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Titan: Jewellery suffers due to hike in gold prices - Views on News from Equitymaster
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  • Jul 31, 2012 - Titan: Jewellery suffers due to hike in gold prices

Titan: Jewellery suffers due to hike in gold prices
Jul 31, 2012

Titan Industries declared the results for the first quarter of financial year 2013 (1QFY13). The company reported 9.2% YoY growth in sales, while net profit has risen by 8.8% YoY for the quarter. Here is our analysis of the result.

Performance summary
  • Net sales grew by 9.2% YoY for the quarter. Slowdown was particularly visible in the high growth jewellery segment that grew by only 7.8% YoY during the quarter. Watches grew by 14.4% YoY and others including eye wear by 15.7% YoY.
  • Operating expenses were up by 9% YoY during the quarter. Slower growth in topline resulted in operating profits increasing in similar manner by 10.4% YoY. Operating margins were stable at 9.5%.
  • Interest charges which form a negligible part of total expenses were up by 44% YoY during the quarter.
  • Depreciation was up by 24.2% YoY during the June quarter.
  • A disappointing growth in topline resulted in lower profits for Titan. Even a lower rise in taxes could not help the company much which reported net profit growth of 8.8% YoY during the quarter. Net profit margins remained stable at 7% levels.

(Rs m) 1QFY12 1QFY13 Change
Net sales 20,206 22,058 9.2%
Expenditure 18,284 19,937 9.0%
Operating profit (EBDITA) 1,922 2,121 10.4%
EBDITA margin (%) 9.5% 9.6%  
Other income 232 250 7.7%
Interest 88 126 44.0%
Depreciation & amortisation 99 123 24.2%
Profit before tax 1,968 2,122 7.9%
Tax 533 561 5.4%
Profit after tax 1,435 1,561 8.8%
Net profit margin (%) 7.1% 7.1%  
No. of shares (m)     887.78
Diluted earnings per share (Rs)*     6.90
P/E (x)     32.32
(*trailing twelve month earnings)

What has driven performance in 1QFY13?
  • Titan's sales grew by 9.2% YoY during the quarter. Watches saw an increase of 14.4% YoY and others including eye wear of 15.7% YoY. But, jewellery segment that has maximum contribution to overall sales (around 80%) grew by only 7.8% YoY. The slower growth in jewellery is attributed to higher prices of gold and depreciation of rupee. Resultantly, gold prices in rupee terms were even higher hurting profits of the company.

  • Jewellery's contribution to overall sales dipped during the quarter from 80.7% in same quarter last year to 79.8% in quarter ended June 2012. Operating margins for jewellery business however remianed stable at 10% levels helped by higher proportion of studded jewellery at 25% of total sales from this segment.

  • Watches segment managed to grow by 14.4% YoY on the back of price hikes that came into effect recently. However, operating margins suffered slightly and were down to 14% from the earlier 15.2%.

  • Others (which includes precision enginnering, eye wear and other accessories) registered a growth of 15.7% YoY.

      1QFY12 1QFY13 Change
    Watches
    Revenue (Rs m) 3,154 3,607 14.4%
    % of total revenues 15.5% 16.2%  
    EBIT margin 15.2% 14.0%  
    Jewellery
    Revenue (Rs m) 16,471 17,755 7.8%
    % of total revenues 80.7% 79.8%  
    EBIT margin 10.1% 10.2%  
    Others
    Revenue (Rs m) 775 896 15.7%
    % of total revenues 3.8% 4.0%  
    EBIT margin -4.6% -1.8%  

  • Operating expenses were up by 9% YoY during the quarter. Slower growth in topline resulted in operating profits increasing in similar manner by 10.4% YoY. Titan was able to maintain the operating margins at 9.5% levels.

  • Interest charges which form a negligible part of total expenses were up by 44% YoY during the quarter. Depreciation was up by 24.2% YoY during the June quarter.

  • A disappointing growth in topline resulted in lower profits for Titan. Even a lower rise in taxes could not help the company much which reported net profit growth of 8.8% YoY during the quarter. Net profit margins remained stable at 7% levels.

What to expect?
Titan has been facing tough times in the recent past for a number of reasons. Economic slowdown has resulted in middle class opting to either defer or cancel the purchases of watches and jewellery which fall under discretionary items. Higher cost of imported gold as a result of falling rupee has affected sales volumes. Also, lesser number of working days and strike by jewelers impacted sales for the company. However, the company has been able to maintain its profit margins even in such tough situations.

Also, it has recently obtained an import license from the Government of India which permits it to import gold directly from abroad. This well help in eliminating payment of value added at tax thereby helping in margin expansion. But, it is not a permanent license. The company will have to renew this by seeking government approval every time it exhausts its quantity limit of imports set by the government. At the current price of Rs 223, the stock is trading at quite a high multiple of 19 times our estimated FY15 earnings. Keeping in mind the uncertainty of gold prices, slow consumption growth and the current valuations of the stock, we maintain our negative view on the stock.

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