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Titan: Bottomline exceeds topline growth
Jul 28, 2009

Performance summary
  • Titan Industries report muted 8.9% YoY growth in topline. The subdued growth in jewelry segment impacted overall performance. Jewelry segment that contributes over 70% to the topline reports 3.2% YoY growth.
  • Operating profits grow by 41.5% YoY.
  • The change in inventory valuation method has resulted in higher profits.
  • Growth at the operating level boils down to the bottomline. Net profits record 40.9% YoY growth during the quarter.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 8,105 8,829 8.9%
Expenditure 7,544 8,035 6.5%
Operating profit (EBITDA) 561 794 41.5%
EBITDA margin 6.9% 9.0%  
Other income 8 9 4.8%
Interest 46 76 66.8%
Depreciation 77 90 15.9%
Profit before tax/(loss) 447 637 42.7%
Extraordinary item - -  
Tax 120 177 47.5%
Profit after tax/(loss) 327 460 40.9%
Net margin 4.0% 5.2%  
No of shares (m) 44.4 44.4  
Diluted EPS (Rs)*   38.8  
P/E (times)   33.9  
*trailing twelve month earnings

What has driven performance in 1QFY10?
  • Titan Industries reported muted growth of 8.9% YoY in topline. The jewelry segment, which contributes over 70% to the topline reported 3.2% YoY growth against the backdrop of high gold prices. The subdued growth in jewelry segment impacted overall performance. The Times product segment reported 21.3% YoY growth in revenues, while other business segment that includes new initiatives such as eyewear business, precision engineering and licensed products and accessories reported impressive 67.6% YoY growth during the quarter.

  • As mentioned earlier, for the company, jewelry segment is the major revenue contributor. Jewelry segment sales are generally of high ticket size and purchases in this case are more linked to the consumer spending behavior that is primarily dictated by discretionary spending.

  • The growth of the company’s business is linked to discretionary spending by consumers. In times of economic slowdown, discretionary spending is the first one to take a hit. Despite being in such a business which is vulnerable to economic cycles and spending behavior, the company continues to grow on account of its ability to understand changing consumer preferences and ability to accordingly streamline its products.

  • The operating profits grew at a robust pace of 41.5% YoY as consumption of raw materials reported stable to marginal growth. Raw materials account for nearly 70% of total cost of operation. The company has changed its inventory valuation method to reflect accurate and appropriate presentation of the financial statements. This move has led to slower growth in cost of consumption of raw materials. As regards other cost heads, they have witnessed an increase, however, the company has not divulged details about it. The same could have been higher as the company is expanding its retail footprint . The company has opened 18 stores across all categories and brands taking the total retail space under the company’s control over 600,000 sq. ft.

  • The change in inventory valuation method has resulted in higher profit before taxes of Rs 300 m. Thus, the strong growth at the operating level has boiled down to the bottomline. Net profits recorded 40.9% YoY growth during the quarter.

What to expect?
The company’s new initiatives, (prescription eyewear and precision engineering) taken with a view to sweat assets and sustain profitability are expected to improve shareholder returns in the future. While these two segments are not expected to contribute significantly to the topline in the coming two to three years, it will help the company sustain profitability going forward.

Having said that, the volatility in gold prices, if they were to continue in the future as well, might increase risks on the sustainability of jewelry business’ margins going forward. However, since gold prices in jewelry business are pass-through in nature, there is no real concern in case these were to rise gradually in the future. As for the risks, the management has indicated that a prolonged economic slowdown is what can impact its growth in the future.

At the current price of Rs 1,317, the stock is trading at a multiple of 16.7 times our estimated FY12 earnings. Overall, we maintain our view on Titan from a 2 to 3 years perspective and shall soon update our research report on the company.

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