Eye Catching Jewel - Titan Industries

The name Titan Industries has become synonymous with watches. However, the company has gone much beyond watches and has successfully forayed in to jewellery business. In fact, the jewellery business of the company contributes 73 per cent of the total revenues, with the balance coming from watches and other businesses. Moreover, the profits of the jewellery business have easily sped past the watch segment in FY09. From its presence in the watch business, the company spread its wings to include other segments such as jewellery and precision engineering and has recently forayed into eyewear business where organized players had no presence. TIL has not just forayed in these segments but turned these products from having a mere utility value to being bought as fashion accessories, be it watches or jewellery. Take, for example, its jewellery business. With brands such as Tanishq and Gold Plus, TIL has achieved strong leadership in the branded jewellery market. In fact, in the watch segment TIL commands 60 per cent market share of the organised watch market in India. Its brands include Titan, Sonata, Xylus and Fastrack. In fact, we expect something similar in the prescription eyewear segment as well in the coming years. It is this strong business model that has attracted big investor such as Rakesh Jhunjhunwala who continues to remain invested in the scrip. In fact, in FY09 his stake continued to remain over 8 per cent. However, though TIL has managed the last fiscal well, will it be able to sustain growth in the current fiscal as well?

A Tough Macro Environment
Last fiscal saw a major slowdown in India’s economic growth, which affected every business and TIL is no exception. The economy in the last two quarters of FY09 grew at just 5.8 per cent each, much lower than the numbers seen in prior quarters. However, though there is optimism about the economic growth in FY10, the revival will take a bit of time.[PAGE BREAK]

TIL is basically into business of lifestyle products and tough economic scenario impacts the purchasing power and preferences of the customers. In FY09, TIL’s watch segment’s revenues grew by a mere 3.59 per cent. In fact, on sequential quarter comparison, the watch segment sales in Q4FY09 grew by 24.30 per cent, though in Q3FY09 it declined by 36.36 per cent. However, the company’s presentation to analyst explains this impact to the planned down-stocking of Sonata. Besides, although jewellery segment’s revenues grew at 36 per cent for FY09, on sequential quarters in Q3FY09 the sales growth stood at 4.85 per cent, while in Q4FY09 jewellery sales actually dipped by 23 per cent. Besides, with gold prices increasing by 23 per cent in FY09, the company volumes have decelerated as well. This has happened for the first time in the jewellery segment for TIL.

Impact of Gold Prices
Any surge in gold prices will impact TIL’s jewellery division and pull down the demand still further. Considering that the company’s jewellery business has become its mainstay, the demand deceleration will erode value in its revenue growth figures. Gold is currently trading at USD 932 and slowly marching towards the USD 1,000 mark. In rupee terms, this translates to Rs 14,581 per 10 gms, close to its all-time peak of Rs 15,780 per 10 gms on February 24, 2009. If gold continues to remain firm or even breaches its previous peak, this will prevent the demand from growing.[PAGE BREAK]

Says Bhaskar Bhat, Managing Director, TIL, “The Indian market is a major driver of the gold prices and if demand for gold falls, then it would impact the prices of gold.” He further adds, “Though experts believe that the gold prices will move up, I believe that the gold prices may hover around USD 900 in the current fiscal.” In Q1CY09, India’s total gold demand fell by a whopping 83 per cent, the lowest quarterly demand seen in 20 years. In fact, for the first five months of 2009, gold imports stood at just 47 tonnes compared to 115 tonnes during the same period last year. In 2008, the total gold import was 400 tonnes for the full year. Bhat is optimistic, though. “The demand for gold will remain good and our jewellery business is expected to grow by 20 per cent in the current fiscal.” TIL is aiming to achieve a revenue figure of Rs 4,600 crore by FY10 and Bhat is confident that this will happen for sure.

Downward Spiral
Though TIL has grown briskly, this growth now seems to be tapering off. Its revenues in the watch segment, for instance, have been declining over the last three fiscals, falling from 19.69 per cent in FY07 to 11.89 per cent in FY08 to a mere 3.59 per cent in FY09. However, Bhat has a different take on the subject. “The watch business is expected to grow by 15 per cent,” he states. But this isn’t the first time the sales growth rate of TIL’s watch segment has fallen. A similar fall was seen during FY04-06 when the growth rate fell from 17.76 per cent to 8.85 per cent. Considering the fact that the economy was then in an upswing mode during FY04-06, why wasn’t the company able to maintain its sales figures? The same has been the fate of the jewellery segment. The sales growth in this segment too has fallen from 63 per cent in FY07 to 36.34 per cent in FY09.

Precision Engineering and Eyewear Business
TIL also has a presence in the precision engineering business (PEB) and eyewear which are still in a nascent stage. PEB achieved a turnover of Rs 76 crore and was able to break even. The eyewear business has a good scalability going forward and if positioned properly could turn into a money-spinner for TIL. This segment has posted sales of Rs 60 crore and it is expected to break even in three years’ time.[PAGE BREAK]

But valuations make sense
For FY09, although TIL’s topline increased by 26.55 per cent to Rs 3,848.62 crore (Rs 3041.09 crore), its bottomline grew by just 7.32 per cent to Rs 169.88 crore (Rs 158.29 crore) due to increased costs. In fact, TIL has seen continuous margin erosion since FY06 and its operating margins also dipped by 267 basis points during the same period. There are certainly some concerns as mentioned above for TIL in the current fiscal. But valuations of TIL have corrected sharply and hence despite the concerns, there is good value that has emerged. It should be noted that on market to sales basis, TIL is available at quite low valuations of just 1.37x its FY09 sales. On PE basis as well, TIL is currently available at 23x its FY09 profits compared to its five year average PE of 49x, which indicates correction in valuations by 53 per cent. Besides with a robust business model and fantastic ROCE of 84 per cent in jewellery and 52 per cent in the watch segment, Titan Industries still can be looked as a buy at CMP of Rs 1179 from long term perspective with target price of Rs 1415 in one year