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Hello everyone, welcome to the channel. Since you asked for it in the comments, today I'm going to analyze Rakesh Jhunjhunwala's legendary bet on Titan to see if we can learn any lessons that can help us find our own profitable assets in our own time. If you haven't heard of Rakesh's legendary investing career, be sure to check out my latest video, which is an introduction of sorts to his investing style.
I had a few comments on a previous video that pointed out that Rakesh made a lot of money in other ways, including insider trading. And while that may be true, it's not what I'm really interested in. Eventually, Rakesh bought Titan shares, and then their value increased more than 600 times. So personally, I'm curious as to why Rakesh bought Titan and what he saw in this company.
Analyzing Titan as of 2001—that's what today's video is about , so let's get started. I know Google says Rakesh first bought Titan in 2002, but Titan's 2002 annual report indicated that Rakesh was already one of the largest shareholders. Therefore, I will consider data as of 2001, since this is the report he was probably studying.
So, in 2001, Titan consisted of two business segments: the watch segment and the jewelry segment . The watch business was Titan's core segment and had been the company's main focus since its founding. While the jewelry division was a relatively new segment created to earn much- needed foreign exchange.
This decision had huge consequences for the company both in the short term and in the years to come. You'll see what I mean when we look at the company's financials. First of all, I want to commend Titan for such detailed financial reporting, which dates back to the 1980s when the company was founded.
I wish every company did this, as it makes it much easier to evaluate the performance of each segment over time. So, if we look at Titan's business segments over the years, their watch segment , which is measured by the volume of watches sold, had an average annual growth rate of 26% for 13 years. And every year, since their founding, they have managed to sell more watches than the previous year, which is very impressive.
Even more impressive is their jewelry division, which has had a staggering growth rate of 108% per year since its inception in 1994. In terms of total revenue, Titan's revenue has grown by approximately 33% per year for 13 years. Finally, if we look at Titan's after- tax profit, it also had an incredible growth rate of 41% per year, indicating that Titan has become more profitable over time, likely due to the operating efficiencies that management details in its annual report.
Which brings us to the next section. As Warren Buffett always says, looking at profits or their growth is pretty meaningless without considering the capital required to achieve that growth. And this is where things get a little more complicated for Titan . So, with this spreadsheet, long-time subscribers will know what's what.
But for new viewers, I'll explain: I often use this table on the channel to assess the quality of a company by looking at its return on capital, return on capital appreciation, and reinvestment rate. And I usually consider both the long-term and short-term perspective. If you're interested, I created a separate video where I explain all this in detail.
So, if you want, watch that video first. If not, keep watching and I'll explain everything as I go. So if we look at a 10- year period, I have Titan's after- tax profits for 1991 and 2001. And then— the difference between the two indicators on the right . This difference is the profit margin. Next, I have total capital employed , which as you can see is the sum of assets minus current liabilities.
And again, the difference on the right is capital gain. So, first of all. If we look at Titan's overall return on capital employed, which is equal to current income divided by current capital employed, at first glance it looks like a business with a fairly low margin. I'll come back to that in a minute.
Next, if we look at Titan's return on capital gains , which is profit growth divided by capital gains, it's even worse—less than 3 %. So let's figure out why. Titan's profits during this period were quite volatile, but in fact, in 10 years, the company tripled its profits from 1.1 million to 2.8 million.
But to achieve this growth, Titan had to raise 15 times more capital into the business. So, there are two ways to look at this. First, Titan needed all this new capital to increase profits, and it is a business with low margins and extremely capital intensive. Or, secondly, Titan didn't need all this new capital to grow profits.
And some of this capital gain is, in essence, an investment that will yield a profit sometime in the future. Now, I believe that to determine the type of business, you need to have a deep understanding of that company, which was certainly the case with Rakesh in the case of Titan. Fortunately, since I have the advantage of knowing how the next 10 years turned out for Titan, a quick look at their later reports showed that Titan had indeed become a very high-quality business that generated exceptional returns on capital employed.
And the million-dollar question: could this have been known in advance, back in 2001? I think the answer is yes. While Titan is a business that is not really within my area of expertise and would, as Buffett would say, fall into the “too complicated” category, for the purposes of this case study I will pretend that it is a business that I understand.
And based on everything I just reviewed, let's say I'm interested enough to dig deeper into Titan's reports and see if it's the first or second option. I believe that one of the best ways to find out , besides understanding the business itself, is to study the company's annual reports and read what management says about the company.
And just like Bezos wrote in Amazon's letters in the early 2000s, we want it to be clear and understandable that the company is reinvesting capital that is not yet profitable but will bring significant returns in the future. So when I reviewed Titan's annual reports, while they're not as candid as Bezos', management provides a tremendous amount of information about the company and its individual segments.
And I think if you had a deep understanding of the watch and jewelry market in India like Rakesh, you would be able to read between the lines and see that Titan was reinvesting a lot of capital that was not yet showing results. The first key point is that, according to management, the wristwatch market in India has not even reached its full potential yet.
They point out that the Indian wristwatch market is estimated at around 25 million units per year, where your company is the leader in terms of market share and status. However, the average annual sales of watches at 25 pieces per thousand population is significantly lower than the global average, which is over 100 watches per thousand.
So, the total number of watches in this country is less than 200 million, which means there is huge potential for watch sales in India, with a population of over a billion people. So Titan's watch business, which was their core segment at the time, had a lot of room for growth and was far from reaching its maximum potential.
The main point, however, which definitely required deep market knowledge to predict, was Titan's investment in the jewelry business, which had huge potential for growth. Titan's report stated that the total capital raised in the jewellery business was around Rs 154 crore, which was a significant portion of their total capital of around Rs 500 crore.
But the jewellery segment at that time was generating only about two crores in profit. So, at that time, a lot of capital was invested with little return. But that didn't last long . By the end of the decade, the jewelry segment generated three times more revenue than the watch segment. And , according to management, it provided a staggering 80% return on capital employed.
Whether it was possible to know this in advance—I'm not sure. But I think it was obvious back in 2001: a lot of capital is being invested in the jewelry segment , which does not yield significant returns. However, there was a fairly high probability of making decent profits in the future thanks to the Titan "moat".
As Monish Pabrai says, the nature of capitalism is this: when a company generates above-average profits, as Titan did at the end of the decade, to maintain a high return on capital, the business must have a lasting competitive advantage, also known as a “moat.” Otherwise, the excess profits of the business will be leveled by competitors over time.
And back in 2001, Titan had one of the best "moats" —a powerful brand with a reputation for quality and trust. In the Titan report, management stated, "One of your company's greatest assets that is not reflected on the balance sheet remains the Titan brand." They go on to mention how they have been repeatedly recognized as the company they most admire over the past few years.
They also point out how their brand and reputation for quality allowed them to gain a foothold in the jewelry business, as the jewelry market in India was highly fragmented and lacked professionalism. Management believed it had the opportunity to bring a high level of professionalism, ethical practices, innovation, and consistently high quality to the industry.
This has led to the Tanishq jewellery brand becoming India's leading national jewellery brand, setting standards for the quality of its products. So , overall, if you combine the fact that Titan's total capital employed was yielding significantly less than its potential, with the company's wide moat and significant growth prospects for both business segments, then in 2001 Titan looked quite interesting to those who understood the business well.
Of course, there were also downsides, such as Titan's huge debts. But overall , I believe Titan was a high-quality business with a great culture that had the potential to become profitable in the future thanks to a wide "moat" around the company protecting those high profits. So, the last question that always arises when investing is price.
Unfortunately, I was unable to find any information on Titan's market capitalization in 2001. But from what I read in articles about Rakesh's investments, Titan was very cheap at that time . And I assume that this was due to their high debt levels and financial statements that showed a low return on capital employed.
I believe he could have even bought Titan shares at a price below their book value at the time. So, in essence, he bought a high-quality , growing business for next to nothing. So that's my analysis of Titan in 2001, and I hope you found it interesting. And if you enjoyed the video, please give it a like, because it really helps support the channel.
As always, if you have any questions, please leave a comment below. And if you watched the video to the end, thank you very much for watching. And if you want to see the best portfolio tracker, stay tuned for a short story at the end of the video. So, that's all for today. Thank you very much for watching, and I hope to see you in the next video.
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