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Titan: Multiplying profitability - Views on News from Equitymaster
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Titan: Multiplying profitability
Jul 28, 2007

Performance summary
  • Topline grows 49% YoY in 1QFY08, led by overall segmental growth.

  • Operating margins expanded by 190 basis points on account of expenses growing at slower pace compared to topline.

  • Bottomline outpaced topline growth on the back of improved EBITDA margins, lower finance charges and on account of nil extraordinary expenses.

Financial performance snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 4,410 6,575 49.1%
Expenditure 4,245 6,206 46.2%
Operating profit (EBDITA) 165 369 123.2%
EBDITA margin (%) 3.7% 5.6%  
Other income 14 5 -62.4%
Interest 49 48 -1.6%
Depreciation & amortisation 49 72 47.1%
Profit before tax 81 254 211.9%
Extraordinary expenses 29 - -100.0%
Tax 12 127 987.2%
Profit after tax 41 126 209.0%
Net profit margin (%) 0.9% 1.9%  
No. of shares (m) 44 44  
Diluted earnings per share (Rs)*   23.1  
P/E (x)   48.8  
*trailing twelve month earnings

What is the company's business?
Titan is the market leader in the organised watch (37% of FY07 sales) and jewellery (60% of FY07 sales) segments. Watches account for 73% of overall PBIT with the rest being accounted for by the jewellery division. The company also has a 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 1QFY08?
Growth everywhere: Despite the fact that the first quarter of the fiscal year is a lean season, in terms of demand for jewellery and watches (demand tends to be higher in the second half of the fiscal year owing to festivals), all the key divisions of the company have registered impressive growth numbers and which has helped topline to register growth of 49% YoY. The expansion of the retail outlets continues to fuel the growth of the jewellery division (from 87 boutiques in 64 cities, 'Tanishq' is expected to touch the 100 mark by 2008), which reported significant revenue growth of 64% YoY. While the time products division witnessed a 15% YoY growth in topline, other products segment that includes precision engineering, machine building and clocks reported robust 71% YoY growth. 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. The company is planning to utilise the distribution network of the Tata group companies such as Tata Chemicals and Tata Steel, which have extensive reach in rural areas. Moreover, precision engineering segment that caters to the component, component assembly and automation requirements of the automotive and aerospace industries holds significant growth potential over the next two to three years on account of booming end user sectors.

Segmental break-up…
(Rs m) 1QFY07 1QFY08 Change
Revenues - Time products 1,487 1,709 15.0%
PBIT margin 8.7% 6.4%  
Revenues - Jewellery 2,883 4,729 64.0%
PBIT margin 19.4% 5.2%  
Other businesses* 136 232 71.4%
PBIT margin -22.6% -11.7%  
*includes precision engineering, licensed products and accessories

Profitability improves: Despite first quarter being a lean season, EBITDA margins expanded by almost 190 basis points (1.9%) on account of expenses growing at slower pace compared to topline. Though the company has been able to reduce its advertisement expenditure (as a percentage of sales), employee costs continue to exert pressure on margins.

While the during the quarter EBITDA margins have expanded, segmental PBIT has fared poorly (as is evident from the table above). In the past few quarter’s margins took a hit as the company has been investing in two-three new businesses, which have impacted the margins of the company. As far as the time products division is concerned, there has been a sharp fall. While the exact reason is not known, part of the decline in margins could be attributed to higher selling and promotional expenses (in light of new launches like Tiatn eye+ eyewear). The same is the case with other divisions. Recently the company has also forayed into the mass-market jewellery business (GoldPlus). However, the loss at the PBIT level for the other businesses is lower compared to previous few quarters, which is an encouraging sign.

Cost break-up
(% of sales) 1QFY07 1QFY08
Increase / Decrease in stokc in trade -11.5% 0.0%
Raw materials consumed 69.8% 68.9%
Purchase of finished goods 8.7% 4.9%
Staff cost 8.7% 7.3%
Advertising 9.1% 5.2%
Other expenses 11.5% 8.1%
Total expeneses 96.3% 94.4%

Provisions no more to impact net margins: The company’s net profits tripled during the quarter on the back of improved operating margins, lower finance charges and nil extraordinary expenses.

Titan has finally exited the European markets after suffering losses of almost Rs 1.1 bn. The company had provided for these losses since FY03 and made the final provision during FY07. During the same quarter last year the extraordinary expense incurred by the company includes provisioning for losses that has impacted net margins. Even if one excludes the extraordinary impact, net margins have expanded marginally by 30 basis points (0.3%). This may be on account of company’s continued efforts to bring down the operating costs (the company has been reducing its working capital, net working capital to sales has reduced from 37% in FY04 to almost 13% in FY07) and on account of reduced interest outgo costs.

What to expect?
At Rs 1,130, the stock is trading at a price to earnings multiple of 49 times its trailing 12-month earnings. While we are enthused by the company’s diversified business model, in our view, the current valuations are reasonably steep. We shall soon update our research report on the company.

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