Titan Industries: Regaining the lustre

Volume growth is expected to be strong after some tight moments in the previous year.

The watch and jewellery leader in the organised segment, Titan Industries, is likely to see robust sales growth on the back of rising income levels and stable gold prices. Volumes in watches and jewellery segments grew 12 per cent and 50 per cent, respectively, in FY08. They later slipped to a negative five per cent for watches and 18 per cent for jewellery in FY09, but recovered in FY10. However, as gold prices stabilise, volumes in the jewellery segment are expected to bounce back.

Overall, revenues and earnings have managed to rise at a compounded annual growth rate of 33 per cent and 66 per cent, respectively, since FY05. But, higher gold prices had taken a toll on the jewellery business. Before 2008, the company not only faced lower volumes due to high prices, but also faced other risks, especially inventory gains and losses.

The company generally uses gold on lease facility and pays rent on the yellow metal till it is consumed, point analysts. It closes gold contracts at the time of product sale, and not at the time of purchase, say analysts at Prabhudas Lilladhar. According to the management, this strategy ensures 90-95 per cent hedging and the company does not need to carry any naked inventory on its balance sheet, thus, preventing it from any mark-to-market losses or gains.

Before April 2008, Titan used to apply fixed making charges on per gram basis, thus, exposing itself to margin volatility in an environment of rising gold prices. From April 2008, Titan has linked making charges to gold prices, charging anything between 16 per cent and 20 per cent of the gold price, thereby ensuring stable margins.

The watch segment, which contributes 22 per cent to its revenues and 46 per cent to earnings before interest and tax, has also been seeing better volumes. The market leader in the branded space is expected to see steady realisations at Rs 950 to Rs 1,000 and better margins as the premium segment expands. Importantly, the company enjoys a 51 per cent premium over the Sensex, courtesy its brand presence. This premium is expected to persist, as its returns-on-capital employed remains high at around 40 per cent. Also, it has steadily generated enough cash from the business to become a zero-debt company.