Why Rakesh Jhunjhunwala invested in Titan Company Limited? (a premise)
Rakesh Jhunjhunwala first invested in Titan Industries (as it was then called) in the 2002-03 period. The stock was available for an average of ₹60 per share
1/n
Titan in FY2003
- Shares outstanding : 4.22 crs; FV = ₹10; Market cap = ₹253 crs
- Share price performing below it’s 8-year average share price
- Net profit = ₹6.21 crs on revenue of ₹800 crores (0.77% margin)
2/n
Titan was going through organization-wide restructuring incl. cost reductions, VRS and downsizing of the company’s European operations.
Plus wage settlement with the Union leading to management lock-out in 4th quarter
These issues were keeping prices depressed
3/n
More things to ponder:
- Dividend lowered to just ₹1 per share due to sharp decline in profits. Lowest since 1990. Co. had to use accumulated reserves to pay dividend
- ROCE was 7.8% due to retention of debt and low earnings
- Net profits had degrown for 2 years in a row
4/n
Why Rakesh Jhunjhunwala showed interest?
1. Mcap was ₹253 crs and net current asset was ₹396 crs
Even after 25% discount, the discounted NCAV per share came to ₹70.4 per share
Huge margin of safety. Benjamin Graham would be proud
5/n
2. Titan’s revenue was rising every year
They had not had a single occasion in last 15 years when revenue had dipped
Net margin stable at 3-4% (except 2001 to 03)
6/n
3. Cost rationalisation exercise was working and margins improving in quarterly reports
4. Exhibited stable and high return on equity (ROE) for years together. Barring 2002-03, Titan always had an ROE of over 30%.
7/n
5. Two divisions at Titan – 1. Time products & 2. Jewellery.
Time Products had higher share of revenue
Jewellery business had tripled its revenue in last 3 years; poised to overtake watches in 2 years
Tanishq established as India’s only organized market brand in sector
8/n
To summarise:
Why invest?
- Depressed share price at delicious valuations
- Growing revenues
- Profitable for many years
- Established brand name
- NCAV > share price
- High ROE
9/n
Why not invest?
- 2 years of depressed profits
- Lockout in Hosur factory which might jeopardize 2003-04 profits
- Low net profit margin
- Low return on capital employed
10/n
What Rakesh Jhunjhunwala saw?
- High margin of safety
- Ethical management (TATA)
- Lockout (not strike; temporary disruption)
- Alice in wonderland valuation (getting a more powerful Titan at 1994 share price)
<End of thread>
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Over dinner with a seasoned businessman, a friend suggested the services of a business consultant who had a reputation of improving corporate profits
The young consultant studied the business over the next few weeks & recommended 3 new businesses to get into
A thread (1/n)
Many years passed. The friend caught up with the businessman & asked : Hey, did that consultant help you improve profits?
The businessman replied : “Yeah somewhat”
What do you mean?
“Earlier 100% of my profits used to come from my core business. Now it gives me 150%” (2/n)
The term “diworsification” is used to describe the over-expansion of a company into new growth projects & businesses they do not fully understand and are not in alignment with the company’s core competencies
E.g. AOL-Time Warner , Microsoft-Nokia, Videocon in telecom etc.