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Titan tumbles - Views on News from Equitymaster
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  • Nov 7, 2000

    Titan tumbles

    Titan Industries, manufacturers of one of the most admired brand –‘Titan’, has reported a disappointing first half financial performance. If one takes a closer look at the sales mix, prospects are not promising either.

    Titan Industries reported a marginal 3% rise in net profits for the second quarter ended 30th September 2000. While sales grew by 13%, operating profits have more or less remained stagnant at previous year’s level. This was because of 200 basis points drop in operating margins in 2QFY01. But, the drop in net profits would have been acute but for lower interest costs and depreciation.

    Margins cramp growth…
    (Rs m) 2QFY00 2QFY01 Change
    Sales 1,540 1,733 12.5%
    Other Income 7 3 -53.5%
    Expenditure 1,251 1,444 15.4%
    Operating Profit (EBDIT) 289 289 0.0%
    Operating Profit Margin (%) 18.8% 16.7%  
    Interest 134 122 -9.0%
    Depreciation 53 55 4.6%
    Profit before Tax 110 116 5.5%
    Extraordinary Income - -  
    Tax 7 9 40.3%
    Profit after Tax/(Loss) 103 107 3.2%
    Net profit margin (%) 6.7% 6.1%  
    No. of shares (m) 42.3 42.3  
    EPS (annualised) 9.8 10.1  

    Now let us consider the first half financial performance of the current year. Sales and net profits have grown by 15% and 109% respectively. Titan made profits to the extent Rs 99 m through sale of equity shares of RDI Printing & Publishing Ltd. in 1QFY01. If one were to exclude this income, profits have nose-dived by 100% in 1HFY01. Operating margins have also declined from 16.2% in 1HFY00 to 12.5% in 1HFY01.

    Other income to the rescue…
    (Rs m) 1HFY00 1HFY01 Change
    Sales 2,498 2,873 15.0%
    Other Income 11 103 842.2%
    Expenditure 2,093 2,514 20.1%
    Operating Profit (EBDIT) 405 359 -11.5%
    Operating Profit Margin (%) 16.2% 12.5%  
    Interest 253 234 -7.3%
    Depreciation 105 110 4.2%
    Profit before Tax 58.1 117.4 102.1%
    Extraordinary Income - -  
    Tax 7 10 43.3%
    Profit after Tax/(Loss) 51 108 109.7%
    Net profit margin (%) 2.1% 3.8%  
    No. of shares (m) 42.3 42.3  
    EPS (annualised) 4.9 10.2  

    What is the reason behind such a huge drop at the operating level?
    The jewelry division contributed to around 25% of FY00 turnover (15% in FY99). Sales and average per unit realisations have shown notable improvement by 79% and 15% respectively. However, the company continues to suffer from higher raw material costs. Raw material cost as a percentage of sales was around 50% in FY00 (45% in FY99). Out of the total raw material costs, gold as a percentage of total cost was around 38% in FY00 (29% in FY99). This is where Titan has taken a hit.

    Going forward, we expect this to continue as margins continue to tumble. Though the company is optimistic about this division, branded jewelry sales continue to remain less attractive to the retail segment thanks to the presence of large unorganised players. Though India is the largest consumer of gold in the world, it remains to be seen whether consumers would switch towards branded jewelry in coming years.

    Besides, the company has to increase its adspend to stimulate sales for both the watches as well as the jewelry division. Added to these woes, export income would attract tax from FY01. Titan is aggressively targeting the European and the US market to become a global player. Therefore, on an overall basis, though the company would post volume growth, significant growth in bottomline is not expected in future.

    The stock is currently trading at Rs 58 at a P/E multiple of 5.6x the annualised 1HFY01 earnings. On the annualised sales of Rs 5,745 m, the market capitalisation to sales works out to 0.43 (Market Capitalisation = Rs 2,542 m).



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