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Titan: Signs of strength

Aug 25, 2003

The slow but steady turnaround at Titan is reflected in the company's 1QFY04 performance. Despite higher PBIT losses in its watch division, the company has managed to increase operating margins by 50 basis points. At the same time, the watch and jewellery division continues to show double digit growth at the topline level. That said, first quarter is generally a weak period for durable companies.

(Rs m)1QFY031QFY04Change
Net sales 995 1,315 32.2%
Other Income 3 6 124.0%
Expenditure 953 1,255 31.6%
Operating Profit (EBDIT) 41 60 46.4%
Operating Profit Margin (%)4.1%4.6%
Interest 105 102 -3.1%
Depreciation 77 65 -15.8%
Profit before Tax (138) (101)-27.2%
Extraordinary items - (24) -
Tax (38) (50)30.2%
Profit after Tax/(Loss) (100) (75)-25.0%
Net profit margin (%)-10.1%-5.7%
No. of Shares (m) 42.3 42.3
Diluted Earnings per share* (9.5) (7.1)
(*annualised)

Topline has grown by 32% led by more than 50% increase in sales of jewellery division. The jewellery division has been the real growth driver in terms of revenues over the last six years for the company (33% of revenues in 1QFY04). On the other hand, the watch division posted a 20% growth in revenues.

However, PBIT margins continue to remain under pressure. In fact, PBIT losses increased for the watch division during the quarter, which could be due to new product introductions and allocation of expenses towards VRS. On a more positive note, the jewellery division is back in the black.

Excluding Rs 24 m as charges for VRS, operating margins have actually risen by 50 basis points in 1QFY04. This is a commendable performance and highlights the steps taken by the company to turn profitable. However, higher interest charges continue to suppress growth in net profit. Despite this, net loss has come down by Rs 25 m.

As far as future growth prospects are concerned, Titan has been talking about capital infusion required to restructure business and reduce high cost debts. Lack of funds has been hampering the company's ability to reinvest in the business for future growth in the last two years (debt equity ratio is at a concerning level of 2.4 times). If cash infusion comes in, Titan will not only be able to reduce interest charges but also restructure its working capital to unlock cash.

The stock currently trades at Rs 82 implying a P/E multiple of 18.2x FY04E earnings. Though the growth prospects are promising, the risk profile of the stock is on the higher side. Competition has increased manifold in the organised watch market and it will take some time for the company to wean away customers from unorganised gold jewellers.

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