06-09-2005

Titan Industries Ltd

Why Titan interests us?

Titan Industries, 25 : 28 JV between Tatas and Tamil Nadu Industrial Development

Corporation, is the market leader (>50% market share) in watches and branded
jewellery segment. Restructuring initiatives coupled with remarkable performance of
jewellery business has enabled the company to stage turnaround in last two years.
Now, Titan is set on growth trail on back of strong brand image, growing presence in
value added jewellery business and new focus on fashion accessories & Precision
Engineering (PE).

About the company

Titan Industries, world’s sixth largest, integrated watch manufacturer, has built a strong
portfolio of brands like Tanishq (jewellery), Titan, Sonata and sub-brands such as Raga,
Nebula and Fastrack in watch segment. It is also introducing Xylus - watch for luxury
segment. Company’s renewed focus on PE and fashion accessories will further power
growth. Titan also has presence in international market through 100% subsidiaries and
associates.

Investment Positives

Ø The flagship Titan brand is market leader in premium watch segment while Sonata –
the lower end mass market brand, has emerged as largest selling watch brand in
India. In order to meet the increasing demand, company is expanding its watch
assembly capacity and increasing outsourcing for Sonata components. Moreover,
its plans to assemble higher value added Titan watches at excise-free units will
improve profitability in coming years.

Ø Branded jewellery market is set to grow exponentially in coming years. Tanishq, with
its first mover advantage and robust strategy, is all set to cash in on this boom.
Increasing focus on high margin diamond studded jewellery segment (its contribution
in product mix has increased from 20% earlier to 35% in FY05 and is expected to
further move up to 40% by 2010) will continue to improve profitability.

Ø Company has one of the largest chains of branded stores. It has started leveraging
its retail space for product launches & extensions. Towards this end, Titan launched
Fastrack brand of sunglasses and Tommy Hilfiger watches. Going forward,
aggressive expansion of retail chain will not only improve sale of existing products
but will also enable company to sell a wider range of premium fashion products
including leather accessories.

Ø PE business, was set up to reduce manufacturing cost in watch division, has

developed capabilities to provide critical PE components for aerospace industry,
medical equipment and dashboard clocks for automobile industry. With India
becoming important hub for hi-end manufacturing, there is tremendous potential for
scaling up operations of PE business, which is going to be one of the major growth
drivers in future.
Ø To support its ambitious growth plans, Titan would incur capex of Rs.100 crore in
watch division and Rs.150 crore in PE business over next five years, to be part
financed thru 1 (PCD of Rs. 600/-) : 20 (equity shares of Rs. 10/-) rights issue
aggregating Rs. 126.8 crore. Post rights, equity will enhanc e to Rs.44.4 crore.

Ø After ending FY05 with its best ever performance, Titan continued excellent show in
Q1 FY06. Net sales grew by 42.9% to Rs.286.21 crore. OPM improved to 6.2%
(5.5%). This backed by low interest cost led to spurt in PBT (before extraordinary
expenses) to Rs.7.67 crore as against a loss of Rs.1 crore. After providing for extra
ord. expense of Rs.5.03 crore (Rs.6.94 crore), it reported PAT of Rs.5.02 crore (loss
of Rs.5.78 crore).

Ø Company has pruned its debt from Rs.467 crore (FY03) to Rs.318 crore (FY05).
Moreover, losses in international operations have been substantially written off.
Above initiatives will enable company to grow topline @ 25% (+) CAGR and PBT @
35% (+) CAGR over next five years.
Investment Negatives

Ø Watch segm ent could be stagnating with increasing penetration of mobile phones
and hi-tech products.
Ø Competition from grey market is a challenge in lower end of watch market.
Ø Lack of capacity in high growth jewellery business.
FY 04 FY 05 % Q1 FY Q1 FY % FY 06 % FY 07 %
Rs. in Crores A A Inc. 05 A 06 A Inc. E Inc. E Inc.

894.8 1,079. 20.7 42.9 1,353. 25.4 1,710. 26.3

Net Sales 9 95 % 200.31 286.21 % 89 % 58 %
-
30.6 7.5 9.4
Other Income 2.09 2.73 % 0.53 0.49 % 2.94 7.8% 3.22 %

111.9 22.1 59.0 35.8 28.5

Operating Profit 4 136.69 % 11.52 18.32 % 185.59 % 238.40 %
- - - -
Interest Expenses / 17.8 24.9 34.3 42.0
(Income) 37.62 30.92 % 7.72 5.80 % 20.33 % 11.79 %
- 1.0 12.5 11.1
Depreciation 21.47 19.61 8.7% 4.80 4.85 % 22.06 % 24.51 %
63.0 66.2 41.1
P.B.T. 52.84 86.16 % (1.00) 7.67 143.20 % 202.09 %
- - -
Extra Ord. Income (38.8 38.6 27.5 76.5 6.6
/ (Exp.) 2) (53.79) % (6.94) (5.03) % (12.62) % (11.78) %
137. 296. 28.9
Net Profit 11.51 27.35 6% (5.78) 5.02 108.39 3% 139.66 %
12.3
OPM (%) % 12.4% 5.5% 6.2% 13.5% 13.7%
Equity Capital (Rs
10/-) 42.28 42.28 42.28 44.39 44.39 44.39
Annualised EPS 74.8 57.1 25.4
(Rs) 9.47 16.56 % 0.08 8.38 26.01 % 32.63 %

Book Value (Rs) 29.60 32.46 68.95 95.03

Valuation

At Rs. 481/-, the share is trading at 18.5 times FY 2006 expected EPS of Rs.26.01 and
14.7 times FY 2007 expected EPS of Rs.32.63 In view of excellent future prospects, we
recommend to “BUY” the share at current price.

Disclosures:

The author may have held / hold the above-mentioned securities in their personal
accounts or on behalf of the clients. The information contained has been obtained from
sources believed to be reliable. While taking utmost care in making the report, the
authors or the company does not take re sponsibility for the consequences of the
report. All investment and information and opinion are subject to change without
notice. The investment recommendations may not be suitable to all the investors.

September 6, 2005.