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Titan: Running too fast? - Views on News from Equitymaster
 
 
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  • Nov 3, 2004

    Titan: Running too fast?

    Performance Summary
    Titan announced its 2QFY05 performance recently. The restructuring initiatives taken by the company over the last three years is reflected in the improvement in margins at the net level. While topline growth remains robust, on account of lower margins in the jewellery division, operating margin has declined in 2QFY05 and in 1HFY05.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 2,047 2,729 33.3% 3,394 4,732 39.4%
    Expenditure 1,764 2,468 39.9% 3,075 4,398 43.0%
    Operating profit (EBDITA) 283 261 -7.7% 319 334 4.5%
    EBDITA margin (%) 13.8% 9.6%   9.4% 7.1%  
    Other income 5 7 48.0% 11 13 19.8%
    Interest 109 82 -24.3% 211 160 -24.3%
    Depreciation 65 56 -15.1% 130 111 -14.8%
    Profit before tax 114 131 14.8% (11) 76 -
    Extraordinary income/(expense) (25) (25) - (25) (50) -
    Tax 27 2 -91.7% (23) (19) -
    Profit after tax/(loss) 62 103 66.1% (13) 46 -
    Net profit margin (%) 3.0% 3.8%   -0.4% 1.0%  
    No. of shares (m) 42.3 42.3   42.3 42.3  
    Diluted earnings per share (Rs)* 5.9 9.8   (0.6) 2.2  
    Price to earnings ratio (x)         79.0  
    (* annualised)            

    What is the company's business?
    Titan is the country’s market leader in the organised watch (56% of FY04 sales) and jewellery (44% of FY04 sales) segments. Watches account for 73% of overall PBIT while 27% is accounted by the jewellery division. After expanding rapidly in the international markets, Titan has scaled down its presence and is focusing on building the export business in a gradual manner.

    What has driven performance in 2QFY05?
    Jewellery coming out of restructuring: Last year in the same quarter, the jewellery division witnessed a lower growth in sales on account of the restructuring exercise. To that extent, in the second quarter of this year, the YoY rise is on the higher side. Nevertheless, the topline growth in also on account of the company's aggressive marketing and expansion exercise. With the festive season drawing close, the time products division also has posted higher growth in 2QFY05. We believe that the growth in the second half of the fiscal is likely to be on the higher side, as this is typically the peak season.

    Segmental break-up…
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Revenues - Time products 1,339 1,561 16.6% 2,248 2,516 11.9%
    PBIT margin 10.1% 12.9%   4.7% 8.9%  
    Revenues - jewellery 891 1,329 49.2% 1,451 2,471 70.2%
    PBIT margin 9.7% 2.8%   6.2% 2.3%  
    Overall EBIT margin 9.9% 8.2%   5.3% 5.6%  

    Margins: its a seasonal game:While first quarter of the fiscal is generally a lean season for watch and jewellery sales, the third and fourth quarter are peak seasons. To that extent, margins of the divisions are likely to exhibit volatility (as is evident from the graph below). However, since 1QFY03, the overall trend in margins is showing an upward bias and we believe that there is a scope for improvement in the future as well. The move to trim global operations and increase focus in the domestic and Middle East markets is paying off. However, the launch of the eye-care range is likely to result in increased marketing spend in FY05 and to that extent, margin expansion will be limited.

    The interest cost is falling: While Titan has historically managed to grow revenues in light of its strong distribution network and brands, it has failed to reflect in terms of better profitability. While the margins at the operating level has been improving, higher interest burden was eating away a large part of profits (38% of operating profits in FY04). With the restructuring, the company has been successful in reducing the working capital requirements, which in turn has enabled it to pay off debts. The graph indicates the YoY change in interest cost and the improvement in net margins.

    What to expect?
    The stock currently trades at Rs 170 implying a price to earnings multiple of 79 times (18 times our expected earnings). The market capitalisation to sales ratio works out to be 0.8 times. While we believe that profitability is likely to improve significantly in the second half (being the peak season), the stock has run up very sharply over the last six months and at the current juncture, valuations seems stretched. Much depends on the pace of the restructuring, which will decide whether current valuations are justified.

     

     

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