Titan Industries

Investors can retain their holdings in the stock of Titan Industries. The company posted strong growth in profits and sales, improvedmargins, and has low debt. Titan has a vast retail network, offerings across price points in the key segments of watches and jewellery, a brand presence unmatched by most other jewellery retailers and an expanding overseas market.



However, at Rs 2,980, the stock has more than doubled in a year. At 46 times the trailing 12-month earnings, and 39 times the estimated earnings for FY-11, this stock is at a stiff premium to jewellery peers such as Gitanjali Gems, though on par with other retail majors. Even with profits growing 51 per cent in FY-10, a good part of the upside appears to be factored in.

For the quarter ended June 2010, profits grew 76 per cent. This growth, however, was on account of lower interest costs following retirement of debt. Interest savings of this order may not be sustainable in the coming quarters, leading to a moderation in profit growth. Investors are thus advised against fresh investments in this stock on account of its stiff valuations.

Watches and jewellery

In the watches segment, Titan owns a clutch of strong brands across the value spectrum. Value offering Sonata commands a good recall in the under-penetrated semi-urban market. Titan Raaga is on the premium side, while Fastrack is a youth brand. Besides its own brands, Titan also markets high-end brands such as Tommy Hilfiger. Exclusive chain World of Titan number 295 stores, (265 at the end of FY-09). Titan introduced a chain of premium watch stores, Helios, marketing own and other brands. Watches are also marketed overseas in West Asia, South Africa and Asia. Potential held in the latter two regions may serve to boost Titan's export revenues, currently at 2 per cent of sales in FY-10.



In the jewellery segment, flagship offering Tanishq still reigns strong, and will continue to enjoy its first-mover advantage in the growing branded jewellery market. Other brands include the higher-end Zoya and the mass-market GoldPlus.

The share of jewellery in total sales increased to 75 per cent in FY-10 from 68 per cent in FY-09. While the nascent branded jewellery market does offer superior growth potential, a greater contribution of lower-margin jewellery at the expense of watches is likely to pressure margins. Operating margins offered by the watches segment averaged a healthy 14 per cent over the past three years, while jewellery managed an average of about 7 per cent in the same period.

Eyewear

The eyewear segment, Titan Eye+, contributed about 3 per cent of sales for FY-10, increasing to 4 per cent for the quarter ended June 2010. Besides eyewear, these stores also offer optometry services. A relatively young business, the segment turned positive in the June quarter, offering operating margins of 3 per cent.

Coupled with the proposed expansion plans, the segment could offer a higher profit contribution, going forward. The higher margins offered by this segment could also help offset the lower margins that jewellery carries. Current store count is at 90.

Financials

Sales grew at a three-year compounded rate of 30 per cent, while net profits grew 31 per cent in the same period. About Rs 110 crore in debt was repaid in FY-10. With minimal fresh debt taken on, debt equity ratio stands at 0.1. Among the lowest in the retail space, low debt will fund expansion plans and sustain margins in a rising interest rate cycle. Interest costs fell 13 per cent in FY-10.

However, an increasing share of jewellery led to operating margins improving only slightly - 7.8 per cent in FY-09 to 8.5 per cent in FY-10. Net margins stood at 5.3 per cent in FY-10, against 4.3 per cent the year before. Inventory cycle improved to 96 days in FY-10 from the 104 days in FY-09, quite an achievement given its nation-wide store network, and the longer cycles of peers.

Expansion plans

Titan opened 52 stores across categories in FY-10, against the 135 new stores the year before. It has charted aggressive expansion plans for FY-11, following an upswing in consumer sentiment, and the potential of the smaller towns. Its presence in such regions, and its lower-value offerings, give it a first-mover advantage even as other retailers are looking to enter this space. Bankrolling expansion will also pose little challenge given its low debt, besides the scenario of lower rentals and revenue-sharing models. Titan plans to add about 35 World of Titan outlets, 15 Tanishq stores and 35 Eye+ outlets.

Concerns

While gold prices appear to have stabilised for the time being, increases in the future may have an impact on demand for jewellery. The company aims to address this risk by introducing lower-priced diamonds for everyday wear, but the branded diamond market already features competitors such as Gitanjali Gems. Overseas retail presence does bring in revenues, but the company has suffered losses in foreign exchange on raw material imports.

via BL