Expansion into new segments and geographies should help drive revenues and increase market share.
TTK Prestige has been the biggest value creator among Business Standard 200 companies, having gained 59 per cent in 2011 so far. Its closest peer, Hawkins has gained substantially in the second half, but is up only six per cent year-to-date.
Notably, at 19 times 2012-13 estimated earnings, there is lots of steam left in TTK from a longer-term perspective, believe analysts, given robust business visibility on the back of strong demand drivers. It’s revenues have grown at a compounded annual rate (CAGR) of 28 per cent during 2005-11 and analysts expect these to grow at 38 per cent annually till 2013.
Says Nick Paulson-Ellis, analyst, Espirito Santo Securities, “We feel the stock can sustain premium valuation due to strong demand drivers, leadership position, brand equity, vast distribution network and well planned expansion.” Also, the company is less prone to an economic slowdown, as spending on the products it offers is not as discretionary in nature as for other consumption-driven companies.
Demand drivers
Demand for branded kitchen appliances is strong, with favourable demographics, increasing urbanisation, rising disposable incomes (in rural households, too), an increasing number of nuclear families, low penetration of pressure cookers and cookware in rural areas (22 per cent penetration of cookers versus 90 per cent in urban areas), low penetration of gas connections and a gradual shift to branded products (unorganised players still account for over 50 per cent of the total market).
Besides first-time buyers, there is a high replacement demand for pressure cookers (25 per cent of segment revenues of TTK) and cookware. Introduction of the Goods and Services Tax (GST) will further help organised players in raising market share. TTK is a leader, with about 40 per cent market share in the organised pressure cooker and non-stick cookware segments; together, these form 60 per cent of revenues. The company’s brand, ‘Prestige’, has strong recall. Besides presence in the entire kitchenware segment, the wide distribution network is an added advantage. And, the company is expanding capacity, reach and product range.
Initiatives, potential
The company is expanding product portfolio by spending Rs 200 crore. TTK plans to double its pressure cooker and non-stick cookware capacity to 9.6 million units and eight million units, respectively by the end of 2011-12. It is also targeting to double its franchise (called ‘Prestige Smart Kitchen’) stores to 500 by 2012-13.
Acquisition of the kitchen appliances division of Triveni Bialetti Industries (cookware plant of a million units per annum) for around Rs 30 crore is expected to be completed by the end of 2011-12. Notably, TTK is a debt-free company, with strong reserves, which enables it to expand organically and inorganically.
Over time, it has been expanding the product range. In 2009, it ventured into electrical appliances (now 25 per cent of revenue), wherein it currently has an eight to 10 per cent market share. Though competition remains stiff, this segment offers tremendous growth potential, given untapped product segments like tea makers, food processors, water purifiers, water heaters and cool*ers. TTK’s growth in this space, though, would depend on the launches it undertakes.
It is also looking to expand geographically. Currently, the presence is concentrated in the southern and western regions (70 per cent of revenue), but it is looking to have a good presence in the east and north as well.
Outlook
Crisil Research has given the company a fundamental grade of 5/5. Says Chetan Majithia, head-equities, Crisil Research, “The grade reflects expected fast-pace growth in the branded kitchen appliances industry and strong position of the Prestige brand in the organised kitchen appliances industry.”
On the flip side, while stiff competition is typical in this business (TTK largely operates in a fragmented industry), volatile raw material prices (stainless steel, aluminium) are another. However, TTK being a market leader (in the organised space) in its core business, it is well placed to overcome such pressure. For now, with the ongoing slowdown, steel and aluminum prices have come down and should support margins.
TTK’s growth momentum is expected to improve in the next few years. As mentioned earlier, compared to a revenue CAGR of 28 per cent during 2006-11, it is expected to be 38 per cent over the next two years. In the six months to September 2011, sales and net profit grew 55-56 per cent each, compared to the year ago period, even as the economy was slowing.
Despite cost pressure, competition, capacity expansion and higher advertising spend, the operating and net profit margins may sustain around 16 per cent and 11 per cent, respectively. In this backdrop, it is not surprising to see the stock command premium valuations, which should get support from high growth prospects and robust plans.
