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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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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posted by Pitabas Mohanty at 5:09 AM
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