TTK Prestige: Buy

The September quarter results, which were below market expectations, pushed the TTK Prestige stock down from a high of Rs 3,800 to Rs 3,300. Long-term investors can, however, buy the stock as the outlook for the company remains positive.

TTK’s leadership position in the organised market for kitchen appliances should help it tide over the current gloomy economic conditions. Improving power situation in south India (the company’s main market), increasing share in other markets and expanding the product portfolio are arguments in favour of the stock.

Also, from December, the company will see its export sales rise as the new model of microwave pressure cookers is ready to be launched.

At Rs 3,276, the stock discounts its estimated FY15 earnings by around 20 times, at the lower end of its valuation band over the last five years.

Revenue to grow

TTK Prestige’s revenues have grown at an average annual rate of 35 per cent over the last five years.

Expansion of the product portfolio with the launch of induction cook-tops and entry into non-south markets has helped. The company today holds a 15 per cent share of the market (organised) for induction cook-tops and a 35 per cent share (organised) for pressure cookers. In FY13, the company recorded 23 per cent growth in revenues and 17 per cent increase in profits.

Though slower than in earlier years due to its increased scale of operations, its growth surpassed that of competitors. Recently too, as gloomy economic conditions saw many players in the consumer goods sector report a drop in sales, TTK managed a better show. In the first six months of this fiscal, the company has recorded a 2 per cent growth in revenues.

Appliance sales increased 11 per cent and revenue from cookers increased 1 per cent. In the cookware segment, however, there was a 9 per cent fall in sales of induction cook-tops and induction-compatible cookers from the high base of last year.

The moderation in sales growth followed a drop in demand in Andhra Pradesh following the prolonged agitation over the State’s bifurcation.

In Tamil Nadu, the company’s main market, severe power shortages kept a check on demand for induction cook-tops. The coming quarters may, however, be better. One, with a bountiful monsoon and improvement in the power situation in Tamil Nadu, sales should receive a boost. Two, the company’s exports to Japan will resume this December as re-designing of the microwave pressure cookers is almost over (design changes were made to prevent competitors from copying it).

At the end of this year, the company’s water filters will also be launched. TTK Prestige should grow at a higher rate than the industry in the coming years, with a deepening presence across the country and overseas.

Healthy margins

The operating margin of the company has increased over the last five years from around 9 per cent to more than 15 per cent in FY13. This is ahead of peers. Improving profitability is thanks to economies of scale and efficiencies in production.

In the first half year of FY14, however, the operating margin was 13.5 per cent and it led to an eight per cent decline in net profit. The margin contraction was due to the higher price of imported inputs and of power.

With south India facing high power deficits, TTK had to rely largely on gensets for power requirements at its Hosur plant.

Also, with the change in product mix and lower-priced appliances selling more, margins were pressured.

But profitability should improve hereon. The power situation in south India is getting better with nuclear power projects coming up, and a good monsoon auguring well for hydro-power generation.

Also, next year, the southern grid is being connected to the national network. Besides, the company’s reliance on imported finished goods is likely to come down, as production at its new unit in Gujarat expands. These factors should help the operating margin pick up to 14-14.5 per cent in FY15.

Strong balance sheet

TTK’s debt-to-equity, at 0.3 times, is quite comfortable. So is its interest cover at 14 times. With expansion of the pressure cooker and cookware capacity already completed, no major capital expenditure is expected in the near term.

The company’s strong financial position should get a boost next year from the sale of land (6.5 acres) in Bangalore for commercial development.

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