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Titan: Will the slide stop? - Views on News from Equitymaster
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  • Sep 13, 2001

    Titan: Will the slide stop?

    Titan Industries, the market leader in the Indian watches sector, reported a dismal first quarter results for the current financial year with a net loss of Rs 146 m. Though the company has managed to boost sales, profitability has come under pressure. Given the prevailing demand scenario, what can one expect from the company in FY02?

    Sales in FY01 had risen sharply thanks to the improved volume growth of its jewelry division (total volumes grew by 140.3% including silver jewelry). However, overall realisations (including silver division) have come down by 44% in FY01 (average realisation for silver division has come down from Rs 127 per unit in FY00 to Rs 54 per unit in FY01). The presence of the huge unorganised segment and unauthorised imports have affected company's profitability to a considerable extent. Similarly, realisations have come down for other two divisions, namely watches and table clocks. With India coming under the purview of WTO with effect from the current year, realisations could be tested further.

    Declining margins...
    (Rs m) FY98 FY99 FY00 FY01
    Raw material 1,654 2,185 3,133 3,412
    % of sales 40.8% 49.8% 55.2% 53.4%
    % of expenses 51.7% 62.4% 64.2% 61.4%
    Employee costs 489 540 722 741
    % of sales 12.1% 12.3% 12.7% 11.6%
    % of expenses 15.3% 15.4% 14.8% 13.3%
    Other expenses 1,058 776 1,026 1,125
    % of sales 26.1% 17.7% 18.1% 17.6%
    % of expenses 33.0% 22.2% 21.0% 20.2%
    Operating margins 21.0% 20.2% 14.0% 12.9%

    If one were to look at the performance of the company over the last four years, operating margins have come down from as high as 21% in FY98 to 12.9% in FY01. One of the key reasons for this continuous fall in margins is on account of rising raw material prices, notably gold prices. Average cost per unit has shot up from Rs 768 in FY98 to Rs 1,647 per unit in FY00. For FY01, it stood at Rs 1,548 per unit. However, the fall in per unit prices is because of higher watch sales in FY01. Gold prices have increased by 7.5% for the company in FY01. On one hand, the company has had to contend with the presence of the huge organised segment. On the other, raw material prices have been a drag on profitability. We expect the operating margins to fall further by 100-150 basis points in the current year.

    Titan raised a total of Rs 1.6 bn by way of borrowings from various sources, of which, Rs 601 m were by way of term loans from commercial banks. Though interest costs have been falling over the last four years, the same may not be the case going forward. Compared to a gross margin of 12.9% in FY01, net margin is a meager 3.7%. We expect the company to raise further resources in the current financial year to augment the working capital as well as capital expenditure requirement in light of worsening profitability ratios (net working capital to sales is as high as 61.4%). The company has decided to exit from non-core businesses and as a first step, it sold 65,000 shares of RDI Publishing (the publishers of Reader's Digest monthly magazine in India) resulting in a profit of Rs 97 m. The company expects to sell the remaining stake in the current year, which could fetch around Rs 30 m.

    The company is expected to report a 50% drop in profits in the current financial year. The scrip is currently trading at Rs 39 at a P/E multiple of 7.1x the FY01 earnings. Given the grim demand scenario, both in the domestic as well as in the international markets, prospects are not promising for the company.



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