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Titan: Lower losses, but concerns prevail - Views on News from Equitymaster
 
 
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  • Aug 7, 2002

    Titan: Lower losses, but concerns prevail

    The last three years has been a rough ride for Titan Industries, the manufacturers of watches and jewelry, which also has one of the most precious brands in the country. After having posted an impressive performance in the fourth quarter of FY02, the company has once again slipped into the red. Though first quarter results may not be representative of the sector demand scenario, the pressure at the operating level is apparent.

    (Rs m) 1QFY02 1QFY03 Change
    Net sales 1,023 1,135 11.0%
    Other Income 5 3 -52.8%
    Expenditure 996 1,114 11.8%
    Operating Profit (EBDIT) 27 21 -20.0%
    Operating Profit Margin (%) 2.6% 1.9%  
    Interest 125 105 -15.8%
    Depreciation 53 57 7.4%
    Profit before Tax (146) (138) -
    Tax - (38) -
    Profit after Tax/(Loss) (146) (100) -
    Net profit margin (%) -14.3% -8.8%  
    No. of Shares (m) 42.3 42.3  
    Diluted Earnings per share* (13.8) (9.5)  
    (*annualised)      

    Titan reported an 11% growth in sales in 1QFY03. As expected, the performance of its jewelry division continues to be impressive. The contribution of this division to total revenues of the company has been on the rise over the years. This has been led by expansion of organised retail outlets in both in the international and domestic markets. In 1QFY03, the division contributed to 34% of sales as against just 17% in FY99. This signifies that Titan's move to diversify from its core operations i.e. watches and clocks, has been successful. Its core business is facing stiff competition from unorganised players, presence of a huge black market and entry of MNCs in the higher-end category. Since demand for Titan's products generally tend to peak during festive seasons, the first quarter growth rate is not representative. Nevertheless, a 11% growth revenues in the current scenario is commendable.

    But the worrying aspect of 1QFY03 performance is the continued pressure on operating margins. While Titan has made a conscious effort to cut staff costs and other expenses, higher raw material expenses has been one of the key cause of concern. Against a turnover growth of 11%, raw material costs have increased by 17%, which translates into 69% of revenues in the same period (65% in 1QFY02). Besides, the industry is also working capital intensive and consequently there are huge sums locked-in, in the form of inventory. With new models being introduced every now and then, the company also runs the risk of obsolete stocks. One of the big threats to the company is competition from cheaper imports and consequently pressure on prices. A combination of all these factors have been affecting operating profits of the company and 1QFY03 was no exception.

    While there is not much write home about below the operating level, Titan's fall in net profit was stemmed by lower interest expenses and rebate on deferred tax. This has also lowered net loss as compared to 1QFY02. The company would have refunded some high cost debts last year, which could have resulted in this fall in interest costs. However, interest coverage ratio has fallen to alarmingly low level of around 1.2 times. The challenge going forward would be improving performance at the operating level, which is an uphill task. While the markets seem to be enthused by the rise in gold prices off late, one has to exercise caution, as gold is also a raw material for Titan. In the foreseeable future, keeping in mind the continuing competitive pressure, profitability ratios would continue to remain stressed. Apparently, Titan has also expressed its interest in HMT, the government owned manufacturer, that is reeling under loss. The company's reserves do not seem to be in a position to help in this acquisition.

     

     

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