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Titan: Jewellery business drags topline lower - Views on News from Equitymaster
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Titan: Jewellery business drags topline lower
Aug 5, 2015

Titan Industries declared its results for the first quarter of financial year 2016 (1QFY16). The company reported 5.9% YoY fall in sales, while net profit fell by 14.8% YoY for the quarter. Here is our analysis of the results.

Performance summary
  • Net sales fell by 5.9% YoY during the quarter.
  • Operating profit decreased by 15.1% YoY due to operating expenses dropping at a pace lower than the drop in revenues. As a result, EBITDA margin has contracted to 7.5% YoY in 1QFY16 from 8.3% in the corresponding quarter of previous year.
  • Other income for the company fell by 40.8% YoY during 1QFY16.
  • Impacted by fall in operating margins, profit after tax fell by 14.8% YoY during the quarter.

Financial performance snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 28,537 26,867 -5.9%
Expenditure 26,171 24,859 -5.0%
Operating profit (EBDITA) 2,366 2,008 -15.1%
EBDITA margin (%) 8.3% 7.5%  
Other income 632 374 -40.8%
Interest 350 118 -66.2%
Depreciation & amortisation 243 228 -6.2%
Profit before tax 2,405 2,036 -15.3%
Tax 632 526 -16.9%
Profit after tax 1,773 1,511 -14.8%
Net profit margin (%) 6.2% 5.6%  
No. of shares (m)   888.7  
Reported earnings per share (Rs)*   9.0  
P/E (x)*   35.1  
* On a trailing 12 months basis

What has driven performance in 1QFY16?
  • Segment wise, jewellery revenue fell by 10.9% YoY, Watches segment grew by 9.1% YoY. 'Others' segment which includes eyewear, precision engineering, machine building, clocks and accessories grew by 24.3% YoY.

  • Total raw material cost as a percentage of sales this quarter have decreased from 75.1% in 1QFY15 to 71.7% in 1QFY16. However, all the cost heads of staff costs, advertising expenses and other expenses have all gone up as a percentage of sales. This led to the contraction in margins.

  • Segment wise, EBIT margin in Watches division has decreased to 9.9% as against 10.9% in 1QFY15. EBIT margin for Jewellery has decreased to 8.7% vs 9.4% in the corresponding quarter last year. The 'others' segment saw a small improvement in its EBIT margins during the quarter however.

    Standalone segment wise break up
      1QFY15 1QFY16 Change
    Watches
    Revenue (Rs m) 4,442 4,845 9.1%
    % of total revenues 15.4% 17.9%  
    EBIT margin 10.9% 9.9%  
    Jewellery
    Revenue (Rs m) 23,253 20,720 -10.9%
    % of total revenues 80.4% 76.5%  
    EBIT margin 9.4% 8.7%  
    Others
    Revenue (Rs m) 1,236 1,536 24.3%
    % of total revenues 4.3% 5.7%  
    EBIT margin 0.4% 1.3%  
    Total* 28,931 27,102  
    * Excluding unallocated items
What to expect?

Titan's products are reliant on the level of consumer discretionary spending in the economy. The management has highlighted that such spending has been extremely weak during the June 2015 quarter leading to reduced customer walk-ins in its stores. May and June have been particularly poor months. Rural demand too has been affected. Further, the Golden Harvest scheme that was there to stimulate demand during the previous year's quarter was no longer there in the quarter gone by due to regulatory changes. These two factors together contributed to the dull performance on the topline front for Titan Company. The silver lining was the company's 'other' segment which includes the Eyewear and precision engineering businesses which both did well during the quarter. However, these are still a relatively small part of the business.

The company is counting on stimulating demand for all its product categories through innovative advertising campaigns and new product launches in the coming quarters. Further, the company's retail expansion drive continued with a net addition of 22 stores across all its businesses during the quarter, thus ending the period with a retail area of over 1.62 mn sq ft across the country. With this, the company's retail presence is now 1,223 stores strong. This is further going to see a rise as the management has in place growth plans for all its retail businesses of watches, jewellery and eyewear.

At the current price of Rs 315, the stock is trading at 35.1 times its trailing twelve month earnings. We are in the process of reviewing our FY18 estimates for the stock. Until then, we recommend investors to not buy the stock at current levels.

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