Titan Industries

The consistent growth model of Titan Industries makes it a good long-term buy in the consumer goods space. The stock can be bought on dips

Beta: 0.09
Institutional Holding: 6.57*
Current dividend Yield: 0.88
Current P/E 19.21
Current m-cap: Rs 4,047 cr

THE economic slowdown in India is expected to affect the sales and profitability of the consumer goods companies. However, Titan Industries, with strong branding and wide retail presence, is less likely to be beaten down by the same. Titan Industries is India’s leading manufacturer of watches and jewellery and world’s sixth-largest manufacturer of branded watches. It dominates the domestic watch and the organised jewellery markets with a market share of 60% and 40% respectively.

BUSINESS

The Bangalore-based company designs, manufactures as well as retails watches, jewellery, sunglasses, clocks in Indian and international markets. Watches are sold under four main brands, namely Titan, Sonata, Fastrack, Xylus as well as a range of sub-brands like Raga, Edge, Octane, and many others. The company has a strong retail presence with a network of 260 ‘World of Titan’ showrooms and nearly 750 service centres. In 1995, the company forayed into the organised jewellery market with its brand ‘Tanshiq’. It is now India’s largest and fastest growing jewellery brand with 120 boutiques. The company ventured into mass jewellery through ‘Gold Plus’ brand that sells plain gold jewellery at its 30 showrooms. Titan has diversified into fashion eyewear by launching Fastrack eye-gear, sunglasses as well as prescription eyewear, sold through its 50 stores under Titan Eye+ brand. In 2003, the company ventured into precision engineering and machine building. The division supplies precision components to the avionics and the automotive industries. Titan is the OEM (original equipment manufacturer) of dashboard clocks and is a supplier of the same to car manufacturers in Europe and America.

FINANCIALS

Titan Industries’ topline has been growing consistently. It has clocked a compounded annual growth rate (CAGR) of 33% in the last five years ending March 2008. Operating profit during the same period grew by a CAGR of 23%, while net profit galloped at the rate of 90% per annum. In the last four quarters, the jewellery business contributed 70% to the company’s total revenues, whereas watches business accounted for around 27%. While the jewellery segment dominated the topline, watch segment accounted for nearly 60% of company’s profit before interest and tax in FY08. In the September ‘08 quarter, the company’s operating margin rose to its highest level, in more than seven quarters, as gold prices breached through a key $600 an ounce.

GROWTH DRIVERS

The company plans to take advantage of its strong brand positioning by launching innovative and theme-based products in both the watches and jewellery segments to drive up sales. So far, it has managed to show a steady growth in its retail expansion in FY09 with the launches of new showrooms for brands Tanishq, World of Titan, and Goldplus in line with its growth targets. The expansion plan for the eyewear segment, Titan Eye+ that right now contributes little to the topline is also on track with an addition of nearly 40 stores this financial year. The company has also signed distribution and marketing deals with Tommy Hilfiger and Hugo Boss for their range of watches and eye wear products.

RISKS / CONCERNS

The company’s considerable size of inventories is leading to a sharp rise in working capital requirement. In the last four financial years, net cash flow from operations declined by a CAGR of 3% against a rise in cash profit by a CAGR of 53%. In the same period, the inventories grew at a CAGR of 98%, which is very significant. While we believe that this rise, in recent quarters, could be to shield against volatile gold prices, it can put pressure on profitability. The company also needs to revive its eyewear and precession-engineering businesses, which contribute less than 3% to its revenues. However, they are still making losses.

VALUATIONS

In the past one year, while the Sensex has lost more than 50% of its m-cap, Titan Industries lost about 35%. On the other hand, since 2003, its m-cap has increased 10 times against a fourfold increase of the Sensex. At the current market price, the P/E is down 60% from its five-year average of 49. Considering that P/E could tick towards the lower side of its last twomonth range, of 17-21, the stock can be bought on dips. The consistent growth model of the company makes it a good long-term buy in the consumer goods space.

TICKING UP

In the last six quarters, Titan saw an average growth of 11% in net sales, 32% rise in operating profit and 35% in net profit

In the last four quarters, the jewellery business contributed 70% to the company’s total revenues, whereas, watches business accounted for around 27%

Plans to launch innovative and theme based products in both jewellery and watches segments

There has been a steady growth in retail expansion of showrooms for all brands in FY09

In last five years Titan’s mcap increased ten times outperforming a four fold increase in Sensex m-cap.

At the current market price, the P/E is down 60% from its five-year average of 49, making it a good pick

Titan showed a steady growth in its retail expansion in FY2009 with the launches of new showrooms for brands Tanishq and World of Titan Titan Eye+ contributes little to the top line is also on track by adding nearly 40 stores in the fiscal