Titan Industries: A well positioned company - Outside View by Luke Verghese

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Titan Industries: A well positioned company
Dec 24, 2012

Blessed with strong brand equity - the company represents the changing face of time

Titan - the changing face of time

Titan acquired its name from its two joint promoters-Tamil Nadu Industrial Development Corporation (TIDCO) and a wing of Tata Sons. (The suffix 'Industries' however does not appear to be such a good idea considering that its businesses are not associated with soot and grime). The former holds 27.9% of the paid up equity of Rs 888 m and the latter holds 25.2%. That is to say the promoters collectively hold 53.1% of the outstanding equity. But just as importantly, the bulge bracket investor Rakesh Jhunjhunwala and his patni Rekha together hold 10% of the permanent capital. Compared to some of his more bizarre investments in India Inc, this is one investment in which he has hit pay dirt. The FIIs' collectively hold another 15% of the paid up capital. Though TIDCO is by far the single biggest shareholder, the company has been run by the Tata management right from inception with the former playing second fiddle in what has turned out to be a most fruitful cohabitation. Titan is also one of the showpieces of the Tata group.

The company has covered quite some distance in its corporate sojourn and then some more. From revenues of Rs 168 m that it recorded in 1987-88 - the first year of its commercial operations - the company rang up gross revenues (including other income) of Rs 90.6 bn in 2011-12. The paid up capital stands at Rs 888 m (post 1:1 bonus issue) with the reserves and surplus in excess of Rs 13.6 bn. It was originally incorporated to manufacture watches (the two major domestic competitors at that point in time being HMT and Hyderabad Allwyn). And if my memory serves me right it was initially name plated as Titan Watches. Over time the company metamorphosed into the manufacture of jewellery, and also other personal accessories. It helped no end that the company also merged with another offspring Tanishq - the maker of branded jewellery. The accessories on offer basically consist of sunglasses, bags, belts, wallets and wristbands.

Besides manufactured sales, the company also indulges in traded sales of jewellery, watches, and accessories - that is the purchase and sale of end products. It cranks out its fare from four watch plants, two precision engineering units, and three jewellery plants. The units cover the three states of Uttaranchal, Karnataka and Tamil Nadu. The parent also boasts of three siblings including what looks like a rupputty and a 'has been' European brand, Favre Leuba AG of Switzerland. There is also the thrust in the export market segment - but the numbers that it generates here is still very marginal given the operational size of the parent. For the matter of record, export sales rolled in Rs 1.6 bn against Rs 1.3 bn previously.

The revenues

Specifically, the company rang up gross revenues of Rs 89.7 bn and other income of Rs 941 m in 2011-12. Of this manufactured goods accounted for 78% of gross revenues, traded goods 20.5%, tools and components 0.13%, and other sales related income of 1.04%. After reducing excise duty of Rs 1.3 bn the net revenues amounted to Rs 88.4 bn. In the manufactured sales segment jewellery accounted for the vast bulk of the gross revenues at Rs 58.3 bn, followed by watches at Rs 11 bn and others bringing up the rear end at Rs 722 m. In traded goods too jewellery hogged the limelight at Rs 11.1 bn, followed by watches at Rs 4 bn with others bringing on Rs 3.2 bn. Other operating incomes include sale of precious and semi precious stones, sale of gold, and scrap sales. Every little bit counts it appears. Giving a leg up no less is the not insignificant interest income of Rs 931 m that the company ekes out on its rather ample cash balances. The liquid loot at year end amounted to Rs 9.6 bn against an even higher Rs 10.9 bn previously. It also helps quite some that it made do with only a gross block of Rs 7.3 bn in end 2011-12 to help churn out the manufactured revenues. Additions to gross block during the year toted up to Rs 1.3 bn.

Based on the segmental information of revenues and assets, the watch business brought in higher margins of 13.6% - but as stated earlier on considerably lesser revenues than that of jewellery. The jewellery business brought in much lower margins of 8.9 % but made up for this shortfall by clocking in considerably higher revenues. The other knickknacks that it hawks are yet to break even. But the contribution of the two major product lines appears a little more uniform when one juxtaposes the revenues with the assets on hand. On a segmental assets basis, for every rupee of assets the watch division rolled in revenues of Rs 1.85. The jewellery business however more than matched steps here with every rupee of jewellery assets boasting revenues which are slightly larger at Rs 2.1.

Self sustaining financials

The most interesting aspect of this company's finances is that it is self sustaining. That is to say it makes do with zero debt - well almost. As a matter of fact it even makes do with a surfeit of cash riches and does not quite know how to make its liquid assets sweat. Total long term borrowings at year end amounted to a puny Rs 59 m and it comes packaged in the form of a forex loan. Then there is the short term borrowing of Rs 54 m - this is also made up of the same category. Why the company continues to make do with these borrowings is not known given the financial dexterity with which the company is run. (In this context the humungous interest charge of Rs 437 m (relative to the quantum of year- end debt) debited to the P&L account does not quite rub-the notes to the accounts notwithstanding).

And how does the company with gross current assets of Rs 42 bn manage to forgo borrowings for starters? Remarkably enough it manages to sell cash down - well almost. Trade receivables of Rs 1.6 bn at year end account to a mere 1.8% of gross revenues accruing from operations for the year - and almost the entire quantum of receivables constitutes sums due below six months duration. Given the products that it hawks and the clientele that buys them, giving credit is an unnecessary corollary. It also logically follows that bad debt provisions are kept at a very minimum. Consider other such nuggets on display. The trade payables at year end on the other hand amounted to Rs 17.5 bn giving the company considerable leeway in its day to day jugglery of its essentials. That is only one half of the upper hand that the company commands. What adds mirch to this concoction is that even though it is more of a marketing enterprise than a manufacturing one, the expenditure on advertising amounted to Rs 3.8 bn against Rs 3 bn previously. More to the point advertising expenditure as a percentage of net revenue from operations was only 4.3% against 4.6% previously.

Under the head 'Other current liabilities' is another bombshell. The words read as 'Advances from customers' amounting to Rs 9.5 bn. Boy, oh boy, this appears to be a swell business to get into! The notes to the accounts states that the advances include Rs 8.5 bn towards the sale of jewellery products under various sales initiatives. (What does the balance advance of Rs 1 bn represent?) It must be saying something about the branding of its jewellery products that entice people to pay such large sums up-front. On a rough indicator basis this advance figure amounts to a slice over 12% of the total jewellery sales of Rs 69.5 bn that it affected during the year. The only negative factor- in a manner of speaking -that it has to contend with is the high level of inventory holding. The inventory value at year-end amounted to Rs 28.7 bn or 32% of the gross revenues for the year. In the main these inventories consist of finished goods stock amounting to Rs 16.2 bn and stock in trade amounting to Rs 6.3 bn totalling 22.5 bn. Why does the company brand its finished goods under two nomenclatures please-considering that they both imply goods held for sale?

The revenue expenses

Against a 36% increase in net revenues from operations, the cost of raw materials consumed and purchase of finished goods which is the principal item of revenue expenses rose 39%. One reason for its inability to keep a strict tab on material input costs is that imported raw materials and components accounted for 69% of all materials consumed of Rs 61.4 bn - and import prices are subject to the vagaries of the rupee dollar parity rate. Other major items of expenditure such as 'Other expenses' and employee payouts grew well below the rate of increase recorded by revenue accretals. It is difficult to take a call on the contribution of traded sales to the overall bottom-line as the company has not separately furnished the opening and closing value of finished goods stocks of traded goods. But going strictly by the figures constituting the value of both purchases and the sales-the gross margin would on the face of it seem to be rather magnanimous. The vast bulk of the traded goods that it purchased are made up of jewellery.

The cash flow generation

The company is indeed rotating on a fine wicket as witnessed from the cash that it generates and the manner in which it splurges it. The only spoilsport here is inventories which takes away almost all the cash that it generates from operations. After accounting for cash outflow of Rs 8.8 bn due to the spurt in inventories, the company still notched up a positive cash flow of Rs 1.6 bn from operations. The entire spending on gross block of Rs 1.4 bn was financed from this cash flow. But the balance cash flow that it generated was not quite enough to take care of such financing needs as repayment of borrowings and interest payouts on the one hand, and post year end exigencies such as dividends and the tax on dividends cumulatively amounting to Rs 2.3 bn. The dividends along with tax thereon alone amounted to Rs 1.3 bn against Rs 772 m previously. Consequently the company had to make do with dipping into its humungous cash resources to balance its books.

The company is indeed finding it difficult to make its cash resources sweat. It apparently has a policy of not playing the liquid debt market or sticking its neck out in any other manner to get more bang for the buck. Consequently the value of its current assets at year end towers over that of its current liabilities. It also does not boast of any investments classified as 'current'. It however boasts a few middling investments in three subsidiary companies and in one associate company. The book value of its investments in the three siblings amount to a mere Rs 134 m and the one in its associate add up to another Rs 15 m. The two India based siblings -Titan TimeProducts Ltd and Titan Properties are 100% owned by the parent, while the Swiss based concoction, a big brand of yesteryears, Favre Leuba A.G., is in the process of getting a share capital infusion - and it too will be 100% owned or so one surmises. Titan Time has a paid up capital base of Rs 19 m while Titan Properties has a base of Rs 3.3 m. The Swiss acquisition will have a much larger capital spread at Rs 107 m. It would appear that the Swiss company will be spearheading the launch of Titan Favre Leuba watches in the European markets or some such.

The inconsequential siblings

True to Indian tradition the siblings appear to be mere flea bites in relation to the financial prowess of the parent. The siblings are in some manner inter related with the parent in the sense that the parent has purchased components and raw materials from one of them -Titan TimeProducts - amounting to Rs 171 m in the latest accounting year. (The purchase of raw materials from the siblings would however amount to be an unnecessary route to acquire these items). The parent in turn sold components, finished goods and fixed assets valued at Rs 4.6 m to the siblings. The parent also made a recovery towards rendering of services of Rs 10 m to them. But these inter-se transactions are minor pickings in the overall scheme of things.

The biggest of the three musketeers any which way is Titan TimeProducts which recorded revenues of Rs 259 m during the latest accounting year. The bulk of the sales of Rs 173 m as stated earlier were made to the parent. The parent also gives the sibling just enough margins for it to swim with its head held just above the plimsoll line. The other sibling Titan Properties is not up to much. The Swiss acquisition is very strangely capitalised for the present. It has assets of Rs 105 m, no liabilities, zero share capital, and a loss before tax of Rs 3 m. But a footnote informs that the company is the beneficiary of share application monies to the tune of Rs 107 m. In other words Titan bought a letterhead company.

Barring the minor hiccups that bedevil every enterprise, this is a company that is ticking on the right path.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


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