Titan Industries Ltd’s revenue and net profit grew handsomely in the March quarter compared with the year-ago period, but operating profit margins shrunk owing to higher costs.
Employee costs, advertising and other expenditure have increased substantially on a year-on-year basis.
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Titan’s total operating revenue increased by 36% to Rs 1,778 crore, while net profit rose by 64% to Rs 84 crore. But, net profit growth was mainly helped by a decline in depreciation and interest expenses.
Operating performance was weak, with margins declining by 170 basis points to 5.9% from 7.6% a year ago. One basis point is one-hundredth of a percentage point. Operating profit, thus, grew at a much slower pace of 6% to Rs 106 crore.
Titan derives most of its revenue from its watches and jewellery businesses; they together contributed about 96% to the company’s revenue in fiscal 2011 (FY11).
The watch business dragged down the firm’s profitability. In the March quarter, the watch business accounted for 18% of the total revenue. Its segment profit (earnings before interest and tax, or Ebit) margin fell sharply to 3% from 7.7% in the same period last year.
Analysts from Prabhudas Lilladher Pvt. Ltd wrote in a post-results note that the watch business margin was affected “owing to one-time special bonus to all the employees (four months of basic salary) and higher lease renewal costs”. The one-time impact is supported by the fact that in FY11, the Ebit margin of the watch business increased by 60 basis points to 14.7%.
The watch business also disappointed analysts on growth. “We are surprised at the flat sequential growth in watches; an average sequential sales growth of about 40% (was) seen during FY2005-10,” wrote analysts from Kotak Institutional Equities.
The jewellery business performed well and accounted for 76% of the overall revenue of Titan. Jewellery business revenue increased by a robust 38.5% and Ebit margin rose to 8.6% from 7.2% last year.
Titan’s remaining revenue comes from other businesses, which include eyewear and precision engineering. Other businesses posted Ebit losses in the March quarter and in the fiscal as well.
Since the beginning of this calendar year, the stock has outperformed the BSE-200 Index on the Bombay Stock Exchange. Titan also announced that it would consider a 1:1 bonus issue and stock split of one share of face value of Rs 10 each into 10 shares of face value of Rs 1.
Though it doesn’t change anything fundamentally for investors, it adds to the stock’s liquidity.
An increase in gold prices and a slowdown in discretionary spending are key risks for the stock.
Graphic by Sandeep Bhatnagar/Mint
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