A PE Ratio of 107.66, heavy debts amounting to approximately 200% of the market capitalization PAT margins of just 2%. How did this company go onto give 100x returns over the next 15 years?
We continue our case study on multibaggers with Titan Industries. Ace investor Rakesh Jhunjhunwala invested in Titan Industries in the year 2002 after a broker friend of his shared the idea with him. We have taken 15 years data of Titan Industries to study the making of this Tata group multibagger.
Apart from the market capitalization of Titan Industries, what else has changed in the last decade-and-a-half?
Balance Sheet
The book value has appreciated at a CAGR of 28.76% p.a. over the last 14 years in-line with the networth of the company. In the long run, to make profits from long term investing in the stock market, you need to invest in companies who’s intrinsic value is going to appreciate. While book value is not equal to intrinsic value, we will consider it as a substitute to gauge the management’s performance.
Note how Titan Industries went from being a debt-laden company to a debt free company in this period. Back in FY03 the company had loans of Rs 467 Crores in its books. This is a huge amount for a company with a market cap of ~ Rs 213 Crores. Will you, as a value investor, go and invest in a company having debts double the size of its market cap?
Revenues and Profits
How was Titan Industries able to repay its debt and clean up its balance sheet? For a company to become debt-free it has to repay it’s loans either by using cash flow from operations, selling its assets or by diluting equity (Issuing more shares).
Titan has hardly diluted equity and it has consistently increased it’s gross block while reducing debt. The debt has been repaid over time through the cash that Titan has generated from its operations. The company has not only made profits but it has also managed to convert the profits from mere numbers to cash.
Titan Industries has grown its sales at a CAGR of 21.84% over the last 14 years and at the same time, its adjusted PAT has grown by 40.99% p.a. This clearly demonstrates the company’s pricing power because it has been able to push up revenues without compromising on it’s margins.
The Profit After Tax margin has improved considerably over the years as the company first reduced it’s debt, thus lowering interest costs and later maintained its margins in the 6% to 7% range. Many investors see lowering EBIDTA margins as a negative sign but Titan Industries has defied the conventional thought process over time. Margins in any business will fluctuate regularly. For sustained periods of time you will also see margins trend lower as revenues are being pushed up aggressively.
The above chart gives a clear picture of revenue growth rate being higher than profits till FY06. As the company managed to sustain margins later, the gap between the growth rate of revenues and profits narrowed down.
Cash Flows:
The company has generated operating cash flows amounting to Rs 5,272 Crores between FY04 and FY17. This is against a cumulative PAT of Rs 5,549 Crores in this period.
Titan was a debt laden company back in 2002 (Debt was 2x the market capitalization) but the company grew at a fast pace and was able to generate cash from operations. The management kept reducing the debt in the balance sheet without diluting equity and selling assets.
Efficiency
Titan has consistently improved its Fixed Asset Turnover ratio and its inventory turnover ratio. In FY03, the company was able to sell its entire inventory 2.77 times a year and in FY17, the company was able to do it 6 times in a year. Also, the company was generating revenues of Rs 2.11 for every rupee of fixed asset in FY03 and it has increased to Rs 16.72 of revenue for every rupee of fixed asset. At Raghav Behani Equity Research we emphasize a lot on efficiency ratios as the key to judging the future performance of a company. Infact, investors put a lot of emphasis on PE ratio and other valuation metrics but often ignore efficiency ratios.
Titan Industries has maintained a current ratio between 1.1 to 1.7 throughout this period indicating a comfortable short term solvency position.
Valuations
Investors usually focus on past numbers and current valuations based on these numbers to take investment decisions. You cannot drive a car forward by looking at the rear view mirror. So, you need to gauge the growth prospects of the company and also the longevity of this growth before you invest. In our article titled: D'Mart: Still a Multibagger? we discuss this exact point of looking at current PE levels to term it as expensive. In D’Marts case we found many patterns similar to that of Titan in growth, profitability and efficiency.
At the end of FY03, the valuations of Titan Industries looked like this in comparison to FY17 numbers.
A PE Ratio of 107.66 is appears to be very expensive. To make it look worse, we are talking of a company that has debt in its book equal to nearly twice. Conventional wisdom would have advised to not invest in this company.
One of our top portfolio picks gave our investors close to 400% returns in just 16-18 months. We have written about the process that helped us identified this multibagger in this post.
Tailwinds
Tanishq Turnaround
Titan Industries was a consumer consumption story (It still is). Indians love to buy jewellery, watches and other accessories. Back in 2002, Titan was one of the most used watch brand in the country and India’s population was bound to go up and coupled with rising disposable incomes, we had a strong tailwind that presented before the company a huge opportunity to grow. Titan capitalized on this opportunity and went on to add further expand its portfolio by adding new brands such as Fastrack and Titan Eye+ but back in those days, the now famous Tanishq was a bleeding business. For five continuous years, Tanishq was making losses and Titan was running solely on its watch business profits.
Titan Industries was a consumer consumption story (It still is). Indians love to buy jewellery, watches and other accessories. Back in 2002, Titan was one of the most used watch brand in the country and India’s population was bound to go up and coupled with rising disposable incomes, we had a strong tailwind that presented before the company a huge opportunity to grow. Titan capitalized on this opportunity and went on to add further expand its portfolio by adding new brands such as Fastrack and Titan Eye+ but back in those days, the now famous Tanishq was a bleeding business. For five continuous years, Tanishq was making losses and Titan was running solely on its watch business profits.
So where exactly did Titan hit Bull’s Eye in the Tanishq story?
Titan correctly identified the opportunity for a national player in the gold jewellery business that was dominated by regional players. Tanishq sales were growing rapidly and the management was confident of the turnaround.
The above numbers are the revenue of Tanishq. The revenues grew at a CAGR of 51.6% p.a. and by FY03, Tanishq was contributing 40% of Titan’s total business (In FY97 this number was at 8%). Tanishq’s story dates back even longer when in 1992 the first plant was set up and in 1996 the first store was established.
Titan’s fairytale story would surely leave every investor in awe but there is a lot of learning in this story. You never know how many such Titans are out there in the making. These companies look like a strict “stay-away-from-this-stock” but you need to dig in deeper than just the historical numbers to dig out multibaggers.
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