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Titan: All round growth - Views on News from Equitymaster
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Titan: All round growth
Oct 30, 2007

Performance summary
  • Topline grows 35% YoY in 2QFY08 led by growth across its segments.
  • Operating margins expand by 0.9% on account of expenses growing at a slower pace than the topline.

  • Bottomline outpaces topline growth on the back of improved EBITDA margins and lower interest costs.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 5,385 7,251 34.7% 9,884 13,917 40.8%
Expenditure 4,839 6,455 33.4% 9,174 12,752 39.0%
Operating profit (EBDITA) 546 797 46.0% 711 1,165 63.9%
EBDITA margin (%) 10.1% 11.0%   7.2% 8.4%  
Other income 5 4 -22.6% 19 9 -51.5%
Interest 43 39 -8.8% 92 87 -5.0%
Depreciation & amortisation 66 72 10.4% 115 145 26.1%
Profit before tax 442 689 55.8% 524 943 80.0%
Exceptional item (21) -   (49) -  
Tax 100 226 125.9% 112 353 216.1%
Profit after tax 322 463 43.9% 363 589 62.5%
Net profit margin (%) 6.0% 6.4%   3.7% 4.2%  
No. of shares (m)       44 44  
Diluted earnings per share (Rs)*         26.3  
P/E (x)         65.2  
(*trailing twelve month earnings)

What is the company's business?
Titan is the market leader in the organised watch (37% of FY07 sales) and jewellery (60% of FY07 sales) segments. Watches account for 73% of overall PBIT with the rest being accounted for by the jewellery division. The company also has a presence in the precision engineering segment where it plans to leverage on its engineering expertise (revenues are a part of the watches division). After expanding rapidly in the international markets, Titan has scaled down its presence there and is now focusing on building the export business in a gradual manner (particularly in the Middle East).

What has driven performance in 2QFY08?
Growth across its offerings: Buoyed by the festive season, the company has witnessed topline growth of almost 35% YoY during the quarter. While all the divisions grew, the main contributor to the growth turned out to be the jewelry division, as revenues here jumped an impressive 46% YoY. Growth has not been a problem here for the company ever since it has launched this initiative. The company has outlined expansion plan to take its tally of total number of showrooms to 100 by end of 2008 from the current 94 (last quarter it was 87). Further, to penetrate into the rural markets, the company has come up with a ‘Gold Plus’ initiative. Thus, the expansion of retail presence in the jewelry segment has gained considerable steam now.

Talking about time wear products, the division has reported 22% YoY growth in revenues during the quarter and the same is expected to grow in future as organised retail in India takes shape. Further, as India is a rather unpenetrated market for watches (only 27% of Indians own a watch), there is an immense opportunity for the company to keep growing its revenues from this segment. In 2QFY008, the company acquired license to exclusively market and distribute Hugo Boss watches in the country. This premium category watches are excepted to augur well for the company in the future.

Over the next three years, the 'others' division will gain significance on account of the company’s precision engineering initiative. In order to better leverage its engineering capabilities, the company has set up a precision engineering business, which will cater to the component, component assembly and automation requirements of the automotive and aerospace industries, sectors which hold significant growth potential in the medium to long-term. Besides, the company’s foray into the prescription eyewear business is further expected to shore up the company’s revenues.

Segmental break-up…
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Revenues - Time products 2,249 2,748 22.2% 3,735 4,457 19.3%
PBIT margin 13.4% 15.9%   11.5% 12.3%  
Revenues - Jewellery 2,969 4,324 45.6% 5,852 9,053 54.7%
PBIT margin 7.4% 7.8%   4.7% 6.5%  
Other businesses* 170 183 8.1% 305 416 36.3%
PBIT margin -7.8% -17.2%   -14.4% -14.2%  
(*includes precision engineering, licensed products and accessories)

Cost control help expand margins: Since the company’s operations fall under lifestyle segment where the purchases are not made on daily basis, a 0.9% expansion in EBITDA margins is respectable. Though raw material costs and purchase of finished goods costs have gone up significantly on a percentage of sales basis, the margins improvement has mainly been brought about by reduction in employee cost, lower ad spends and reduction in other expenditure. In the past few quarter’s, margins suffered as the company has been investing in two-three new businesses, namely the mass-market jewellery business (GoldPlus), the precision engineering business and the prescription eyewear business.

Cost break-up
(% of sales) 2QFY07 2QFY08 1HFY07 1HFY08
Increase / Decrease in stock in trade -9.9% -36.3% -10.6% -18.9%
Raw materials consumed 68.7% 93.6% 68.6% 81.3%
Purchase of finished goods 5.4% 10.6% 6.8% 7.9%
Staff cost 7.7% 7.2% 8.1% 7.2%
Advertising 5.8% 5.2% 7.2% 5.1%
Other expenses 10.0% 6.8% 10.5% 7.4%
Total expenses 89.9% 89.0% 92.8% 91.6%

Boils down to bottomline: Despite witnessing increase in depreciation charges and lower other income, the company was able to expand its net margins by 0.4% on account of expansion in operating margins and lower finance charges. Further, Titan has finally exited the European markets after suffering losses of almost Rs 1.1 bn. The company had provided for these losses since FY03 and made the final provision during FY07.

What to expect?
At Rs 1,715, the stock is trading at a price to earnings multiple of 65 times its trailing 12-month earnings. While we are enthused by the company’s diversified business model, the valuations, in our view, appear rich at the current levels. We are in the process of updating our research report on the company and will soon come out with our forward estimates for the same.

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Feb 22, 2018 (Close)


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