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Titan: Glittering show - Views on News from Equitymaster

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Titan: Glittering show
Aug 1, 2008

Performance summary
  • Topline grows by 23% YoY in 1QFY09, mainly led by growth in the jewellery segment.
  • Despite spiraling cost of operation, EBITDA margins expand by 1.3% YoY in 1QFY09. Increased focus towards premium brands and better working capital management has enabled the same.
  • Net profit grows by a whopping 155% YoY on the back of improved operating profitability and lower taxes.


Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 6,575 8,103 23.2%
Expenditure 6,206 7,543 21.5%
Operating profit (EBDITA) 369 561 52.1%
EBDITA margin (%) 5.6% 6.9%  
Other income 5 8 56.6%
Interest 48 52 8.3%
Depreciation & amortisation 72 77 7.2%
Profit before tax 254 440 73.3%
Tax 127 117 -7.8%
Profit after tax 126 322 154.9%
Net profit margin (%) 1.9% 4.0%  
No. of shares (m) 44 44  
Diluted earnings per share (Rs)*   38.3  
P/E (x)   31.0  
(*trailing twelve month earnings)

What has driven performance in 1QFY09?
  • First two quarters of a fiscal year is a slack season for the lifestyle or specialty retail major, Titan, as has been indicated to us by the management. The topline growth is aided by the second half of the festive season. Thus, a 23% YoY growth in topline during 1QFY09 is respectable. Titan sustained its growth momentum on the back of 32% YoY growth in the jewellery segment. This division continues to outpace the time products division in terms of growth rate, despite high volatility in gold prices. The time products division reported a 2% YoY growth in revenues, while the ‘other’ business segment that includes new initiatives such as eyewear business, precision engineering and licensed products and accessories grew by nearly 4% YoY in 1QFY09.

    Segmental break-up…
    (Rs m) 1QFY08 1QFY09 Change
    Revenues - Time products 1,688 1,719 1.8%
    PBIT margin 6.5% 9.9%  
    Revenues - Jewellery 4,664 6,157 32.0%
    PBIT margin 5.3% 5.8%  
    Other businesses* 227 235 3.8%
    PBIT margin -12.1% -8.5%  
    (*Includes precision engineering, licensed products and accessories)

  • During the quarter, Titan has opened 29 ‘World of Titan’, ‘Tanishq’, ‘Eye+’ and ‘Gold Plus’ stores. Further, the company launched its watches in Pakistan and opened the first exclusive store of Tanishq in US (Chicago). The new initiatives are expected to work in the company’s favour going forward.

  • Titan’s jewellery division that contributed over 75% to the total revenues in 1QFY09 witnessed lower margins as compared to the time products division and other new initiatives. Despite this, the overall EBITDA margins of the company expanded by 1.3% YoY during the quarter. The same is attributed to the fact that all the segments have witnessed improvement in profitability on account of better working capital management and increased focus on premium brands that fetch better margins apart from the strategy to venture into related business segments to capitalise upon the existing facilities.

    Cost break-up
    (% of sales) 1QFY08 1QFY09
    Raw materials consumed 68.9% 64.1%
    Purchase of finished goods 4.9% 8.9%
    Staff cost 7.3% 6.4%
    Advertising 5.2% 5.0%
    Other expenses 8.1% 8.6%

  • Titan’s net profit grew by a whopping 155% YoY during 1QFY09. This was on the back of a good show at the operating level, higher other income and lower tax outgo.

What to expect?
At the current price of Rs 1,185, the stock is trading at a multiple of 16.4 times our estimated FY11 earnings. The company’s new initiatives (prescription eyewear and precision engineering) initiated 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 jewellery business’ margins going forward. However, gold since prices in jewellery 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. We maintain our positive view on the stock from a 2 to 3 years perspective.

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