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 Company and Rakesh Jhunjhunwala
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)

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

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

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

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)

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%.

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

To summarise:

Why invest?
- Depressed share price at delicious valuations
- Growing revenues
- Profitable for many years
- Established brand name
- NCAV > share price
- High ROE

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

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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