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Titan: Operating woes

Nov 11, 2002

In light of India's large population and potential for higher disposal income in the long run, a number of multinational retailing majors have set shop in the last three years. Among Indian companies, Titan was the first to spot the growth potential. India's numero uno in watches and jewellery however, has had a difficult time over the years. FY03 so far has not been any different.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net sales 1,271 1,811 42.5% 2,153 2,805 30.3%
Other Income 9 5 -44.8% 14 7 -47.9%
Expenditure 1,052 1,565 48.8% 1,905 2,526 32.6%
Operating Profit (EBDIT) 219 246 12.1% 248 280 12.6%
Operating Profit Margin (%) 17.2% 13.6%   11.5% 10.0%  
Interest 123 110 -10.0% 248 216 -12.9%
Depreciation 58 91 55.5% 114 160 40.8%
Profit before Tax 47 50 5.3% (99) (89) -10.4%
Extraordinary items - (22) - - (22) -
Tax 18 9 -48.9% (34) (29) -14.9%
Profit after Tax/(Loss) 30 19 -36.9% (65) (82) 25.9%
Net profit margin (%) 2.3% 1.0%   -3.0% -2.9%  
No. of Shares (m) 42.3 42.3   42.3 42.3  
Diluted Earnings per share* 2.8 1.8   (3.1) (3.9)  

The first half performance in the current fiscal year reflects both the potential and concern. While revenues have risen at a impressive rate of 30% in 1HFY03, much of the growth was on account of second quarter performance. However, growth in revenues has also got to be viewed in the context of lower base in the corresponding period previous year. In 1HFY02, revenues plummeted significantly due to de-stocking exercise and subdued demand. As a result, sales growth in 2QFY03 seems inflated. The graph below clearly reflects the same as indicated by the quarterly trend in revenue growth and operating margins. That said, demand for both jewellery and watches tends to gain pace as a build up to the festive season i.e. Diwali. Besides, the company's new watch launches like 'Edge' have been well received in the market apart from other successful models like 'Raga' and 'Fastrack'. This has also added to the topline growth during 2QFY03.

However, concerns at the operating level remain intact. The company's growth strategy revolves around expanding presence in both domestic and international markets. Revenue growth in the international market has been sluggish on account of slowdown in global economy (Titan has significant presence in Europe and Middle East). Secondly, cheaper imports, huge unorganised market, investment in upgradation/expansion of retail outlets and promotion expenses continue to weigh heavily at the operating level. Historical trend, as suggested by the graph, shows that operating margins tend to peak in the second quarter driven primarily by a combination of both festive and marriage season demand.

PBIT margin trend...
(% of sales) FY02 2QFY02 2QFY03 1HFY02 1HFY03
Watches & clocks 12.8% 11.0% 10.2% 4.9% 5.1%
Jewellery 4.6% 2.6% 5.4% 4.6% 2.5%

But the graph also shows that operating margin, even in the peak season, is on the decline consistently when compared on a year-on-year basis. This is on the account of stiff pressure from higher raw material costs. As is evident from the table below, raw material costs as a proportion of sales has gone up significantly and in 1HFY03, the composition has touched 73% of net sales. This is among the highest in the last five years. As the contribution from the jewellery division rises, gold as a percentage of total raw material cost also shoots up, thus pressuring operating profit. We expect the trend to continue in the near term until the distribution reach attains a critical mass and the customer acceptance towards the organised jewellery market improves.

Scaling down OPM...
(Rs m) FY01 FY02 2QFY02 2QFY03 1HFY02 1HFY03
Raw material 1,044 2,160 753 1,267 1,421 2,045
Net sales 2,582 4,078 1,271 1,811 2,153 2,805
RM/sales (%) 40.4% 53.0% 59.3% 69.9% 66.0% 72.9%

At the same time, Titan has positioned itself well to capitalise on upturn in industry demand. The stock currently trades at Rs 60 implying a P/E multiple of 19.4x FY02 earnings and at 14.5x normalised earnings for the previous four years. While Titan's strong brands, distribution network and gaining acceptance of organised retailing are big positives, presence of the huge unorganised watch and jewellery players are cause for concern. This increases the risk profile of the company. Considering the past track record, valuations at the current juncture seem to be stretched.

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