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Stellar performance; net profit up 82.4%; margins expand 193bps
Titan Industries’ (Titan) Q3FY11 revenues, at INR 19.5 bn, jumped ~47%
Y- o- Y, above our estimate of INR 16.5 bn. Q3FY11 EBIDTA was commendable
at INR 1.95 bn vis-à-vis INR 1.07 bn for Q3FY10. EBITDA margin jumped 193bps
Y-o-Y, to 10%. Lower COGS contributed 78bps Y-o-Y, employee cost 73bps and
other expenses 46bps, to margin expansion. Ad spends remained flat for
Q3FY11. PAT catapulted ~82% to INR 1.37 bn (our estimate of INR 1.2 bn).
Jewellery: Volume growth of ~26%; mix improvement continues
Buoyancy in consumer demand contributed to ~26% growth in volumes. Price
hike contributed 19% to growth which was further buoyed by mix improvement.
Jewellery grew a robust 50%, to INR ~15.7 bn, with margins ballooning 196bps
backed by improved product mix (studded jewellery sales grew 50% while plain
gold jewellery grew 20% Y-o-Y) and better operating leverage. Negative capital
employed in this quarter aided by higher consumer advances under ‘Golden
Harvest’ scheme, further enhanced the return profile.
Watches: Highest sales growth in recent quarters; sees uptrading
Watches grew at an astounding 35%, to ~INR 3.3 bn, led by ~28% volume
growth. Watch business grew 15% Y-o-Y in the overseas market. We believe
change in product mix has led to 332bps Y-o-Y expansion in margins.
‘Others’ drag on profitability; eyewear business: potential growth driver
The others segment grew at 37% Y-o-Y, to INR 552 mn; it, however, suffered
PBIT loss of ~INR 52 mn in Q3FY11. Precision and engineering (US, Europe
centric) had a tough quarter. The eyewear business, however, performed
satisfactorily, reducing some of the losses. The eyewear business has grown its
retail presence to over 40 towns through Titan Eye+ stores.
Outlook and valuations: Robust; maintain ‘BUY’
The jewellery business continued its robust performance in Q3FY11. Owing to
better-than-expected numbers in watches and jewellery and steady growth in
retail (624 stores across segments as at Q3FY11 end), we remain confident of
uptick due to improving consumer sentiment. However, in the absence of low
base effect in the coming quarters, such high growth rate is unlikely to be
maintained. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’
on relative return basis.
Company Description
Titan was incorporated in 1984 as a joint venture between the TATA Group and Tamil
Nadu Industrial Development Corporation (TIDCO), a Government of Tamil Nadu
undertaking. The company manufactures and markets quartz watches since 1987 and is
now India’s leading watch manufacturer and retailer. Gradually, jewellery, precision
engineering, accessories, and licensed products were added to the watches portfolio to
leverage on the premium positioning that was assiduously achieved and the success of
the Titan brand was extended to Tanishq and other retail businesses. Its watch brands
include Titan, Edge, Fastrack, Nebula, Raga, Steel, Regalia, Bandhan, Zoop, and Sonata.
The company has also acquired a license for marketing global brands Tommy Hilfiger and
Hugo Boss in India.
Investment Theme
The Indian retail landscape is evolving with interplay of several demographic and
economic factors. The long-term prospects backed by changing consumer behaviour in
favour of larger discretionary spending, has set the stage for a healthy growth in the
retail space over the next five years. The big opportunity lies in the growing share of
organised retail with growing trend among consumers to allocate a larger share of
income to consumption and gradual improvement in lifestyle.
Titan has assiduously positioned itself in the premium watch and designer jewellery
space. With constant product innovation it has become the largest organised player in
both these segments. Given its well established brand and sound management we
expect Titan to replicate this success in its new eyewear venture as well. We believe
Titan has the ability to create significant value with its large distribution presence, strong
brand, designing skills and proven execution track record.
Key Risks
Deterioration of macro conditions: Poor macro outlook could lead to prolonged
slowdown in the company’s growth as the company’s revenues depend on discretionary
spend.
Volatility in gold prices: Gold prices have a significant bearing on gold demand. Any
steep rise in prices results in lower demand, and investment buying that comes in is low
margin.
Margin pressure due to deterioration in product mix and investment buying:
Down trading in watches and jewellery divisions on account of fall in discretionary
spending and higher growth in tier II and IV towns could impact margins.
Sustained losses in new initiatives: New initiatives like Eye+ and the precision
engineering division are currently a drain on profitability. With the slowdown in
consumption these are unlikely to turn around in the next couple of years. Prolonged
losses in these divisions will impact overall profitability.
Business seasonal, restricted to marriage season and festivals: The jewellery
segment is seasonal with respect to marriage season and festivals. Additionally, the
number of wedding dates varies in a year. This could impact the company’s revenue.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Stellar performance; net profit up 82.4%; margins expand 193bps
Titan Industries’ (Titan) Q3FY11 revenues, at INR 19.5 bn, jumped ~47%
Y- o- Y, above our estimate of INR 16.5 bn. Q3FY11 EBIDTA was commendable
at INR 1.95 bn vis-à-vis INR 1.07 bn for Q3FY10. EBITDA margin jumped 193bps
Y-o-Y, to 10%. Lower COGS contributed 78bps Y-o-Y, employee cost 73bps and
other expenses 46bps, to margin expansion. Ad spends remained flat for
Q3FY11. PAT catapulted ~82% to INR 1.37 bn (our estimate of INR 1.2 bn).
Jewellery: Volume growth of ~26%; mix improvement continues
Buoyancy in consumer demand contributed to ~26% growth in volumes. Price
hike contributed 19% to growth which was further buoyed by mix improvement.
Jewellery grew a robust 50%, to INR ~15.7 bn, with margins ballooning 196bps
backed by improved product mix (studded jewellery sales grew 50% while plain
gold jewellery grew 20% Y-o-Y) and better operating leverage. Negative capital
employed in this quarter aided by higher consumer advances under ‘Golden
Harvest’ scheme, further enhanced the return profile.
Watches: Highest sales growth in recent quarters; sees uptrading
Watches grew at an astounding 35%, to ~INR 3.3 bn, led by ~28% volume
growth. Watch business grew 15% Y-o-Y in the overseas market. We believe
change in product mix has led to 332bps Y-o-Y expansion in margins.
‘Others’ drag on profitability; eyewear business: potential growth driver
The others segment grew at 37% Y-o-Y, to INR 552 mn; it, however, suffered
PBIT loss of ~INR 52 mn in Q3FY11. Precision and engineering (US, Europe
centric) had a tough quarter. The eyewear business, however, performed
satisfactorily, reducing some of the losses. The eyewear business has grown its
retail presence to over 40 towns through Titan Eye+ stores.
Outlook and valuations: Robust; maintain ‘BUY’
The jewellery business continued its robust performance in Q3FY11. Owing to
better-than-expected numbers in watches and jewellery and steady growth in
retail (624 stores across segments as at Q3FY11 end), we remain confident of
uptick due to improving consumer sentiment. However, in the absence of low
base effect in the coming quarters, such high growth rate is unlikely to be
maintained. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’
on relative return basis.
Company Description
Titan was incorporated in 1984 as a joint venture between the TATA Group and Tamil
Nadu Industrial Development Corporation (TIDCO), a Government of Tamil Nadu
undertaking. The company manufactures and markets quartz watches since 1987 and is
now India’s leading watch manufacturer and retailer. Gradually, jewellery, precision
engineering, accessories, and licensed products were added to the watches portfolio to
leverage on the premium positioning that was assiduously achieved and the success of
the Titan brand was extended to Tanishq and other retail businesses. Its watch brands
include Titan, Edge, Fastrack, Nebula, Raga, Steel, Regalia, Bandhan, Zoop, and Sonata.
The company has also acquired a license for marketing global brands Tommy Hilfiger and
Hugo Boss in India.
Investment Theme
The Indian retail landscape is evolving with interplay of several demographic and
economic factors. The long-term prospects backed by changing consumer behaviour in
favour of larger discretionary spending, has set the stage for a healthy growth in the
retail space over the next five years. The big opportunity lies in the growing share of
organised retail with growing trend among consumers to allocate a larger share of
income to consumption and gradual improvement in lifestyle.
Titan has assiduously positioned itself in the premium watch and designer jewellery
space. With constant product innovation it has become the largest organised player in
both these segments. Given its well established brand and sound management we
expect Titan to replicate this success in its new eyewear venture as well. We believe
Titan has the ability to create significant value with its large distribution presence, strong
brand, designing skills and proven execution track record.
Key Risks
Deterioration of macro conditions: Poor macro outlook could lead to prolonged
slowdown in the company’s growth as the company’s revenues depend on discretionary
spend.
Volatility in gold prices: Gold prices have a significant bearing on gold demand. Any
steep rise in prices results in lower demand, and investment buying that comes in is low
margin.
Margin pressure due to deterioration in product mix and investment buying:
Down trading in watches and jewellery divisions on account of fall in discretionary
spending and higher growth in tier II and IV towns could impact margins.
Sustained losses in new initiatives: New initiatives like Eye+ and the precision
engineering division are currently a drain on profitability. With the slowdown in
consumption these are unlikely to turn around in the next couple of years. Prolonged
losses in these divisions will impact overall profitability.
Business seasonal, restricted to marriage season and festivals: The jewellery
segment is seasonal with respect to marriage season and festivals. Additionally, the
number of wedding dates varies in a year. This could impact the company’s revenue.
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