Analysis of Annual report of Titan industries Limited

Submitted ToProf. Vandana Gupta, FORE School of Management, New Delhi

Submitted ByNikhil K Khattar(201088) Prashant Pallaw(201106) Nitin Aggarwal(201095) Kritanjali Maltiar(201066) Rakesh Kumar(201115) Virendra Anand(201120)

Chapter 1
Introduction and Background
Titan Industries is the world's fifth largest wrist watch manufacturer and India's leading producer of watches. It is a joint venture between the Tata Group, and the Tamil Nadu Industrial Development Corporation (TIDCO) and was established in 1984. There are four key product line for the company namely- watches, jewelry and precision engineering and others. Watches Division:At the time of its incorporation, Titan was the third watch company in India after HMT and Allwyn. Titan formed a joint venture with Timex, which lasted until 1998, and setup a strong distribution network across India. As of 2010, Titan watches account for a 60% share of the total Indian market and are also sold in about 40 countries through marketing subsidiaries based in London, Aden, Dubai and Singapore. Titan watches are sold in India through retail chains controlled by Titan Industries. Jewelry Division:Tanishq is the brand under which Titan sells jewelries and diamonds. Tanishq is currently the most prominent jewelry brand of India, and it pioneered the concept of branded jewelry and ornaments in India. Karatmeter was introduced to create confidence among the customers as initially they were reluctant to buy from Tanishq. Bulk of Titans revenue is generated by its jewelry division. Precision Instrument Division:Precision Engineering Division of Titan was started in 2002. It has become one of the leading manufacturers of Precision Parts for Automotive and Aerospace Industries. The Diverse Product range includes pointers, dashboard clusters like Fuel Gauge, Temperature Gauge, Gear Shift Indicators, Clocks for Automobiles and any kind of Injection molded Plastic parts, Electromechanical Assemblies for automobiles, all kinds of pressed and turned parts for automobiles. Others:Other product ranges of Titan include eyewear and accessories under the name of Fastrack. In fact Fastrack is the largest selling eyewear in India. As acknowledged by the Managing Director of Titan, accessories division of Titan would not be able to compete in the main stream, but it is being used to strengthen the brand name of Fastrack.

Board of Directors:A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of governors, board of managers, board of regents, board of trustees, board of visitors, or executive board. It is often simply referred to as "the board." Table: Board of Directors of Titan Name Of Director Mr.Bhaskar Bhat Mr. Debendranath Sarangi Mr. Rajeev Ranjan Mr. N N Tata Mr. Ishaat Hussain Mr. T K Balaji Dr. C G Krishnadas Nair Ms. Vinita Bali Mr. V. Parthasarathy Mrs. Hema Ravichandar Mr. R. Poornalingam Mr. Nihal Kaviratne Nominated Commision Sitting by Fees TATA Group 1,50,00,000/TIDCO 15,36,900/- 40,000/TIDCO TATA Group TATA Group Other Directors Other Directors Other Directors TIDCO Other Directors Other Directors NA 12,08,100/5,36,900/26,84,600/22,81,900/87,500/40,000/2,00,000/1,67,500/Number of Shares NA NIL NIL 2345 703 28050

33,55,700/- 2,37,500/- NIL 24,16,100/- 1,80,000/- NIL 28,18,800/- 2,07,500/- NIL 10,73,800/- 75,000/NIL 14,76,500/- 1,07,500/- NIL 16,10,700/- 1,20,000/- NA

Important Observations about the Board of Directors: y Director's remuneration is lower for Titan Industries as compared to the Board of Directors at the other similar sized companies. So retention of the members may be an area of concern for the company. Employee stock Option Plan(ESOP) helps in alignment of interest of higher management with share holders. ESOPs are not used by the company to encourage its higher management.

Shareholding Pattern:Share holding pattern gives the amount of shares of a company held by different investor communities. Following table gives the share holding pattern of the company. Table: Shareholding Pattern of Titan Industries Ownership Pattern as on 30-06-2011 Foreign (Promoter & Group) Indian (Promoter & Group) Total of Promoter Non Promoter (Institution) Non Promoter (Non-Institution) Total Non Promoter Total Promoter & Non Promoter Custodians(Against Depository Receipts) Grand Total No of Shares 0 473267660 473267660 165868324 248650176 414518500 887786160 0 887786160 % Share Holding 0 53.30 53.30 18.68 28.00 46.69 100 0 100 Share Holder 0 25 25 348 92882 93230 93255 0 93255

As we could observe from the above table, the company is closely held by its promoters. Among the promoters TIDCO holds the maximum amount of shares. 28% of the shares are held by general public. Around 7% of the shares are held by Rakesh Jhunjhunwala.

Chapter 2
Operating Performance
This chapter of the report deals with analysis of different segments, peer comparison and raw material cost for the company. Segment Reporting gives the percentage break-up of the amount of sales going into each of the segments. Peer comparison provides with the comparison of each of the segments with other companies in same business. Raw material analysis would show the nature of raw material used by the company. 1. Segment Reporting:There are four prominent segments according to which company segments its revenues. They are watches, jewelry, others which include products other than jewelry and watches like eyewear , precision instruments. The last segment is called corporate which reflects revenues like commissions and other services provided in B2B form. Table 2.1: Segment Reporting:Watches Revenue(Rs. Lakhs) Net Sales Previous Year %(2010-11) %(2009-10) Segment Results PBIT(2010-11) PBIT(2009-10) %(2010-11) %(2009-10) Other Information Segment Assets Profit per unit asset No. of units Sold(201011) No. of units Sold(200910) Av. Price/Unit(2010-11) Av. Price/Unit(2009-10) 126516 102534 19.40 21.93 18623 14473 30.66 41.74 59960 31.05 Jewelry 501202 349747 76.86 74.82 42910 25468 70.66 73.44 182410 23.52 Others Corporate Total 652090 467442 100 100 994 -1378 1.63 -3.97 112511 0.88 60721 34674 100 100 373395 16.26

24372 Nil 15161 Nil 3.73 Nil 3.24 Nil -1806 -3889 -2.97 -11.21 18514 -9.75

13628615 11061018 928.31 926.98

2273354 2091391 22046.80 16723.17

In this table, profit per unit asset gives the profit earned by a particular segment with respect to assets allocated to it. Number of units sold for both the years is quite a homogenous mixture of products. Watches include both wrist watches and clocks and jewelry include both coins and jewelry. In both the above segments number of units sold includes manufactured and purchased items. Other two segments are ignored in this section as for others which include eyewears, accessories and precision instruments, calculation of average price would not give the actual picture. The costs for precision instruments are very high with respect to eyewears. In case of corporate, numbers of units were not provided by the company. As we see from the table, percentage break-up of sales is almost same for both the years. The drop in jewelry can be attributed to drop in demand due to continuous rise in gold prices. The percentage break-up of PBIT for these two segments show drastic changes, but these may be due to decrease in losses of others and corporate segments. As informed by the MD of Titan Industries, eyewears business is still running in losses but the precision instruments segment is profitable. PBIT per unit of asset is highest for watches while is low for other sections. The reason may be that other segments are relatively new and operational efficiency might not be achieved at a very high level for them. Here we also see that even though there was a rise in prices of gold during the year, number of units sold for jewelries has increased. This shows a high level of customer loyalty towards the company. Company doesnt maintain a geography wise segmentation as the operating facilities are common for both domestic and export business.

2. Peer Comparion:For Titan, our group identified two major segments for peer comparison. They are watches and jewelry. Major chunk of precision instruments (apart from sales of Titan) is mainly imported. So we dont have clear competitor for this segment. Watches Division:Titan Industries control a market share of about 605 in watches segment in India. Bulk of the rest sales comes from grey market. So, we observe that there are not many listed competitors for Titan in watches segment. In premium segment, the companies like Rado, Tissot, etc are not listed. So the only eligible competitor for peer comparison is Timex Group.

Table 2.2: Peer Comparison:Titan Industries Rs. 19491.35 cr 65% 14.71% 211.00 Timex Group Rs. 291.34 cr 15% 9.33% 13030.56%

Market Capital Market Share PBIT Margin RO Segment Asset

According to an estimate, unorganized sector control 65% of the watch market in India. The figures of market share given in the above table reflect the market share out of organized sector. For calculating PBIT margins and return on segment assets, segment reports of both the companies were used. The market share of Titan also includes gains from its other businesses. So it is far higher than Timex Group. Higher PBIT margins for Titan reflect its control over pricing due to monopolistic position. High ROSA may indicate over utilization of assets by Timex Group for its watch division. Jewelry Division:Tanishq, the jewelry division of Titan was one of the first retail chains for jewelries and diamonds. It has captured almost 70% market in the retail chain division of jewelries in India. The other main retail chain is Gitanjali Groups Nakshatra. The third company we have taken for comparison is Shree Ganesh jewelers. It has third highest market capital for any jewelry company. Table 2.3: Peer Comparison:Titan Industries Rs. 19491.35 cr 70% 8.56% 274.76% Gitanjali Gems Shree ganesh Jewelry Rs. 2881.39 cr Rs. 894.40 cr NA NA 6.41% 6.06% 26.59% 176.94%

Market Capital Market Share PBIT Margins RO Segment Assets

High PBIT margins for Titan indicate the monopolistic power it has over the market. Bulk of sales for Gitanjali comes from diamonds while for Titan jewelries contribute highest for the sales. Again, here return on segment assets is highest for Titan which reflects higher efficiency.

3. Raw Materials:Raw material for Titan includes gold and precious stones for its jewelry division. Bulk of the raw material is imported by the company. Company also imports finished good for resale.

Table 2.4: Raw materials

(Rs. Lakhs) 2009-10 260336.77 624.26 1077.52 586.78 26245.29 18695.84 1177.59 308744.05

Precious metals Brass Steel Components Precious and semi-precious stones Sundry charges Total

Gold Other

2010-11 369239.5 1013.07 1237.18 754.03 34533.09 28573.62 1769.02 437118.58

Most of the raw materials required by the company are metals and so company is exposed to high volatility in the prices of raw material. Even though units of gold imported 15698 kg in 2010 to 17934 kg in 2011, a part of increase in value is also due to rise in prices. Components include those used in watches. Following table gives the percentage break-up of import and indigenous raw materials.

Table 2.5: Raw Materials Imports:In Rs. Lakhs 2010 65% 1% 665 34%

Imports Custom Duties Total(Imports) Indigenous

2011 69% 1% 70% 30%

Here we see that almost 70% of the raw materials have been imported by the company. So company is very much vulnerable to foreign currency fluctuations. Apart from these raw materials, company also imported Rs. 22580.5 lakhs of finished goods for resale. These include eyewear and watches.

Chapter 3
Financial Analysis
In this section of the report, we will try to do the financial analysis of the company. Tools used for financial analysis of the company are ratios and common size analysis. In ratios, we will consider liquidity ratios, solvency ratios, profitability ratios and efficiency ratios. 1. Liquidity Ratios:Liquidity ratios give the current liquidity positions of the company. It gives the companys ability to pay short term liabilities as they fall due. Following graph gives the liquidity ratios for past four years of the company.

Graph 3.1: Liquidity Ratios Current ratios have been below 2 for all the four years under consideration. This may be due to high amount of creditors on the books of company. High increase in cash at hand may be attributed to improvement of quick ratio for the current ratio.. So we can say that current liquid position is not very good for the company. But due to its high reputation, company can sustain these low levels.

2. Solvency ratios: Solvency ratios give the long term stability of the company. It gives companys ability to meet its long term obligations. Following graph would give the solvency ratios for the company for past four years.

Graph 3.2: Solvency ratios Titan is a low debt company. This is evident from both the ratios shown in the graph. There is a reduction in long term debt for the company for these past four years. Debt equity ratio is higher than long term debt equity ratio due to high current liabilities.

4. Profitability ratios: These ratios show the profit margins at different level. Higher the margins, higher the cushion for the company to face market fictions. Following graph shows the profit margins for the company.

Graph: Profitability ratios

There is a steady increase in both the profit margins for the company which is a good sign. The margins have improved for the company due to operational efficiency. The amount of increase in operational costs is lower than the proportionate increase in sales figure for the last three years.

5. Return on Investments: These ratios give the amount of profits earned by the company using the assets it has. Following graph gives the return on networth and return on capital employed by the company.

Graph 3.5:Return on Investments: Return on capital employed and networth have increased for the given four years for the company. The reason for this may be increase in profits of the company while the capital structure has remained almost same. We can see that both these ratios are quite healthy for the company.

6. Debt Coverage Ratio: This ratio gives the number of times financial charges have been covered by the PBIT of the company. Higher the ratio, higher is the ability of the company to meet its financial charges. Following graph gives financial charges coverage ratio for the company.

Graph:3.6: Financial Charges Coverage Ratio

The financial charges coverage ratio for the company is quite high. This may be attributed to low long term debt for the company. The recent hike in the ratio may be due to increase in PBIT for the company.

7. Common Size Statements: In this part of analysis common size statements of balance sheet and P&L account has been analyzed for the past four years. The following table gives the common size balance sheet of the company. Table: Common Size: Balance Sheet:2010 SOURCES OF FUNDS : Share Capital + Reserves Total + Total Shareholders Funds Secured Loans + Unsecured Loans + Total Debt Total Liabilities APPLICATION OF FUNDS : Gross Block 4.06 89.75 93.81 6.19 0.00 6.19 100.00 61.49 2009 5.57 85.30 90.87 9.13 0.00 9.13 100.00 78.32 2008 6.11 69.75 75.86 16.07 8.07 24.14 100.00 81.61 2007 6.40 56.48 62.88 27.12 10.00 37.12 100.00 80.45

Less : Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Net Deferred Tax Total Assets Contingent Liabilities

35.59 25.90 1.77 0.84 182.40 10.40 100.17 20.13 313.10 221.33 20.13 241.46 71.64 0.00 -0.14 100.00 5.31

45.37 32.95 1.54 0.96 168.14 11.74 23.42 22.96 226.26 144.21 16.90 161.11 65.15 0.00 -0.60 100.00 6.71

43.84 37.77 2.69 1.05 165.51 14.62 7.53 15.71 203.36 129.52 12.86 142.38 60.99 0.00 -2.50 100.00 5.34

41.17 39.28 1.44 6.83 147.20 13.90 7.49 14.30 182.89 115.61 11.27 126.88 56.01 0.00 -3.56 100.00 5.90

As we could see from the sources of funds, the company is mostly funded by shareholders funds. Company doesnt have any unsecured loans. A part of unsecured loans is from debentures and a part from a bank. In current assets, inventory level is very high. This may be attributed to the fact that company imports about 70% of its raw material. Also, due to speculations of further increase in prices of gold, company might have accumulated some extra amount. 76% of the inventories held by the company is finished goods. The reason may be that company is not able to sell its product due to high inflationary pressures on gold and other materials. Other reason may be that company sells its products from showrooms and these finished goods may be those displayed in showrooms. The company has a very high amount of cash and cash equivalents. In fact Titan is one of the most cash rich companies in India. There may be many reasons for this increase. Company may not be able to allocate capital effectively or it may be accumulating cash to do some acquisitions. As we can see from the statement above, current asset is more than 300% of total asset. This is due to high cash accumulated this year. Inventories for the Titan remain high historically. Generally jewelry companies have higher fixed assets and so is the case with Titan. And since Titan resells imported watches, this also may be the reason for high inventories. Current liabilities are high due to high creditors(66%). This shows a high credit worth of the company. It may be attributed to the business model pursued by Titan.

Now we will analyze the common size statement for balance sheet for past four years. Table: Common Size Statement: P&L Account INCOME
Sales Less : Excise Duty Net Sales Income Other income Total EXPENDITURE Operating and other expenses Depreciation / Amortisation Interest Total PROFIT BEFORE TAXES Income taxes Current Deffered Fringe Benefit Tax PROFIT AFTER TAXES Less : Income tax of earlier years NET PROFIT Profit brought forward Amount available for appropriation Appropriations Transfer to debenture redemption reserve Proposed dividend on equity shares Tax on dividends Transfer to general reserve Balance carried to balance sheet

2010
99.91 0.76 99.15 0.85 100.00 90.24 0.52 0.12 90.89 9.11 1.24 -0.05 0.00 2.51 6.59 0.05 6.54 4.15 10.69 0.08 1.69 0.27 2.07 4.12 6.58

2009
100.36 0.61 99.75 0.25 100.00 91.32 1.28 0.54 93.14 6.86 1.74 -0.29 0.00 1.45 5.40 0.06 5.34 4.50 9.84 0.11 1.42 0.24 2.25 4.02 5.82

2008
101.03 1.16 99.86 0.14 100.00 92.08 1.10 0.77 93.95 6.05 1.65 -0.17 0.11 1.59 4.46 0.29 4.17 5.74 9.91 0.14 1.17 0.20 2.87 4.37 5.54

2007
101.52 1.58 99.94 0.06 100.00 91.58 0.99 0.67 93.25 6.75 1.10 0.24 0.12 1.47 5.28 0.27 5.02 4.37 9.39 0.18 1.19 0.20 0.53 2.09 7.30

The main observation from this common size P&L account is that the amount of increase in operating and other expenses is proportionate with the increase in sales and it has been decreasing for the past three years. PBT margins have increased for current year due to low depreciation charges and decrease in operating expenses. A fixed amount of fund is transferred to debenture redemption reserve as per the requirements of Companies Acts amendment of 2000.

8. Cash Flow Statement: In this section of the report cashflow statement is analyzed. Cash flow statement gives the amount of cash generated by the company and the sources for it. The following table gives the cash flow statement for Titan Industries.

Table: Cash Flow Statement: Cash flow statement for the year ended 31 March 2011 Rs. lakhs
Current year A. Cash flow from operating activities Net profit before tax Adjustments for : Depreciation / Amortisation Unrealised exchange difference Marked to Market loss Loss on sale/ disposal/ scrapping of fixed assets (net) loss/ (gain) on sale of investments Bad debts written off Provision for doubtful debts/ advances (net) Interest income Dividend income Interest expense Operating profit before working capital changes Adjustments for : (Increase)/Decrease in sundry debtors (Increase)/Decrease in inventories (Increase)/Decrease in loans and advances Increase/(Decrease) in current liabilities and provisions Cash generated from operations -1995.29 -65349.72 -2149.45 130082.83 119720.22 1170.68 -13763.98 -1905.59 22302.16 47595.28 3448.25 141.45 118.08 180.81 48.32 -13.81 5511.17 -1.14 820.97 59131.85 64.05 1062.62 2541.88 39792.01 6008.01 -426.61 219.42 324.15 -7.97 59900.09 32131.70

Rs. Lakhs
Previous year

Direct taxes paid Net cash from operating activities B. Cash flow from investing activities Additions to fixed assets Proceeds from sale of fixed assets Purchase of investments- Others Proceeds from redemption of investments Dividends received Interest received Net cash used in investing /activities Cash flow from financing activities Proceeds from new borrowings Repayment of borrowings Dividends paid Tax on dividends paid Interest paid Net cash used in financing activities Net cash flows during the year (A+B+C) Cash and cash equivalents (opening balance) Add / ( Less) :Unrealised exchange (gain) / loss Cash and cash equivalents (closing balance) Add / ( Less) :Unrealised exchange (gain) / loss

-17224.32 102495.90

-13404.79 34190.49

-6624.12 84.97 -150.00 0.13 1.14 3963.71 -2724.17

-4415.84 187.49 -0.45 11.97 1052.56 -3164.27

C.

-542.22 -6615.83 -1105.88 -797.99 -9061.92 90709.81 18671.84 42.77 18714.61 109488.78 -64.36 109424.42 90709.81

1042.68 -11046.81 -4415.42 -754.40 -2620.59 -17794.54 13231.68 5469.10 13.83 5482.93 18671.84 42.77 18714.61 13231.68

Increase in cash and cash equivalents

The total cash generated from investment activities of the company is more than twice the net profits of the company. This increase is mainly because of increase in current liabilities of the company. This may show that company has a good reputation with the creditors. A part of the increase has also come from the increase in profits of the company. The cash flow from investing activities is negative. The main reason for this is the addition of new fixed assets. The amount is less negative than last year because of increase in interest received by the company.

In cash flow from financing activities, company has repaid some loans. Due to continuous repayment of loans, interest expense has decreased. Company has increased the payout of dividends for the year. There has been a high increase in cash flow for the current year with respect to last year. This has been attributed to increase in current liabilities. The company would have to pay these liabilities in near future, so the cash reserves are likely to go down. But even though company would be able to meet its cash requirements if it maintains the current profit levels. If company is in need for further cash, it can use debt channels to fund itself as debt equity ratio is healthy for the company.

Chapter 4
SWOT Analysis
y y y y Strengths Ability to maintain low debts. High cash inflows. High market shares in jewelry and watches business. High operational efficiency. y y Weaknesses High current liabilities. Not much funds in investments.

y y y

Oppurtunities High amount of cash at hand. Many options for fundings. Operating in under-penetrated markets.

y y y

Threats Increasing completion in jewelry division. Fluctuations in prices f raw materials. High international exposure for raw materials.

References:1. www.wikipeida.com 2. www.investopedia.com 3. www.answer.yahoo.com 4. www.answer.wiki.com 5. Ramachandran m, Kakani R K, Financial accounting for Management. 6. www.titanworld.com 7. www.capitaline.com 8. www.moneycontrol.com 9. www.timexindia.com 10. www.gitanjaligroup.com 11. www.sgjhl.com