TTK Prestige: BUY

Investors who want to bet on the ‘consumer’ theme can buy the stock of TTK Prestige.

With inflation having dropped from double-digit levels of last year and the RBI’s rate cut last week, consumer demand should revive.

Political stability in Andhra Pradesh and the improved power situation in Tamil Nadu now should also be favourable to the company.

TTK Prestige gets about 60 per cent of its revenue from the southern market. From our buy recommendation on the stock in May at ₹3262, the stock hit a high of ₹4832 in August, and has corrected since. But, this could be a good entry point into the stock for new investors.

At ₹3,705, the stock discounts its estimated FY16 earnings by 26 times, at the lower end of its valuation band (21-40 times) over the last three years.

In the last five years, TTK Prestige’s sales have grown at a compounded annual average of 26 per cent. Profit in this period has grown at 38 per cent annually.

The year 2013-14 was not a good one. High inflation, disruption in sales in Andhra Pradesh, and power shortages in Tamil Nadu hit revenues.

But the situation is getting better. After a 5 per cent drop in sales in 2013-14, in the first half of 2014-15, the company’s sales grew 10.4 per cent. This is thanks to improved demand.

In the September quarter, revenue from cookers that make up more than a third of overall sales increased 14 per cent (versus 4 per cent growth in the same period the prior year) and that from cookware jumped 32 per cent (versus negative 8 per cent in the year-ago period).

In the coming financial year, rural demand in South India is expected to be better than in the northern pockets. The north-east monsoon has brought good rains to the southern peninsula, especially Tamil Nadu and Puducherry. TTK Prestige which is still largely dependant on the southern markets should benefit.

Also, the power situation in Tamil Nadu has improved over last year. Demand for kitchen electrical appliances including induction stoves and the bundled items, which were hit due to power shortages in the State, may perk up now.

Sales should get a boost from the company’s new product launches too. The company’s exports (about 5 per cent of overall sales) which dropped 16 per cent in the first half of 2014-15 due to delay in the launch of the new microwave pressure cookers, should revive now given that the product has been launched (in November). Efforts to expand market reach should also benefit. The company intends to grow its retail presence from about 550 stores (Prestige Smart Kitchen outlets) now to 1,000 in the next three years.

The operating margin in the September quarter was 12 per cent, a tad lower than the 12.8 per cent in the same quarter the prior year. There were two reasons for this. One, an increase in the cost of some inputs, which the company passed on to the customer only in September.

As the goods were sold at the old price in July and August, margins were hit. Also, the new plants of the company where production was commissioned recently, are not functioning to full capacity; the resultant increase in overheads put pressure on margins.

In the coming quarters, as the new plants run full steam and the full benefit of the price hike is seen, margins should improve. The sharp correction in global aluminium prices since September will also reflect in the numbers of the company, after a lag. The metal’s price has dropped from $2,107/tonne in September 2014 to $1,791/tonne now.