Titan's financial performance was plagued for the previous two years owing to the build-up in inventories and the large requirement of working capital. For 1997-98, efforts at rectifying the effects of ballooning inventories worked as total inventories were lower by Rs 53 crore, against anincrease of Rs 74 crore in the previous year. This resulted in an improvement in the cash flow. Titan Industries managed to generate a positive cash flow of Rs 22.5 crore, against a negative flow of Rs 74 crore last year.

But these operational improvements and better market responsiveness has not helped where it matters. Revenues were up by 8 per cent, but margins were lower at 19 per cent from 21 per cent, mainly owing to a rise in operating expenses. Though net income was lower by 40 per cent, the previous year's performance was buoyed by a substantial profit on sale of investments (it sold 4.5 million shares of Timex Watches, but still holds on to another 5 million shares), which was absent in 1997-98. If the effect of extraordinary income is removed, the net profit has improved. Despite all efforts to improve operations, the financial condition has not improved. The business is still overcapitalised, with Rs 577 crore in assets generating just Rs 440 crore in revenues, and the operations are stilloverleveraged with a debt- equity ratio of almost 2:1 and a very poor interest coverage. The company was forced to put a long-delayed rights issue on hold, but has substituted that requirement with preference shares instead.

In a further attempt to improve its product profile, a decision has been made to introduce Titan-manufactured watches at the extreme low end of the mass market. Owing to its brand positioning till now, Titan has lost out on this high-volume, low-margin business. This has become painfully evident to the management ever since the break-up of the understanding with Timex Watches, which was in the low-end mass market for watches. But for the moment, though the company has continued to grow and make changes for the better, no cohesive benefits have accrued to the shareholders, either in terms of return on capital, which has deteriorated further or even dividend income, which has reduced. Even to pay this reduced dividend, the company has had to draw into its retained earnings.

TimexWatches:

In Timex Watches's case, the break-up with Titan Industries will prove to be expensive in more ways than one. First, Timex Watches will have to create the infrastructure to design, market and service its watches, which were being done till recently by Titan Industries. This will require additional investment. To this end, the company has set up a product and tool design centre. Second, it will now be competing with its one time collaborator, Titan Watches. Timex currently holds the number two slot in the country in the quartz watch segment and the company has decided to invest further in the mid and low end of the watch market. This has been the only segment to have seen any growth in demand, though prices have fallen considerably in this category.

But the fact that the company has no premium products in its product portfolio, unlike Titan, showed clearly as its performance regressed on almost every parameter. The per-unit selling price fell by 11.5 per cent, which squeezed operating margins,further resulting in a book loss for the year.