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Titan: Glittering performance - Views on News from Equitymaster

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Titan: Glittering performance
Oct 21, 2008

Performance summary
  • Topline grows by 38.7% YoY in 1HFY09, mainly led by growth across its offerings.

  • Despite inflationary pressures, EBITDA margins expand by 1.1% YoY in 1HFY09.

  • Near doubling of net profits is backed by a good show at the operating level and a jump in other income.



Financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 7,114 10,885 53.0% 13,689 18,988 38.7%
Expenditure 6,318 9,624 52.3% 12,524 17,164 37.1%
Operating profit (EBDITA) 797 1,261 58.3% 1,165 1,824 56.6%
EBDITA margin (%) 11.2% 11.6%   8.5% 9.6%  
Other income 4 12 202.4% 9 21 120.2%
Interest 39 62 57.8% 87 117 33.3%
Depreciation & amortisation 72 79 8.6% 145 156 7.9%
Profit before tax 689 1,133 64.4% 943 1,572 66.8%
Tax 226 261 15.7% 353 379 7.2%
Profit after tax 463 871 88.2% 589 1,194 102.5%
Net profit margin (%) 6.5% 8.0%   4.3% 6.3%  
No. of shares (m)       44 44  
Diluted earnings per share (Rs)*         47.5  
P/E (x)         19.8  
(*trailing twelve month earnings)

What has driven performance in 2QFY09?
  • The topline growth of 53% YoY and 38.7% YoY in 2QFY09 and 1HFY09 respectively was aided by growth across its offerings. The jewellery segment that grew by over 50% YoY continues to outpace time products division in terms of growth rate, despite high volatility in gold prices. The time products division reported a 12% YoY growth in revenues in 1HFY09, while the ‘other’ business segment that includes new initiatives such as eyewear business, precision engineering and licensed products and accessories reported an impressive 43% YoY growth in 1HFY09.

    Segmental break-up…
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Revenues - Time products 2,553 3,035 18.8% 4,242 4,753 12.1%
    PBIT margin 17.2% 19.9%   12.9% 16.3%  
    Revenues - Jewellery 4,388 7,522 71.4% 9,053 13,679 51.1%
    PBIT margin 7.7% 9.0%   6.5% 7.5%  
    Other businesses* 176 341 93.7% 403 576 43.1%
    PBIT margin -17.9% -18.0%   -14.6% -12.4%  
    (*includes precision engineering, licensed products and accessories)

  • Despite the inflationary situation, Titan was able to expand its EBITDA margins by 1.1% in 1HFY09. The same could be attributed to increased focus on premium brands and better working capital management apart from the strategy to venture into related business segments to capitalise upon the existing facilities. In case of time products and jewellery segment, improved product mix led to margin expansion. On the other hand, the performance of the other businesses is still subdued, as the division comprises of new initiatives, which are yet to turn profitable.

  • Titan’s net profits doubled in 1HFY09. This was on the back of a good show at the operating level and the 120% YoY growth in other income.

What to expect?
    At the current price of Rs 938, the stock is trading at a multiple of 13 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, since gold 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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