Titan Industries (BOM:500114)

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Titan is India's largest watchmaker with a share of 60% of the domestic organised watch market. The company diversified into related areas of organised branded jewellery which now accounts for almost 68% of sales. Post FY03, the company started curtailing its international unprofitable businesses and also writing off losses of European operations. After establishing itself in select growth countries in the Middle East and Asia Pacific, Titan hopes to grow aggressively in the domestic market. In 2005, the company forayed into the mass market jewellery business with the launch of Gold Plus stores. It has also recently forayed into the prescription eyewear business segment. In FY09, it closed the two Tanishq stores it had opened in the US and with that exited the US market. This resulted in a charge of Rs 290 m to the profit and loss account. In FY09, the Silver Jubilee year, the company witnessed largest expansion in its retail network adding 135 new stores across business segments.

Titan reported 27% YoY growth in topline in FY09 on account of 36% YoY growth in the jewellery segment. The Time products division reported muted growth of 4% YoY. The operating profits grew at a slower pace of 18% YoY in FY09 as costs grew at a faster pace as compared to the topline. At the PBT level, the company reported 14% YoY growth, while growth in net profits stood at 5.8% YoY. Higher tax outgo apart from rising depreciation and interest costs continued to exert pressure on the bottomline.

The new initiatives (prescription eyewear and precision engineering) were set up with a view to sweat assets and sustain profitability. The growth of specialty retail, which is more a concept near to lifestyle retailing, is impacted by discretionary spending, which is the first to get impacted in case of a prolonged economic slowdown.

Quarterly Result Analysis- Sept '09

Performance summary

- Titan Industries report tepid growth of 5.4% YoY in 2QFY10, led by growth in jewellery sales. Lower growth of other segments restricts topline growth.

- Operating profits decline by 14.3% YoY as costs grow at a faster rate as compared to topline.

- Dismal show at the operating level led to 11.6% YoY decline in net profits.

                                                      (*trailing twelve month earnings)

What has driven performance in 2QFY10?

- Titan Industries’ revenues grew by merely 5.4% YoY on account of 9.4% YoY growth in the company’s jewellery business, which contributes 70% to the topline. Higher gold prices have impacted customer walk-ins during the quarter ended September 2009. However, with the onset of festive season, jewellery segment continued to support overall growth report in 2QFY10. The time products segment and other segments that include eyewear, precision engineering and machine building and clocks hampered the overall growth of the company. Titan Industries watch sales declined marginally by 2.6% YoY, while other segment revenues came in lower by 7.2% YoY. Precision engineering division witnessed decline in sales on account of cancellations and postponements of orders by international customers owing to the global economic downturn.

- The growth of the Titan’s business is linked to discretionary spending by consumers. In times of economic slowdown, discretionary spending is the first one to take a hit. Despite being in such a business which is vulnerable to economic cycles and spending behavior, the company continues to grow on account of its ability to understand changing consumer preferences and ability to accordingly streamline its products.

- The operating profits declined by 14.3% YoY on account of higher raw material costs and employee costs. The company has changed its inventory valuation method to reflect accurate and appropriate presentation of the financial statements. This move has led to slower growth in cost of consumption of raw materials. The increase in other cost heads has also exerted pressure on margins. However, the company has not divulged the details for the same. The costs could have been higher as the company is expanding its retail footprint.

- The change in inventory valuation method and adoption of new principles of hedging and derivative accounting has resulted in higher profit before taxes of Rs 20 m. Also during the quarter the company has been able to lower interest charges and reported more than two-fold growth in other income. However, dismaying performance at the operating level resulted in 11.6% YoY decline in bottomline.