Sunday, March 9, 2014

Titan Company Ltd

BSE: 500114 | NSE: TITAN | ISIN: INE280A01028

A darling of the value investors - even my grandfather owned this stock and through growth became one of his good picks. Its come into the limelight again as the gold imports ban in India seems to have hit margins. I think this is a special situation and cannot continue for long. Plus the pricing power in the hands of Tanishq is large enough to counter the drop in margins.

1. How big is the moat?

A+ Moat.

Needs little explanation. Jewellery is around 80% of revenues and Tanishq is unlikely to be replaced in the largest jewelry market in the world - India. 65% of the organized sector of the watches market is with Titan. Yes watches are rapidly being replaced by phones but as an ornament they still will continue to exist. The weddings industry in India will always continue to consume jewelry and is unlikely to abate in demand.

2. Performance during recessions

Unlikely to be hit. From 2011 till 2013 sales growth was a tremendous 24% when the economy was slow. Also this is likely to become the top Indian luxury stock over the years where the consumers are wedding buyers. Wedding buyers tend to be irrational and emotional leading to massive profits for Titan.

3. Financials

  • CFO vs Net Income: 5 years net income and 5 years CFO is within 2% of each other.
  • Inventories stand at 30% or so of sales value for the past 5 years which is very high - but in a high value retail business that is probably ok.
  • Inventory valuation: Inventories are marked up for finished goods which is a little bit of a concern as discounts may not be factored in.
  • Margins: Net margin has gone up from 3.9% to 6.6% whereas operating margin has stated between 8.6% and 9% which basically means that the margin increase has been due to higher revenues from the same fixed asset base.
  • Return on equity/invested capital: Very high!  ROE has gone up from 29% 5 years ago to 37% last year. The company is virtually debt free with 1100 crores of cash which if subtracted from the Equity will give a ridiculously high ROIC.
  • Debt: Zero
  • Receivables - Stand at 1.5% or so of sales - which is excellent.
  • Working capital - stands at around 3% or so of sales - which is a sign of a very well run company
  • Dividend % of earnings - 30% which is ideal. Shows that the money is being sent back to shareholders and a good percent is reinvested. In this case has been used to pay down debt.

4. Soft factors & growth

  • Promoter shareholding - This is a TATA company and is likely to have great corporate governance thus this factor does not matter much. TATA group owns 25%+ and so does Tamil Nadu industrial development corporation.
  • Employee relations - The company reports manhours of training per head at 10 plus hours per year and 259% of the contractual employees being upgraded for skills. No cases of unrest. This sounds excellent.
  • Growth - Titan is continuously adding brands, stores and increasing international presence in various countries. Growth in India might be slow for the next few quarters until the gold ban is lifted but is definitely going to go up.
  • Is a huge position for Rakesh Jhunjhunwala - so as far as cloing goes might be a 

5. Pricing

I started writing this blog at the wrong time. Should have started 3 months ago! But still at 254 I think this is a good long term Value stock.