The September quarter results of TTK Prestige suggest the company is headed for difficult times, which may last a couple of quarters. Not surprisingly, the stock has fallen over 14 per cent in two sessions to Rs 3,146, accompanied by heavy volumes, which is possible because of huge institutional holding. Notably, domestic mutual funds have sold almost half of their holding in the company since June last year. Analysts say given the muted outlook and valuations, there is more downside.
"We spotted TTK Prestige at Rs 90 and have been consistently holding a view that it is overvalued. As of date, we fail to understand how this stock can even trade at Rs 3,000 when the real worth of this stock is not even Rs 1,500. We will see some day this stock trading at Rs 1,500 or even below," says Kishor Ostwal, CMD of CNI Research. Among the few multi-baggers stocks, TTK Prestige was the most talked about after its share price zoomed from around Rs 100 in mid-2009 to about Rs 4,000 few days back or about 40 times return in three years. The stock’s performance was aided by fundamentals as well as increasing favour for consumer plays. Since FY09, the company's sales turnover has grown almost four times and profits are up five-fold. However, going by the recent developments, this trend could be in for a change and the stock could take a pause in the near-to medium term.
Poor show in Q2
The most recent event was last Friday, wherein the company reported a 10 per cent decline in net profit for the quarter ended September, despite an 11 per cent growth in net sales, as operating profit margins fell to 15.9 per cent compared to 17.5 per cent in the year-ago quarter. Further, interest costs jumped by 185 per cent, along with a 67 per cent rise in the depreciation, which together impacted TTK’s profits.
"TTK witnessed the worst quarter in the last four-five years with mere 10 per cent top line growth and Ebitda margin shrinkage of about 160 basis points. While we have maintained our negative stance on moderating growth and margin shrinkage over the last couple of quarters, this has been below our expectation of 25 per cent growth and 90 basis point margin cut," says Aliasgar Shakir, who tracks the company at Elara Securities. The management explains the fall in profit to a depreciating rupee and higher raw material prices. However, demand for induction cookers (runs on electricity) and other appliances have been under pressure.
| CONCERNS CROP UP | ||
| In Rs crore | FY12 | FY13E |
| Revenues | 1,103.4 | 1,324.0 |
| OPM (%) | 15.5 | 15.2 |
| Net profit | 113.3 | 126.2 |
| EPS (Rs) | 100.2 | 111.5 |
| PE (x) | 31.6 | 28.4 |
| RoE (%) | 47.6 | 37.4 |
| E: Estimates; RoE: return on equity Source: Elara Securities | ||
More pain going ahead
In the near-term, analysts see less scope for margin improvement despite the recent rupee appreciation as commissioning of facilities (pressure cooker and cookware) could lead to increase in fixed cost like depreciation and interest, which will keep margins under check. Additionally, due to increasing competition TTK may not be in a position to pass on higher costs to the consumers. Importantly, revenue growth has also been tapering down over the last few quarters.
“We see increased risk to demand as slowing GDP growth, negative real wage inflation and lack of employment opportunities increase risks to consumption of discretionary items; this risk has been exacerbated by persistent inflation and a slow monsoon. During our last meeting, the hitherto optimistic management sounded cautious, highlighting that decreasing disposable income has meant that they are struggling to achieve even 25 per cent top line growth," says Nitesh Sharma of Espirito Santo Securities in a recent note on TTK. Analysts have already cut their revenue growth and earnings estimates by 8-10 per cent. They expect revenue growth of 20 per cent in FY13 as against the management guidance of 25 per cent.
High growth stocks typically are measured from a PEG (price earnings to growth) ratio perspective. At 20 per cent earnings growth, analysts say the stock may see a decline in the PEG ratio (it was 1.4 times at Rs 4,000 levels). Even at about 1-1.2, the fair price works out to Rs 2,200-2,700 per share.