Hanung Toys and Textiles – Look for the rebound

  • Date: October 24, 2011
  • CMP: Rs 109; Small Cap
  • Advice: High Risk, High Gain stock at attractive entry point
  • Target: 9 month – 200; 24 month – 290

Hanung Toys and Textiles is a small but fast growing manufacturer of textile furnishings and toys. The business performance has been robust. A series of news disappointments has depressed prices. But today it is an attractive contrarian pick.

Hanung – Description and Profile

  • HANUNG Toys & Textiles Ltd is a niche player in Soft Toys, Decorative Cushions & Children’s Room Furnishings. Turnover is Rs 1160 crores (last 4 quarters). The Market Cap is Rs 274 crores.
  • The revenue breakup by category is 65% textile furnishing and 35% soft toys.
  • The CMD of HTTL, Mr. Ashok Kumar Bansal, is a Chartered Accountant who started this company in the 80s.
  • The financial management of this company appears to be conservative and understated; while the business plans are aggressive.
  • HTTL had exports of 75% of sales. See Sales break-up by geography in Fig 1.
Hanung Toys Textiles, JainMatrix Investments

Fig 1 - Hanung - Sales by Geo (click to enlarge)

  • The key facilities consist of toys manufacturing facility, home furnishing production facility and textile processing facility, 3 located in Noida and one in Uttaranchal. The toys manufacturing unit is established in the Noida SEZ wherein the benefits of duty free imports and single window clearance for imports/exports are available.
  • Internationally, products made by HTTL are available on the shelves of Bloomingdales, William-Sonoma Group, Macy’s, JC Penney, Target Stores, Home Depot, Wal-Mart, Anna’s Linens, Ikea, Homebase, Argos, etc
  • In India, HTTL owns ‘Play-n-Pets’ and ‘Muskan’ brands in stuffed toys and ‘Splash’ in Home Furnishings. They have more than 100 distributors for the stuffed toys across the country, including multi-brand outlets like Lifestyle, Shopper’s Stop, Westside, Big Bazar (Pantaloon group), Pyramid, Globus, Landmark, etc. Its ‘Splash’ range of home furnishings is available at 600 stores across the country.
  • The current order book is estimated at Rs 1500-1900 crore, which is about 1.5 years of Sales.
  • Shareholding pattern is: Promoters 65%; FIIs 1%; Bodies Corporate 12 %; Individuals – retail 19%; Other 3%
  • HTTL exports are positioned in the Mid-Market range, making the business less sensitive to Chinese exports.
  • Business potential is very high. In toys, the demand is large in current markets. Quality and price matter here. Competition is mostly from China. In home furnishings, the demand, particularly abroad is very high.
  • In effect, the addressable market for HTTL is 100s of times its current Sales.

Stock evaluation, performance and returns

  • The IPO in Sept 2005 was 8.6 times oversubscribed. Pricing was at Rs 95
  • HTTL has been paying Dividend for last 4 years, which increased from 15% to 20% of late.
  • The price has fallen from Nov 2010 highs of 410, to a CMP today of 109. The volatility is high, see fig 2.
Hanung Toys; JainMatrix Investments

Fig 2 – HTTL stock price – shows high volatility

  • Sales and Profit have however grown very steadily (Fig 3)
  • Sales have grown at 42% CAGR over the last 5 years
  • Profits have grown faster at 44% in this period
Hanung Toys; JainMatrix Investments

Fig 3 - Quarterly income and profits have, however grown steadily. (click to enlarge)

Price Action and Events

  • Price of HTTL peaked in Oct 2010, and then dropped sharply. There was some negative news and bad publicity:
  1. The high interest rates regime has taken a toll on HTTL. Costs have risen, as there is debt on the books of Rs 1000 crores. Debt equity ratio currently is 1.74
  2. Overall the Sensex fell sharply. The Small Cap shares fell faster than large cap shares. HTTL due to it’s volatile nature suffered even more.
  3. A GDR plan – to raise capital and fund growth plans – was dropped due to low share prices.
  4. Textiles sector has not done very well in the last year. Cotton prices have risen sharply.
  • However, HTTL has made several smart moves that are improving prospects
  1. In March 2011, HTTL acquired a controlling stake in the US-based Cody Direct Corp. This firm deals in marketing and distribution of home furnishings. This acquisition will not contribute to topline, but to profitability and operating margins, as some of the middlemen will be removed from the sales cycle.
  2. Plans are on to ramp up capacity, and also a backward integration by setting up spinning plants. A capex plan for the next 2-3 years is in place of Rs 720 crores. This will be raised from cash from operations as well as loans from banks.
  3. The firm is rationalizing interest costs by switching over from the existing Indian Rupee loans to ECB (European Central Bank) or similar, where they can save 3-4% of interest.
  • Another near term trigger is the recent appreciation in the US$ – INR rates. This will boost USD earnings for HTTL, and should reflect in quarterly earnings for Q3 and Q4.


  • The Price and PE graph Fig 4 – shows that valuations are bottoming out and are near all time lows of 2008.
  • The Price and EPS graph Fig 5 – shows that EPS is at all time highs.
  • Put together, we can see that this is a very attractive time to enter the stock as a long-term investor.
Hanung Toys; JainMatrix Investments

Fig 4 - Price and PE Graph (click to enlarge)

Valuations and Financial metrics

  • EPS (adjusted) growth has been 44% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows a steady rise. This is a small but stable company in a good market that is establishing base and will achieve critical mass of size, brand and reach over the next 5 years.
  • PEG is at 0.05 – indicates underpriced status, a very good investment opportunity
  • RoE is at around 17-20% – healthy statistic.
  • Price/Book is 0.54, this is very attractive.
  • Management has projected 20% revenue growth for the next 2 years.
Hanung Toys; JainMatrix Investments

Fig 5 - Price and EPS Graph (click to enlarge)

Opinion, Outlook and Recommendation

  • This is a volatile small cap stock. There has been a large fall in share price since Oct 2010, by 75%. There is of course a possibility that this falling trend will continue.
  • However, business performance has been excellent. After this recent fall, HTTL now has a PE of 2.26. This is an opportunity for investors to average down their cost of holdings, or enter afresh.
  • The stock may be waiting for a trigger to reverse the price downtrend. Once this happens, the upside is high.
  • Our projection is a Rs 200 price level in 9 months (Aug 2012) and a Rs 290 price level in 24 months (Nov 2013).
  • Retail investors with a risk appetite can start a systematic investment (monthly) at current levels.
Hanung Toys; JainMatrix Investments

Fig 6 - Price Projections (click to enlarge)


  • Small size; it is a volatile stock. It falls hard in poor sentiment periods and rises rapidly in good.
  • Current price fall may continue for an unpredictable period, till investor sentiment recovers.
  • Being a small firm, can be affected badly by a single accident, strike or untoward incident
  • Recent GDR was cancelled due to unfavorable market conditions, causing a further fall in price
  • Debt equity is rising, and is at 1.74 as of now.


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These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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A Titan for the long term


There is an update of this report dated Nov2012, Titan – The Jewel in the Crown 

Titan Industries is a power brand and the largest specialty retail chain in India. It is translating the success in watches into new categories by adding one every 5-7 years, and now also straddles jewellery, eye wear and precision components. Titan is at a very early stage of revenue and profit growth. Invest.

Titan Industries – Description and Profile

  • Titan Industries is a Tata group company selling watches, jewellery, eye wear and precision components. Titan has built excellent brands that drive sales in these consumer categories.
  • They have also set up specialty retail chains to display these products and improve the customer experience. This chain is the largest specialty retail chain in India.
  • Started in 1984 with a joint venture between the Tatas and the Tamil Nadu Industrial Development Corporation for watches, it expanded in 1995 into jewellery and in 2007 into eye wear.
  • Today the turnover is 6050 crores, PAT 430 cr and sales has grown 35% CAGR over the last 6 years.
  • Here is a graphic of Titan’s products, distribution, brands and future growth drivers

Titan Industries

Fig 1 – A snapshot of Titan’s products, brands, distribution and future growth (click to enlarge)

  • The demand for Titan products depends on consumer disposable incomes, and straddle the mid to high end segments
  • In watches, the owned brands are Fastrack, Xylys, Titan and Sonata. High end licensed watch brands include Tommy Hilfiger, fcuk and Hugo Boss.
  • In eye wear, the three in-house brands are Titan, Eye+ and Dash, while the international and luxury brands include Gucci, D&G, Armani, BOSS, Esprit, Daniel Swarowski and Mont Blanc
  • There has been a steady growth in consumer demand except for 2008-09. Recovery is complete, and this trend is expected to continue and even accelerate.
  • Watch parts which were sourced from China, are now being transitioned to production in house in India. This is due to increase in prices from Chinese parts. Even though Titan’s investments requirements and cost of production increase, this gives Titan greater control over the supply chain and quality control.
  • Titan operates 85–90% of its stores through the franchisee model – this allows flexibility in scale and lower cost expansion

Stock evaluation, performance and returns

The Price and Dividend history of Titan is detailed below:

Titan Industries

Price and Dividend History

Fig 2 – Price and Annual dividend history

(Dividend in Rs/share, FV Rs 1) Click to enlarge graphic

Titan IndustriesFig 3 – Quarterly revenues and Profits have grown steadily over the last 8 years

Titan Industries

EPS and Cash Flow

Fig 4 – Cash Flow and EPS are up substantially

  • Sales are growing at 35% CAGR over the last 6 years.
  • Over the same period, EPS (on a steady equity base) has grown 57%. This is remarkable profitability.
  • However, cash from operating activities is up only 19.8% – this is because Titan is investing in building the retail chain as well as in the manufacturing facilities.
  • Putting these together, Titan appears to be in a virtuous cycle of investment – growth – profits that (barring any India/ global slowdown) – is a multi year business acceleration.
Titan Industries

Price and PE

Fig 5 – Price and PE Graph

Titan Industries

Price and EPS

Fig 6 – Price and EPS Graph

  • Even with the rapid appreciation of Titan’s share price in the last 2 years, the PE is around 46. This is historically in the medium/ average range for Titan over the last 7-8 years. Investors seem to have always expected more from Titan :-)
  • EPS  has increased steadily, barring the 2008-09 period where overall the economy had slowed. Post this period, the earnings have rebounded and caught up with the previous growth path
  • ROCE has been at an amazing 42-48% in the last 2 years.
  • PEG is at 0.81 – indicates safety and still undervalued status
  • Very low debt equity ratio, and good cash position indicates strength in the balance sheet.
  • The company has recently approved a share split to 1 Re face value (from 10Rs), and a bonus issue of 1 for 1 held. This will reduce market price by 1/20 and boost retail participation (and shareholder returns in the short run).


  • Titan is seen as a proxy for gold. In recent times, Titan has been enjoying appreciation on the inventory due to gold appreciating. A fall in price of gold can be a risk to the gold inventory and the jewellery demand at Titan.
  • Competition in India is intensifying with a host of jewellery and eye wear brands challenging Titan.
  • Precision components is a commodity type business, needing volumes, compared to watches, jewellery and eye-care, which are branding, manufacturing and retailing oriented. This business may never reach profitability levels compared to the other three.
  • So what next after eye care? In the next 2-4 years Titan needs to enter into a new business that falls in it’s sweet spot of takeover of unorganized sector – precision manufacturing – consumer retail where it’s strong brand can be deployed successfully. If it does not, business in India can taper off in the next 7-10 years.

Opinion, Outlook and Recommendation

  • In India the ‘demographic dividend’ and GDP growth have pulled the per capita income to over Rs 54,000. Experts expect consumption to accelerate now, as consumers have more discretionary spending power, (and spend less of total income on food). Titan’s watch, jewellery and eye care categories will ride this consumption wave.
  • In Jewellery and eye care, Titan is addressing a relatively unorganized sector, and by leveraging it’s national brand and distribution network, building credibility and loyal consumers. This is a sustainable model, and Titan enjoys a first mover advantage.
  • Exports too are a big driver of future growth, as the Indian success story is replicated in 26+ countries. In these business categories, margins can be much higher in developed countries, so there is high potential here.
  • Precision components manufacture, while being a lower margin business, has a very large global potential. Anecdotal evidence from Titan’s procurement for watch parts suggests that Indian parts are gaining in competitiveness compared to Chinese equivalents.
  • Titan has built capabilities in branding, design and manufacturing that are strong core competencies.
  • In the last 2 years, share price has appreciated 4 times. For new investors, it may appear to be a case of, closing the stable door after the horse has bolted :-). However, this stock is expected to continue to perform strongly for several years to come.
  • Invest now and systematically for long term outperformance
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These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/
Performancing Metrics

Bharti Airtel – CMP:331 – 2 years target 800 – Invest

Bharti Airtel is a bit of an enigmatic company. Emerging from humble origins, it has risen rapidly in the last decade to be today the largest telecom company in India by subscribers, revenues and profitability.

Leaving in its wake the famed business houses of India. It is #7 in India in market cap.

I first entered this stock in 2004; at this time, the stock was trading at a P/E of about 100. The market price was about Rs 161, and had risen from about 22 a few years before. Pretty soon, the price fell 15%.  I held on, thought about it, and then bought some more shares.

Here’s why.

Profile and the growth path

Bharti Airtel Fig 1 – In the last 1.5 years Airtel has under performed. This will change in the next two quarters.

  • Like many new industries, the mobile Telecom industry has emerged from chaos. Even today, the DoT, TRAI and Ministry of Telecom have brought to this sector little clarity, poor governance and transparency. Even so, today at least it is better regulated than 7-8 years ago.
  • In these circumstances, the story of Bharti Airtel is impressive.
  • They follow an outsourcing model and have brought on the best vendors in the world – IBM for software, and Ericsson, Nokia, and Siemens for telecom network – equipment. Today Airtel has the widest all India telecom network
  • More than good vendors, what was commendable was the engagement model with these vendors. All were hired on a SLA based revenue model, where earnings were proportional to number of subscribers and performance against SLAs. At one stroke the Enterprise – Vendor relationship changed from a tug-of war based on negotiation to one of win-win with aligned objectives. These deals in the early 2000s were admired worldwide for their superior structure.
  • Airtel thereafter was free to concentrate on the things that are core to the company – the Airtel brand, the customer experience, customer service and new business avenues
  • Airtel has added several business to its portfolio and now provides Mobile, Telemedia (broadband, IPTV and fixed line), Enterprise (end to end telecom services) and Digital TV (DTH) services – all high growth businesses related to mobile phone services.
  • When the next technology was introduced – 3G, Airtel was ready and won the largest number of circles in the very expensive auction.
  • In the 2007 – 10 period Airtel executed on a strategy to grow overseas. It has successfully launched operations in Bangladesh, Sri Lanka, (through the Zain acquisition), in Africa, totally 19 countries.

Common criticisms of Bharti Airtel, and my take on them:

Criticisms of Airtel My response
1. Airtel paid too much for the Zain acquisition in 2010, and this debt will dampen profits in the years to come They paid $9 billion, in the form of cash. However, by applying fair leverage of balance sheet and good financial engineering, they claim that debt servicing will only cost $200m per year.In fact per Airtel estimates, Africa will eventually overtake India and China as a telecom market – as population of Africa will peak at 1.8 – 2.0 billion
2. Airtel paid too much for 3G in the auction, and this will also hit performance Airtel paid Rs 15,609 crores to get 3G licenses in 13 circles. However, this gives Airtel access to lucrative markets such as Delhi, Mumbai, Andhra Pradesh, Karnataka and Tamil Nadu. This covers 5 of the top 6 cities of India.
3. Airtel has spread itself thin outside India in Africa and 3-4 Asian countries, this is a recipe for disasterFig 2 – Net Cash from operations has shown a steady and substantial growth In India, the penetration is crossed 50% and growth in subscribers will slow. Investments required in networks too have been made. This market is expected to grow now in terms of ARPU as consumers become affluent. Cash flow from operations is expected to increase rapidly, see Fig 2belowAirtel realized that it can now look at new markets, and roll out it’s successful Indian model elsewhere. The most logical market is Africa where mobile penetration is far less than India, and characteristics show that Airtel can develop this market and reap long-term dividends.Bangladesh and Sri Lanka are small markets, but similar to India, and Airtel found entry opportunities here also.

In fact the management of Airtel has found new challenges in these new markets after stabilizing the Indian operations.

4.       There is too high competition in India, and telecom companies here including Airtel are doomed to subpar performance for many years While there are 12-14 players in the current Indian telecom market, it is expected that this number will reduce over the next 1-2 years. This is due to a combination of heavy initial investment required for network rollout and severe pricing pressure due to competition. Inevitably the viability of the market has reduced and newer players have been unable to justify additional investments.This will be positive for Airtel also as it may snap up some of these players, and certainly will soon face less competition in this market.
5.       Just when people were getting convinced about Airtel, the share price plummeted in 2008-9 and it is now a poor stock The stock market recognized the high competition scenario and slowing growth characteristics. Hence the high P/E that players got earlier were reduced sharply and the market prices fell – for all telecom. However, see Fig 3, the EPS growth of Airtel has remained stable.
6. The Telecom sector in India is under a cloud due to regulatory problems, scams, etc. This is expected to clear up soon due to high visibility from media and political parties. In fact with valuations low and uncertainty high, it is a good time to look at an investment in Airtel.

Fig 2: Cash Flow from Operations

Fig 3: Steady increase in Airtel EPS over last 5 years.  EPS is Expected to stabilize now in 2 quarters and grow again.      

Fig 4: Development of Indian Telecom – Source TRAI

Conclusions, projections and Investment advise:


  • Today as the seventh largest Indian firm by market cap, Airtel is poised to show huge multi year growth, profitability and cash flow from Indian and International operations
  • As the 5th largest telecom company globally, Airtel is poised in the next 5 years to explode in terms of revenue, profits and subscriber numbers, eventually encircling the current global leaders.
  • My opinion of Bharti is that it is a fantastic company, run by some of the best and experienced telecom businessmen. They have succeeded in the Indian environment, and will not just continue on this path here, but will also translate this experience to new geographies – of Asia and Africa.
  • Hyper-competition in India has resulted in a temporary blip in performance of the industry. This is created by poor regulation and governmental interference.
  • In spite of these circumstances, Airtel has maintained a good revenue and profit performance, keeping an efficient organization, investing in required capital equipment and riding though this rough patch.
  • MNC telecoms with deep pockets have not been able to overtake Airtel, which is staying ahead.
  • Rapid yet steady increase in cash flow will be used to both lower debt levels and invest in African markets, which will increase profits. Also Airtel is the only telecom firm in India paying dividends.

Fig 5 – Airtel’s PE is far lower than the average over the last 5 years. It will return to 25-30 levels.


  • As an investor, I would say, this 1-2 year period is the opportunity to buy, for outsized returns over the next decade. In 2 years the telecom sector will recapture investor interest and Airtel will reach my price target of 800.
  • Basis for projection:  (1) stabilization of African operations (2) consolidation in number of Indian telecom players from current 14 to 8-10 leading to reduction in pricing pressures (3) successful 3G launch in 5 of India’s top 6 cities plus partnerships in others; and (4) Launch of number portability will see customers gains for Airtel (5) These will result in growth in market share for Airtel (6) Likely clarity in Indian telecom industry governance and regulation in 8-12 months, with Airtel generally benefiting.