.

Net margin: Despite a 55% rise in VRS charges and lower deferred tax benefits, net loss is lower in 1QFY05. This has come about on account of a sharp fall in interest charges. Higher interest burden has been suppressing Titan's performance over the last few years and any reduction in the same is likely to improve margins at the net level at a faster rate.

Over the last few quarters: As is evident from the graph above first quarter tends to be a subdued one for the company. From a trend perspective, there is a visible improvement on a YoY basis in EBIT margins, which we expect to continue over the medium-term.

What to expect?
The stock is currently trading at Rs 116 implying a P/E multiple of 42.6x FY04 earnings. At the same time, the company is expected to benefit from the shift to organised watches and jewellery market over the long-term. The financial restructuring is likely to result in net margins outpacing EBIT margins in the future. Amidst such positives, volatility in earnings, low interest coverage and risks related to new business ventures like eye-ware increases the risk profile of the stock.

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Dec 1, 2021 02:19 PM