TTK Prestige: Buy

The small-ticket home appliances market has been showing strong demand trends, notwithstanding the inflationary scenario and rising interest rates in the market.

TTK Prestige offers exposure to this niche segment where demand is relatively inelastic unlike the big-ticket durable goods segment, where financing options and interest rates play a crucial role in the consumer's purchase decision.

TTK Prestige reported 50 per cent growth in sales (at Rs 775.6 crore) and 69 per cent jump in net profit (at Rs 120.9 crore- before exceptional items) in 2010-11. TTK Prestige enjoys a market share of 35 per cent in the organised segment of the pressure cooker and non-stick cookware market, thanks to its venturing into northern and eastern states.

Given the far superior growth clocked by the company, the stock of TTK Prestige trades at a premium compared to smaller peers such as Hawkins as also the bigger durable players such as Whirlpool of India. At the current price of Rs 2398, the company's stock trades at a price-earnings multiple of 31 times its trailing 12-month earnings, far lower than the multiple of around 40 seen as recently as March.

On the likely earnings of FY12, the stock trades at valuation multiple of 24 times. With earnings growth expected to remain at very robust levels going forward, we see further upside in the stock from current levels.

TTK Prestige enjoys healthy profit margins too as its strong brand gives it an edge over other players in this industry to pass on increase in cost without much trouble. Moreover, the company's key input component is aluminium, large capacities of which may flood the market over the next two-three years and price increase thereon may not be very sharp.

Demand drivers

With the country's demography shifting towards a high percentage of floating population and nuclear families, the demand for pressure cookers and other kitchen appliances has been growing.

TTK Prestige has seen a 28 per cent increase in sales on a compounded basis over the last five years. The company has benefitted from its presence in the rural markets too, where the consumption pattern has changed over the last two years with disposable income of the people increasing. Rural people have moved up the value chain and are showing a growing appetite for consumer products.

TTK Prestige, which started as a player in the outer-lid pressure cooker market in the South, now has a Pan-India presence with a network of over 25,000 dealers, offering a complete kitchen solution with non-stick cookware, kitchen electric appliances, gas stoves and modular kitchen cabinets and accessories. To expand the reach further in the Tier-II and Tier-III cities, the company is now trying to market its products through self-help groups in the local areas.

The company competes with the Premier brand in the South and Hawkins in the North. There are other smaller players in the unorganised market who cater to some portion of demand. Aggressive marketing initiatives and an expanding dealer network has, however, helped TTK Prestige steadily grow its revenue and garner higher share in the market. TTK Prestige's take-off in the new markets is thanks also to its R&D team that innovates product features that are appealing to the young homemakers.

Margins insulated

TTK Prestige appears better placed to handle commodity cost inflation compared to some of the other consumer durable players. Its key input component is aluminium, where the risk of a sharp upside in price is limited from the current levels as the supply is likely to outstrip demand in the global market in the coming years.

From $2470/tonne in end-December last year, aluminium prices went to $2797/tonne in the first week of May. While the rally was due to some temporary supply disruption in the market, Hindalco Industries, the local aluminium manufacturer which supplies to TTK Prestige, had also increased prices. Domestic prices of aluminium keep pace with prices in the global market. In the last year, the increase in aluminium price in LME was around 15 per cent. TTK Prestige, however, was able to maintain operating profit margins around 16 per cent for 2010-11. Its leadership position in the market helps it pass on cost increases. The company revises its prices every six months depending on the behaviour of the cost-side components. In April, the company increased the price of pressure cookers by 4-6 per cent. However, the good news is commodity prices, globally, have come off peak. Aluminium is trading at $2499/tonne currently, down nearly 10 per cent from the highs in the beginning of the current month.

Healthy finances

TTK Prestige is expanding the capacity of pressure cookers (doubling of capacity to 8 million units) and cookware at its plants at a cost of Rs 200 crore. With Rs 50 crore already been spent on the expansion work at the factories, the company plans to spend the remaining amount over the next two years and complete the work by 2012-13. TTK Prestige has a debt outstanding of Rs 2.24 crore only, with interest cover at a comfortable 160 times.

The work at the company's land in Bangalore (of area 6.5 acres), which is being developed as a residential-cum-office space, is under progress. Over the long term, the company will see some regular cash flows in the form of rental income from this property.

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