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Titan: Gaining strength - Views on News from Equitymaster
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Titan: Gaining strength
Nov 28, 2005

Performance Summary
The emergence of organised retailing and its ever growing share in the overall retail sales is a macro trend. One company that aims to benefit from the same is Titan and it is clearly reflected in its financial performance in the first half of the fiscal year. While net sales grew at an impressive 43% YoY, the company has posted a net profit in 1HFY06 as compared to net loss in the same period previous year.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 2,729 3,488 27.8% 2,003 2,862 42.9%
Expenditure 2,475 2,938 18.7% 1,925 2,684 39.4%
Operating profit (EBDITA) 254 551 117.1% 78 178 129.5%
EBDITA margin (%) 9.3% 15.8%   3.9% 6.2%  
Other income 7 6 -20.3% 5 5 -7.5%
Interest 82 60 -27.5% 77 58 -24.9%
Depreciation 48 48 -1.0% 48 49 1.0%
Profit before tax 131 449 - (42) 77 -
Extraordinary income/(expense) (25) (152) 509.2% (37) (50) 35.2%
Tax 2 91 - (22) (24) 10.2%
Profit after tax/(loss) 103 206 - (58) 50 -
Net profit margin (%) 3.8% 5.9%   -2.9% 1.8%  
No. of shares (m) 42.3 42.3   42.3 42.3  
Diluted earnings per share (Rs)*   19.5     4.7  
(*annualised)            

What is the company's business?
Titan is the market leader in the organised watch (53% of FY05 sales) and jewellery (47% of FY05 sales) segments. Watches account for 76% of overall PBIT with the rest being accounted for by the jewellery division. The company also has 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 and is focusing on building the export business in a gradual manner.

What has driven performance in 2QFY06?
Revenue growth not surprising: Net sales in 2QFY06 grew by 29% YoY, led by robust performance of both the watches and the jewellery segments. The company continues to invest in brand extensions in both these divisions, apart from expansion of network, which is propelling the topline growth. Also, as compared to around Rs 60 m as revenues from the machine tools division in FY05, Titan plans to generate around Rs 200 m in FY06 on the back of good order book position. This has also added to the overall topline growth.

Robust margins: The first half of the fiscal is not the peak season for both the jewellery and watch divisions and the margin performance has to be viewed in this backdrop. While the watch division has posted profits as compared to loss in the same period previous year, the jewellery division continues to impress on the margins side. We have factored in 5.5% as overall EBIT margins for the jewellery division for FY06 and going by the first half numbers, there is a need to upgrade our margin estimate.

Segmental break-upů
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Revenues - Time products 1,561 1,934 23.9% 2,516 3,278 30.3%
PBIT margin -0.2% 2.1%   -0.1% 1.2%  
Revenues - jewellery 1,329 1,727 29.9% 2,471 3,388 37.1%
PBIT margin 1.6% 5.4%   0.9% 2.7%  
Overall EBIT margin 8.2% 14.6%   5.6% 10.0%  

Lower interest helps matters: As we had mentioned over the last two years, Titan was primarily focussed on reducing the working capital requirements through the implementation of ERP system, which is reflected in lower interest charges. The reduction in interest cost is in line with our estimates. Excluding the extraordinary items in both the quarters, the rise in net profit is on the higher side. The extraordinary expenses are towards diminution in the value of investments in its key subsidiaries).

What to expect?
At the current price of Rs 663, Titan is trading at a price to earnings multiple of 20 times our estimated FY08 earnings. While we believe that there is upside to our earnings estimates, in our view, the current valuation level adequately reflects in the near-term growth potential and therefore, one has to exercise caution. Having said that, if one takes a two to three year view, the ongoing rights issue (though will be earnings dilutive in nature), will enable Titan to retire some of its existing high cost debts and invest for expansion going forward. In our view, organised retailing will propel growth in jewellery and watches and despite higher competition, Titan is likely to consolidate its market share. On the balance, the risk-reward equation seems to be skewed towards risk at the current juncture.

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