>Titan (FIRST GLOBAL)

REASONS FOR DOWNGRADE

• Titan delivered a disappointing performance in Q4 FY09, both on the topline as well as bottomline front, as the economic downturn led to a slowdown in the company’s revenues, while higher operating costs, coupled with an increase in depreciation and interest expense took a toll on its profitability

• The company witnessed a slowdown in sales of the Jewellery segment, while sales of the Time Products segment declined in the quarter

• The ongoing recession forced Titan to close down two Tanishq boutiques in the US

• With gold prices scaling new highs, sales of Titan’s Jewellery segment will continue to be adversely impacted, while the ongoing economic slowdown will affect sales of the Time Products segment

• Also, the company’s high operating cost structure, coupled with rising interest costs, will keep margins under strain, going forward


The Story.....

Titan Industries Ltd. (TTAN.IN)/(TITN.BO) delivered a disappointing performance in Q4 FY09, both on the topline as well as bottomline front, as the economic downturn led to a slowdown in the company’s revenues, while higher operating costs, coupled with an increase in depreciation and interest expense took a toll on its profitability. Titan witnessed a decline in revenues of the Time Products segment, while the revenue growth in the Jewellery segment also slowed down. The company reported net revenues of Rs.8.89 bn for the quarter, up 6.3% Y-o-Y, as against our estimate of Rs.10.52 bn, while its net profit declined 54.0% Y-o-Y to Rs.278 mn in the quarter. The EBIDTA margin declined 392 bps Y-o-Y to 6.3% in Q4 FY09, while the net margin was down 419 bps Y-o-Y to 3.2%. The ongoing recession also forced Titan to close down two Tanishq boutiques in the US, which led to the company incurring a charge of Rs.290.2 mn for the quarter.

With gold prices scaling new highs, sales of Titan’s Jewellery segment will continue to be adversely impacted, while the ongoing economic slowdown will affect sales of the Time Products segment. Also, the company’s high operating cost structure, coupled with rising interest costs, will keep margins under strain, going forward. We are now lowering our FY10 EPS estimate from Rs.59.3 to Rs.32.8. On the valuation front, the stock currently trades at a P/E of 22.7x our FY10 EPS estimate of Rs.32.8 and an EV/EBIDTA of 10.3x our FY10 estimate. We, therefore, downgrade Titan to Moderate Underperform.

In Q4 FY09, Titan reported net revenues of Rs.8.89 bn, up 6.3% Y-o-Y, as against our estimate of Rs.10.52 bn. Jewellery sales grew 14.1% Y-o-Y to Rs.6.07 bn (a topline contribution of 68.7% in Q4 FY09, as against 63.5% in Q4 FY08). Time Products sales declined 13.4% Y-o-Y to Rs.2.41 bn and contributed 27.3% to the topline, while Others, which primarily includes Eye wear, Precision Engineering, Machine Building and Clocks, grew 28.6% Y-o-Y to Rs.354 mn and contributed 4.0% to the topline.

Raw material costs, as a percentage of sales, increased by 156 bps Y-o-Y to 69.4%, due to rising gold prices, while Personnel expenses, as a percentage of sales, declined 17 bps Y-o-Y to 5.7% in the quarter. Advertisement expenses and Other expenses, as a percentage of sales, also increased by 32bps Y-o-Y and 222 bps Y-o-Y to 4.2% and 14.5% respectively in Q4 FY09, thus severely eroding the company’s margins. Other expenses included an amount of Rs.290.2 mn incurred on account of two Tanishq boutiques being closed down in the US due to the economic recession. The higher than proportionate increase in total operating expenses led to a decline of 392 bps Y-o-Y in the EBIDTA margin to 6.3% in Q4 FY09. Titan reported a decline of 34.1% Y-o-Y in the EBIDTA to Rs.552 mn in the quarter.

The Jewellery segment recorded an EBIT margin of 1.8% in Q4 FY09, as against 5.1% in Q4 FY08, while the Watches segment reported an EBIT margin of 19.2% in Q4 FY09, as against 21.6% in Q4 FY08. The EBIT margin of the Others segment came in at a negative 28.6% in Q4 FY09, as against a negative 29.5% in Q4 FY08. An increase of 130.5% Y-o-Y in depreciation, coupled with a rise of 97.8% Y-o-Y in interest costs, led to a decline of 54.0% Y-o-Y in the profit after tax to Rs.278 mn in Q4 FY09. The net profit margin declined 419 bps Y-o-Y to 3.2% in Q4 FY09. Titan reported a proforma diluted EPS of Rs.6.3 for Q4 FY09, as against Rs.13.6 in Q4 FY08.

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