TTK Prestige: From frying pan to fire

Currently, it trades at 25.8 times FY14 estimated earnings, which is at higher end of its historical average one-year forward PE ratio

TTK Prestige put up a dismal show for the September quarter, led by weak demand in the south (half of Prestige’s revenues) and sharp margin contraction. The stock fell nine per cent on Monday's session to a day’s low of Rs 3,176, before closing 2.5 per cent down at Rs 3,395 against a flattish Sensex. Currently, it trades at 25.8 times FY14 estimated earnings, at the higher end of its historical average one-year forward price-to-earnings ratio. Most analysts say the demand weakness is likely to persist over the next two to three quarters, though some support from rural demand (on good monsoon) is likely. This suggests valuations do not seem to capture the risks adequately.

“We have been sellers of Prestige from a year and expect further downgrades by 10 per cent reflecting the poor quarter. We don't foresee any improvement in the second half as consumer sentiment remains weak. We believe induction cook top is a commodity product where competition has caught up and inventory in the system is huge,” says Nitesh Sharma, mid-caps analyst at Espirito Santo Securities.

Analysts say headwinds such as limited pricing power, weak rupee, intensifying competition, aggressive ad spends and changing product mix could pull down the margins. After the latest results, Prestige indicated margins could fall 50 basis points every year in the next three to four years as the sales mix shifts in favour of low-margin products. The company’s efforts to reduce import dependence, though, will cushion the margin fall to some extent, say analysts.

“We expect the pressure from the rupee depreciation to be partly offset by the commissioning of Prestige’s Vadodara manufacturing unit in October, as this could further streamline working capital management through import substitution on cookware and through the shift of the three-million manufacturing capacity from Hosur to Gujarat,” says Rakshit Ranjan, analyst at Ambit Capital.

Though the company has increased focus on non-south markets, revenue growth will take some time to pick up. “While we retain our buy stance based on the strong long-term growth prospects, we reiterate caution around a high-base effect for the December quarter. Hence, we do not expect any positive catalysts before January,” adds Ranjan of Ambit. He expects (after Prestige’s analysts call on Thursday) to downgrade FY14 earnings estimates five per cent after the results.

For the September quarter, Prestige reported sales growth of three per cent to Rs 345 crore year-on-year. This growth was largely a function of a robust 34 per cent growth in sales from the non-south markets, as revenues from the south fell 20 per cent. The weakness in this market is due to macro factors including persistent power issues in Tamil Nadu, strikes related to the Telangana issue in Andhra Pradesh, rather than any market share loss.

The earnings before interest, taxes, depreciation and amortisation (Ebitda) margin fell to its lowest level in four years as the proportion of lower-margin electrical appliances products (in relation to pressure cookers and non-stick cookware) to total sales increased. The inability to pass higher input costs (on rupee depreciation) amid a weak demand scenario also added pressure on the margins. As a result, the Ebitda margin contracted 232 basis points to 12.8 per cent compared to a year ago. While reduced interest costs, higher other income and lower tax rates enabled the firm to keep its net profit unchanged at Rs 30 crore, the net profit number was still lower than consensus estimates by 15 per cent.