TTK Prestige: Buy

A kitchen appliances maker may not appear to be an obvious play on the Modi theme or economic recovery. But TTK Prestige, which makes pressure cookers, cookware and induction stoves may turn out to be a good bet on urban consumers loosening their purse strings. The company’s impressive sales growth rates a couple of years ago were driven by a booming job market, worker migration and healthy spending by city-dwelling nuclear families. This consumer confidence took a beating during the downturn. But Modi’s promise of urban job creation and big ticket investments in the cities, may re-energise the stock.

TTK Prestige has a diversified product portfolio and nation-wide presence. Its sales, which grew at a compounded annual rate of 32 per cent between 2007-08 and 2012-13, dropped in 2013-14.

High retail inflation and the consequent drop in consumer demand played spoilsport. Besides, issues such as power shortage and political disturbance in the company’s key market — Andhra Pradesh — were also a drag.

For 2013-14, sales were down 5 per cent and profit lower by 16 per cent over the previous year. However, the coming two years should be better for many reasons.

One, if the new government tames inflation, the economy is bound to revive, resulting in more job opportunities and improving consumer sentiment. This should propel the demand for small appliances. Also, in Andhra Pradesh, that contributes over 10 per cent of TTK’s revenues, the demand has been improving over the last month, thanks to the political stability and the company’s enlarged distributor base in the State. Finally, with the rupee unlikely to depreciate much from the current levels, profits are expected to shore up; last year, margins were hit because of higher input costs on account of rupee depreciation.

At the current market price of ₹3,262, the stock discounts its 2014-15 earnings by 24 times at the lower end of its three-year valuation band.

With the rapid growth over the past few years, sales and profit growth may not be at the scorching 30 per cent-plus range in the coming years. Nevertheless, the company’s prospects seem bright. It should continue to benefit from the growing purchasing power of the middle-class, rising number of nuclear families and a shift to branded products.

TTK Prestige created the market for pressure cookers in India in 1960s and is today the largest kitchenware company in the country. Its product portfolio has expanded slowly over the years to include non-stick cookware and a range of appliances, including mixer grinders, gas stoves, ovens and grills.

TTK is planning to launch 50 new variants of pressure cookers, cookware and mixer grinders this year. Also ready for launch is the company’s non-electric water purifier. Given that the water purifier market in India is under-penetrated and people are becoming more health conscious, there is ample opportunity in this space. But there are challenges too. Finding a foothold in a market where there are established players such as Hindustan Unilever, Eureka Forbes, Tata Chemicals and Kent, is going to be a test for TTK. But the company’s track record of breaking into new segments such as inner-lid pressure cookers by innovating product features lends confidence.

Water purifiers could contribute to the company’s growth in the coming years. TTK has tied up with Vestergaard Frandsen, a Switzerland-based water purifier manufacturer, to make and sell the product in India.

TTK’s export revenues should also pick up this year given that the company’s new model microwave pressure cookers are ready for launch now.

The company’s induction cook-tops and bundled products may however not see the double-digit growth of earlier years.

Though the power situation in the southern states is improving, the increase in the cap on subsidised LPG cylinders (from six to 12 in a year) could impact demand. Last year itself, induction cook-tops sales were down by 38 per cent. The growth in induction cook-tops sales may moderate and be driven by the ease they offer in cooking, rather than as a substitute to LPG cylinders. That said, shortage of cylinders, if any, in the future may give a leg-up to this segment.

Over the last 10 years, TTK Prestige has built a strong network of distributors throughout the country. It today sells products in supermarkets, distributor showrooms, and its own retail stores in 22 states and 275 towns. The company’s retail stores — Prestige Smart Kitchen outlets — number more than 500 currently across 260 towns. TTK intends to add 500 more stores in the next three years to expand its reach to more consumers in the small towns.

Importantly, the company has spread its footprint from its predominantly southern market to across the country. The non-south markets today account for over 40 per cent of its revenues — this has reduced the risk of geographical concentration considerably.

In the north and the west markets, there is plenty of scope for growth. Also, the company’s south market, which has been lagging for a few quarters now, may soon catch up. In Andhra Pradesh, the agitation in Telangana had hit the company’s sales, especially in the last quarter. But now, with the bifurcation of the State and normalcy returning, sales should pick up.

TTK’s operating margin reduced from around 15 per cent in 2012-13 to 12.7 per cent in 2013-14. Though the company enjoys leadership position in most of the product segments, it couldn’t increase prices much last year due to the lacklustre demand environment. The depreciating rupee led to a sharp increase in the cost of imported inputs and dented the company’s margins. The rupee now stabilising below 60 to the dollar, should help control costs and improve margins.

Also, TTK has reduced its import dependence by making in-house or domestically outsourcing the manufacture of some key products in cookware and appliances. In 2013-14, 75 per cent of the revenues came from domestically-manufactured (or sourced) products. This was lower at 66 per cent of revenues in the previous year. Besides, the price of aluminium, a key input, may be weak in the medium term, given the oversupply of the metal in global markets. Aluminium price declined from $1939 a tonne last May to $1,718. This should also add to profitability.