TTK Healthcare - Restructuring: a re-rating trigger - Angel Broking

TTK Healthcare (TTKH), a part of the TTK group is present across businesses like pharmaceuticals, consumer products, medical devices and foods. The company has leading brands like Woodward's Gripe Water with more than 50% market share and Eva which is a leader in women's deodorant segment. TTKH's continuous advertisement spend has resulted in suboptimal RoE, although the same is expected to reap benefits in the long term. With termination of the low margin condoms distribution business, the top-line is expected to be impacted by ~20%. The company's increasing focus on branded foods - a high RoE business, and orthopaedic implants - a niche product in a nascent stage; provide long term growth opportunities. We initiate coverage on the stock, with a Buy recommendation and a target price of Rs.643.

High advertisement cost to reap benefits in future: TTKH in FY2012 spent ~ Rs.45cr on advertising and sales promotion, which is very high at 191% of PBT. Though this continued spend is likely to lead to near term sub-optimal ROE, we believe it would provide a strong growth momentum to the company over next 4 to 5 years.

Food business - a long term driver: TTKH is focusing on the foods business especially pellets, which is a high RoE business. In addition to being a major supplier to players like PepsiCo, the company is planning to launch branded pellets under its own brand. We believe this could be a long term growth driver for the company.

Orthopaedic implants- a niche play: TTKHs knee implants in the orthopaedic segment are better suited for Indian markets and are competitively priced in an import dominated market, thus providing it an edge over its competitors. This niche segment being in the nascent growth stage provides immense future growth prospects.

Outlook and Valuation: We expect TTKH to post a 9.6% and 27.6% CAGR in its revenue and net profit respectively, over FY2012-14E, while the EBITDA margin is expected to expand by 275bp over FY2012-14E to 9.5%. The company has a strong balance sheet with RoIC as high as 73.6% for FY2012. At the current market price, the stock is trading at EV/sales of 0.8x for FY2014E. We initiate coverage on the stock with a target price of Rs.643 based on a target EV/sales of 1.0x for FY2014E.

Source : Equity Bulls

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