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Titan: Watch margins shrink - Views on News from Equitymaster
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Titan: Watch margins shrink
Oct 31, 2011

Titan Industries declared the results for the second quarter of financial year 2012 (2QFY12). The company reported 36.5% YoY growth in sales, while net profit has risen by 16% YoY during the quarter. Here is our analysis of the result.

Performance summary
  • Net sales grew by 36.5% YoY during the quarter and by 47.6% during the half year ended September 2011.
  • Operating margins registered a decline of 1.7% YoY and 0.9% YoY during the quarter and 6 month periods.
  • Interest charges continued to fall. They were down by 91% YoY this quarter.
  • Net Profits grew by 16% YoY during the quarter. For the half year, the profits grew by 39.5% YoY.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 15,361 20,965 36.5% 27,889 41,171 47.6%
Expenditure 13,624 18,961 39.2% 25,039 37,322 49.1%
Operating profit (EBDITA) 1,737 2,004 15.4% 2,850 3,849 35.1%
EBDITA margin (%) 11.3% 9.6%   10.2% 9.3%  
Other income 81 200 147.9% 161 430 167.4%
Interest 24 2 -90.8% 49 13 -73.1%
Depreciation & amortisation 86 106 23.1% 168 205 22.1%
Profit before tax 1,707 2,096 22.7% 2,794 4,061 45.4%
Tax 430 614 42.8% 703 1,146 62.9%
Profit after tax 1,278 1,482 16.0% 2,091 2,916 39.5%
Net profit margin (%) 8.3% 7.1%   7.5% 7.1%  
No. of shares (m)         887.78  
Diluted earnings per share (Rs)*         6.3  
P/E (x)         34.8  
(*trailing twelve month earnings)

What has driven performance in 2QFY12?

  • Titan's jewellery segment grew by around 45% during the quarter. Its share in total sales increased further to 77.2% as compared to 73.1% in the same quarter last year. For the half year period, sales were up by 58% YoY. The growth has however been slower as compared to previous few quarters. This is mainly due to rising gold prices resulting in reduced consumer interest.

  • The company's second major business segment of watches saw a growth of 16.1% during the quarter.

  • The other businesses which include eye wear, clocks, and precision engineering components saw slower growth at 16.3%. Slowdown in the economy has impacted these segments.

      2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Watches            
    Revenue (Rs m) 3,594 4,174 16.1% 6,139 7,328 19.4%
    % of total revenues 23.3% 19.7%   21.9% 17.6%  
    EBIT margin 21.5% 16.1%   19.5% 15.7%  
    Jewellery            
    Revenue (Rs m) 11,274 16,312 44.7% 20,788 32,783 57.7%
    % of total revenues 73.1% 77.2%   74.2% 78.9%  
    EBIT margin 9.1% 9.2%   8.3% 9.4%  
    Others            
    Revenue (Rs m) 560 652 16.3% 1,098 1,426 29.9%
    % of total revenues 3.6% 3.1%   3.9% 3.4%  
    EBIT margin -8.3% -2.1%   -2.7% -3.5%  

  • Operating profits witnessed 16% growth on account of higher costs of input. PBIT (Profit before interest and tax) margin of watches segment reduced by a drastic 5.4% YoY while the margins for the jewellery segment were maintained at 9% levels.

  • Interest costs have declined sharply by around 91%. The company had a debt to equity ratio of 0.01 times at the end of September 2011.
What to expect?
Higher input costs in the form of increased gold and diamond prices have shrunk margins for Titan. The watch major has taken price hikes of around 6-7% on an average across product categories to deal with this. Titan being the leader in the industry has the pricing power and the increased costs may get absorbed by the customers. But, with newer product launches and more expansion on mind, the margins might continue to be under pressure. At the current price of Rs 218, the stock is trading at a high multiple of 20 times our estimated FY14 earnings. We maintain our negative view on the stock.

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