TTK Prestige - Lowest revenue growth in a decade - Cholamandalam Securities

- Revenue up 1.3% YoY and 8.1% QoQ at INR 3.06bn
- EBITDA at INR 413.7mn down 13.5% YoY; EBITDA margin fell by 230bps YoY to 13.5%.
- PAT down 15.9% YoY to INR 257.9mn

Induction based appliances played a spoilsport

Revenues in 1QFY14 was largely affected due to steep decline in the induction cook-tops sales (especially in South India), thus affecting the sales of cookers (-2% YoY) and cookwares (-11% YoY) which used to be bundled along with Induction cook-tops. Shortage of power in the South India, oversupply of Induction cook-tops in domestic market and easing the cap on LPG cylinder is hurting the demand for Induction cook-tops. It is estimated that there is an oversupply of 2 to 3mn pieces of induction cook-tops in the domestic market. Cookers sales were also affected because of the deferral of export orders of microwave cookers to 2QFY14.

South, Non-South gap narrowing down

In yet another quarter, growth in the Non-South market has compensated the sluggishness in the south market. Non-South revenue stood at INR 1,280mn up 43% YoY, and revenues from South stood at INR 1,850mn down 13% YoY. The revenue share of Non-South has increased to ~41% versus ~30% in 1QFY13.

Product mix, lack of operating leverage and rupee depreciation took a toll on margin

In 1QFY14, TTKPT margin stood at 13.5%, down 230bps YoY. The margin was impacted due to lack of operating leverage, adverse product mix (the revenue share of low margin appliances has increased to 44.1% vs 39.5% in 1QFY13) and rupee depreciation. Rupee has depreciated ~10% in 1QFY14, which had a double whammy effect on margin, one it has offset the fall in Aluminium prices in LME and second it has impacted the margin of electric appliances, which is predominantly imported. However the rupee depreciation impact has been partially mitigated through the timely price increase taken by the company.

Other business updates

Net addition to Prestige Smart Kitchen (PSK) network was 30 taking the total count to 463 and company plans to add 100 stores in FY14. PSK accounts for 17-18% of company's sales. Company has guided for a revenue growth of 15-20% in FY14 and an EBITDA margin of 14%.

Valuation: Over the last few years the robust growth in induction cook-tops has spurred healthy growth in the cookware and cookers. Company has stopped bundling the cookwares & cookers, which will normalize the growth rate in these segments and the growing share of revenue from Kitchen Electric Appliances is likely to affect company's margins going forward. However, improving power situation in Tamil Nadu will act as a near term trigger for the stock. We are also optimistic about the company's foray into water purifier segment, which is likely to happen in FY14. At CMP the stock is trading at 22.3X to FY15 earnings. We have arrived at a target price of INR 3,237 based on 22XFY15 E (PEG of 1.6) and assign a Market Performer rating. Risks: The downturn in economy leading to deferring discretionary purchases and down trading, competition from both foreign and domestic player, volatility in prices of raw materials.

Source : Equity Bulls

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