22 September 2018

Timex Group Turnaround Story?

What are the chances of a Timex Group Multibagger? It is a multi-national microcap company with an established brand image.
Timex Group India Ltd. is a part of the Timex Group which is a leading global watch company. The group has been in existence since 1854. Timex was the first sports wrist watch maker. Timex Group Luxury Watches B.V. owns a 74.93% stake in Timex Group India Ltd. The company’s plant is located in Baddi – Himachal Pradesh.

Products

The company is into wrist watches for men, women and kids. The watches are across many segments such as fashion, fitness, luxury, etc. The company has a presence in both the online and offline market. In the offline market, the sales channel covers distributors, counters at large stores, Timex stores and the CSD (Canteen Service Department).

Wrist watch industry in India

As per market statistics, the wrist watch industry in India is worth ~ Rs 6,500 Crores to Rs 7,000 Crores. Titan is the dominant brand in the market with a ~ 24% market share of the Indian wrist watch market. Timex Group’s market share is estimated to be ~ 4%.
Globally, the wrist watch industry is dominated by 3 players who own these brands:
The Swiss watch companies have a combined turnover of ~ Rs 1,500 Crores in India but most of them fall in the Luxury segment. Overall, there is a strong competition in the wrist watch market. While people going for luxury brands have a preference (Rolex, Rado, etc), the < Rs 15,000 segment is price sensitive but strongly dominated by Titan.

Financials

Timex Group’s networth has been eroded due years of accumulated losses.
The company’s problems started in FY13 as revenues started falling and the company started making losses. The losses were a result of slow moving inventory and a sharp depreciation the rupee which impacted raw material prices. The company used to import most of the raw materials and thus a weak rupee hit the margins. When you are in a low margin, high competition business and you import ~75% of your raw material, then your margins will be volatile due to the currency volatility.
Since FY12, the import % as a part of the total import has gone down. However, 46% of raw materials are still imported. Since FY14, the company has seen negative cash flows every year and has burned ~ Rs 38.11 Crores of cash.

Significant Expenses


The major expenses apart from raw material are Sales Promotion, Minimum Guarantee, Advertising and Purchased Services.

Balance Sheet

A case for Timex Group Multibagger would be improving financial position of the company. Not only should we see profits and positive cash flows but the same should be supported by an improvement in the balance sheet.
The company’s networth is now positive because of the issuance of preference shares in 2016-17. However, there are accumulated losses of Rs 74.43 Cores in the balance sheet as on 31st March, 2018. The company’s debt is short term and unsecured. There are no long term debts on the company’s balance sheet.
The company is managing it’s receivables better as the receivables amount has reduced while the revenues have gone up. However, the inventory requirement is still keeping the company’s operating cash flows negative. Another interesting point is that while revenues have gone up, the net block has reduced. In the annual report, the company has reported a sharp reduction in the “Property, plant and equipment” head. The Gross amount under property, plant and equipment has reduced from Rs 20.66 Crores in FY11 to Rs 2.59 Crores in FY18.
A significant part of the trade receivables is outstanding for more than 180 days.
The company’s receivables management appears to be weak. As of FY18, Rs 21.39 Crores of receivables are from related parties. In FY17, the receivables from related parties was Rs 13.31 Crores. The company does not hedge it’s foreign currency transactions. Because of its no hedge policy, the company incurred big exchange losses in FY14, 15 & 16.

Timex Group Multibagger

Timex Group is turning around it’s business performance as evident from the positive EBITDA. However key business concerns still remain:
  • Cash flow from operations is still negative – Receivables and Inventory
  • High dependence on imports. Negative in a low margin business with heavy competition.
  • The company is unable to collect receivables on time. However, the receivable days have drastically reduced from 243 in FY13 to 87 in FY18

Other challenges:

The wrist watch market is crowded, highly competitive and price sensitive in the low to mid price segment. Over the last two years, smart watches have entered the competition too! Timex Group neither enjoys the brand advantage and out reach of Titan, nor does it have a mark in the fitness and smart watch segments.
Gaining market share from other established brands while maintaining and improving margins will be very tough for the company. We would not advice investing in the company at this stage. Most of the turnarounds never really happen.

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