TTK Prestige: To much pressure to perform?

Moneylife Digital Team 12 October 2012

In its latest report, Espirito Santo has downgraded one of the greatest value creators of the last decade because the stock is overvalued, relative to slower sales growth guided by the management

The management of TTK Prestige, one of the solid mid-cap performing stocks, with a 40% market share in the organised pressure cooker segment, has struck a cautious tone, going forward. The management has admitted that consumers have been deferring purchases owing to difficult economic conditions, slower wage growth and persistent inflation, according to Espirito Santo Securities. A favourite stock among many individual and institutions investors, like its competitor Hawkins, Espirito Santo has downgraded the stock to neutral. It pegs the value of the company at Rs3,500. Currently the share price (10 October 2012) is Rs3,673. Does this mean retail investors have to sell?

The company’s share price has gone up from Rs127 (1 January 2006) to Rs3,673 (10 October 2012), a whopping 63.16% compounded annual return! At the same time, its sales grew at 30% CAGR (compounded annual growth rate) between FY06 and FY12. The company is solid, with a strong balance sheet and impressive product line that provides essential cooking wares. Its quality is also top-notch. However, when the management, according to Espirito Santo, started to worry that it is struggling to even meet 25% growth levels, it is a sign to reconsider holding the stock, at least in the short-term. On the other hand, its long-term story remains intact, as it has sufficient ‘moats’ around its business model. According to Espirito Santo Securities, the share price of the company has gone up 48% since the beginning of the year and it feels that there is hardly any movement left for it to rise further owing to management tone. It said, “We like TTK Prestige and recognise its longer-term potential, and have had a ‘Buy’ on it since initiation, but the stock has run up 48% YTD (year-to-date) and we now expect near-term challenges.” From a growth perspective, the company’s price-earning ratio stood at 37 (2012, according to Espirito Santo), which is deemed high and could be an indicator that it has reach its peak.

According to Moneylife database, TTK Prestige makes a 19% return on equity %, with strong three-quarter year-on-year sales growth of 17%. However, its operating profit has been subdued of late, due to higher expenses. Its three-quarter operating profit has grown only 5% while its market capitalisation is quoting at nearly 12 times its operating profit, signifying that the stock is expensive. Its EBITDA margins have been flat despite increased sales. Based on the above metrics, one should hope that TTK Prestige is able to contain its costs in the near-term. This is critical as it is the only variable that can be controlled by the company. In fact, Espirito Santo mentioned that volatility in prices of raw materials (stainless steel and aluminium) need to be controlled.

An erratic monsoon, persistent inflation and weaker wages meant that consumers are cutting back, especially in rural areas where pressure cooker demand is untapped. Even the dealers were unable to sell the inventory fast enough. In fact, for the festive season, according to Espirito Santo, the company is marking down the prices of its products by at least 15%-20%, in order to get rid of slack inventory. One of key risk is that it has introduced electrical appliance products, as more households gain access to power. But this there is competition in form of cheap Chinese goods which are far more affordable to the rural segment. TTK Prestige hopes that its brand and quality will fend off unorganised competition and tap into newer markets.

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