Titan's Valuation

One thing that has perplexed me is the share price of Titan. Its financial performance is anything but satisfactory. But its share price has more than tripled since March 2003. It was Rs.52 in March 2003. It has increased to Rs. 106 in March 2004, and now it is hovering around Rs.182. Either there is something about Titan that the market knows that I do not know. Or the market is wrong.

I started looking at all that has been written about Titan in the last one year. Yes. Titan has changed, and changed for the better. Its DE ratio has improved. Last year itself, it redeemed debt without issuing additional equity. In the recent past for the first time, it increased sales without issuing equity. It reduced dividend payout and I believe it is a good thing for its DE ratio (2.5 on a book basis) is still very high. Its supply chain initiatives have reduces its working capital investments. It has replaced Rs.100m of short term debt with long term debt.

However, one thing that confused me is its policy with respect to Tanishq. Its operating margin is much lower than that for the watch segment. Though it is contributing about 43% of the total sales, it is contributing only about 27% of the profit. But Titan wants to depend more on the jewellery division. However the share of the studded jewellery (with higher margin) has increased and hence the overall profitabilty of the jewellery division has increased.

I first did a financial statements analysis by using the figures for 2004. It has changed a lot. For every Re1 that Titan gets now, it gets about Re. 0.288 from equity shareholders. Its low working capital investment has increased its turnover substantially, and it ensures that even after payment of interest, there is something left for equity shareholders. The incremental ROE comes out to about 15.2% (against a cost of equity of 14.5%). This figure was negative till last year.

Then I did a value driver analysis on the company. I find that asset turnover does not have a major impact on the EVA of Titan. Does this mean that its entire effort on supply chain is meaningless? The answer is no. Because now sales growth has become a major value driver. More sales can now come without additional investments in working capital. Titan is also increasingly depending on outsourcing. Together they reduce its dependence on debt. This increases the margin (net margin). In fact now, sales growth has a larger impact as compared to margin.

But do all this justify a price of Rs.180? My analysis shows that its intrinsic value can vary between Rs.156 to Rs. 231 depending on what assumptions you make. But one does not need to make mad assumptions now (as before) to justify the price of Titan.







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Compulsory Class Attendance

What does compulsory class attendance rule achieve?

Nothing, as per a recent research done in US. The study does not find any relationship between the performance of the students in an Economics course (at a graduate level) and class attendance.

I however believe the study is flawed in many counts. Firstly, performance in the examination should not be used as the output in the system. My experience shows that students who attend the classes regularly are sincere students and get jobs during the final placement much ahead of students who are not as sincere.

There is another advantage of attending the classes regularly. Not all lectures will be equally entertaining. In any case faculties are under no obligation to entertain the students during the class. Students who attend all classes regularly get used to this boring stuff and it increases their tolerance level and improves their personality. Once they get a job, where in the meetings they have to listen to all the stupid things their boss has to say, they will be able to cope with the situation much better.

Not so with students who do not attend the clases regularly.


(P.S. I have 14 gmail invitations. If you are interested please send me a mail at pitabasm@gmail.com)






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Stocks for 2005

I always believe that when real options are absent, DCF method is the only scientific method available to value a stock. DCF method emphasizes on cash flow, growth rate in cash flow and riskiness while valuing a stock. And a rational investpor should care for nothing else.

For a research journal, I was valuing the 30 stocks in Sensex as on 12 December 2004. I found that as many as 23 of the 30 stocks are grossly overvalued. I find that three stocks, namely Hero Honda, HLL, and HPCL are undervalued by the market. So much so that even if these stocks stop growing, one can still find the current values to be lower than the fundamental value.

Amongst the stocks valued at a very high level, Satyam, and Balaji televenture stand out. For Balaji Tele Venture, I found that even a 100% growth for the next ten years cannot justify the current stock price.

Subsequently I tried to value Sensex after deriving the values of all the stocks. Here instead of trying to value Sensex for some realistic growth projections, I tried to find the range within which it can fluctuate given the current madness of the stock market.

I found that if the market remains mad as it is now, the max value of Sensex will be about 6200. However, a more realistic value seems to be about 2300.





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Six Rules of Academics

Based on my experience in three business schools, I find that certain funny rules work in academics. I am sharing these rules here.

• Even if you extend the deadline of assignment submission by one month, students are going to submit the same assignment that they will submit otherwise.
• Students come to your office to get their doubts cleared, when you are either extremely busy or absent.
• B Com students never do well in accounting courses in an MBA program.
• A finance professor can never tell the difference between OB, HR, IR, PM, etc.
• More the number of students who tell you that they are enjoying your course, the lower the feedback you receive from the students.
• Two professors can never work in a group effectively.