TTK Prestige: Diversification to offset near-term pressure

Continued pressure in TN market (23% of sales), mainly due to power shortages, hurting company's overall growth

TTK Prestige (TTK), the country's largest pressure cooker maker in the organised sector, has seen its stock underperform the Sensex and Consumer Durables Index over the past few months. Continued pressure in the Tamil Nadu market (23 per cent of sales), mainly due to power shortages, is hurting the company’s overall growth. However, non-south markets (up 52 per cent in FY13) have cushioned the weakness in southern markets. Focus on non-south markets along with efforts to expand its product reach should help going ahead.

Experts believe the current stock valuations are ignoring positives such as rising penetration (induction cookers, kitchen appliances) and distribution strength in non-south markets, high cash flow generation (annual cash from operations expected at Rs 160 crore for FY14) and strong brand equity. The stock is trading at 21 times FY14 estimated earnings or 12.5 per cent below its three-year average multiple of 24 times. Not surprisingly, most brokerages remain bullish on the company and expect upsides of 10-15 per cent from current levels of Rs 3,300.

“The evolution of the kitchen from functional to fashionable is a structural trend that will benefit TTK, given leadership in the fragmented and high-growth kitchenware category”, says Pratik Biyani, analyst at Standard Chartered Equity research. He has set a price target of Rs 3,729 on the stock.

Analysts expect TTK’s earnings to grow at a compounded rate of 20-22 per cent over FY13-15, driven by 23-25 per cent compounded revenue growth in the same period. New product launches, expansion in non-south regions (43 per cent of sales) will be the key growth drivers for TTK going forward. While power issues in Tamil Nadu could prolong for a few more quarters, any pickup in demand scenario in the state will add to the company’s numbers. The company’s efforts to diversify its product mix has also yielded fruits and boosted growth. Non-pressure cooker sales now form 62 per cent of its revenues as against 35 per cent in FY05. Among the products, induction cookers and kitchen appliances segment will be key growth catalysts for TTK going forward.

The company’s margins are expected to hover around 14-15 per cent range over the next two years. Healthy sales growth and soft commodity prices will be key margin drivers going forward.

“While management expects a decline of 50 basis points per annum for next three years in margins due to change in mix, we expect the impact on Ebitda margins to be much lower on account of operating leverage”, says Rajasa Kakulavarapu, equity analyst at Jefferies. While a sharp rupee depreciation may put pressure on margins in near-term (imported products form 34 per cent of revenues in FY13), the company plans to pass the increase in costs to the end consumer in a phased manner.

Prolonged demand slowdown, sharp volatility in commodity prices and currency depreciation remain key risks for the company.

Recently, TTK raised about Rs 106 crore by selling a 5.6 per cent stake to Cartica Capital. It plans to reduce its debt of Rs 115 crore from these proceeds, as well as scout for acquisitions wherein it is yet to short-list any targets. In terms of new products, it plans to enter the water purifier market over the next few months and expects it to be a significant growth driver.

Notably, a large part of TTK's planned capex of Rs 300 crore is done and the company plans to incur the remaining Rs 50 crore this financial year. The capex incurred has seen TTK’s pressure cooker capacity double while its cookware capacity is up five-fold. This capacity expansion will reduce the company's dependency on imported products and hence lower the currency risk.

It plans to add 100 more Prestige Smart Kitchen (PSK) stores this financial year and take the total number of PSKs to about 533. PSK's contribute about 17 per cent to TTK's revenues, and apart from adding to growth also help improve reach and brand equity.