TTK Prestige 20110518

ICRA EQUITY RESEARCH SERVICE

1

Fundamental GradeICRA Online has assigned the Fundamental Grade ‘4’ to TTK Prestige Limited (TTKP). The Fundamental Grade “4” assigned to TTKP implies that the company has “strong fundamentals”.

TTKP has posted strong growth over the past five years, outperforming the underlying industry growth. Favourable industry prospects, product introductions at regular intervals, foray in new product segments and markets have been the key growth drivers for the company. TTKP has followed a single brand strategy and has successfully leveraged it to expand its presence in segments other than pressure cookers. This strategy has allowed TTKP to emerge as a complete ‘Kitchen appliances company’ with presence in pressure cookers, non-stick cookware, kitchen electrical appliances and gas stoves. In addition to strong brand franchise, TTKP also benefits from its wide distribution network, particularly in the Southern and Western markets and increasing presence through exclusive ‘Prestige Smart Kitchen’ stores.

We expect the company to remain on the growth trajectory as it continues to benefit from India’s favourable consumption story, high growth expectation from smaller towns and rural markets, where penetration levels for most kitchen appliances are still low and more importantly the company’s focus on introducing new products and increasing reach in newer markets. Though the core business would remain its key value driver, the company has some surplus land in Bangalore where it has entered into a joint development agreement with real estate developer, which can provide some additional upside to earnings in the long-run.

Grading Positives TTKP’s key strengths includes (a) its leadership position in the organised pressure cooker market, (b) strong brand equity and distribution network, allowing it to expand its business across product segments in the kitchen appliances market, (c) strong growth prospects driven by favourable demographics. Key upside to our estimates include higher than estimated growth of branded segment of the industry on shift to quality by consumers. Apart from its strong business position, TTKP has demonstrated robust financial performance over the past five years characterised by high RoCE, strong operating cash flows and debt-free status.

Grading SensitivitiesNotwithstanding the growth prospects, the company continues to face stiff competition and pricing pressure from unorganised segment for majority of its business. Competition from other branded players is also significant as they have been expanding their product profile and benefit from their extensive distribution reach. Increasing input material prices also pose a threat to company’s margins.

TTK PRESTIGE LIMITEDMay 18, 2011 Industry: Home Appliances

ICRA Online Grading

• Fundamental Grading of ‘4’ indi cates “strong fundamentals”

Key Stock Statistics

Bloomberg Code TTKPT INCurrent Market Price* (Rs.) 2,357Shares Outstanding (crore) 1.13Market Cap (Rs. crore) 2,66852-Week High (Rs.) 2,60952-Week Low (Rs.) 575Free Float (%) 25.1%Beta 0.85P/E on 2011-12 EPS Estimate (x) 25.0

*As on 13th May 2011Shareholding Pattern (31st March, 2011)

Source: Bloomberg

Source: BSE Website

Share Price Movement (24 months)

FY10A FY11A FY12E FY13E

Operating Income (Rs. crore) 505.2 763.6 1,006.2 1,248.3

EBITDA Margin (%) 15.3% 15.9% 15.9% 16.1%PAT Margin (%) 10.3% 11.0% 10.5% 10.6%Fully Diluted EPS (Rs.) 46.3 74.0 94.2 117.7EPS Growth (%) 134.3% 59.7% 27.4% 24.8%P/E* (x) 50.8 31.9 25.0 20.0P/BV* (x) 21.9 13.9 9.6 6.8RoE 51.3% 53.4% 45.4% 39.8%RoCE 84.3% 80.4% 57.5% 50.3%EV/EBITDA* 33.7 21.5 16.9 13.2

Source: Company, ICRA Online estimates *on fully diluted basis

2

ICRA Equity Research Service TTK Prestige Limited

SUMMARY

A well-known kitchen appliances company with leading position in pressure cookers and non-stick cookware

TTK Prestige Limited (TTKP) is positioned as the largest organized player in the fast-growing domestic kitchen appliances industry with a market share in access of 35-40% in the organized segment of the pressure cooker and non-stick cookware market. TTKP is a well-known name in the kitchen appliances segment and has over the years evolved into a total kitchen solutions company from predominantly being an outer-lid pressure cooker maker with presence concentrated in the Southern region. TTKP is one of the few consumer durable companies which have effectively been able to implement a strategy in expanding a single brand across product segments and build a sizeable business across segments. The company benefits from its strong brand, its wide spread distribution reach in Southern India, its expanding trade model comprising of exclusive retail stores besides strengths in product innovation.

Strong brand recognition and extensive distribution set up

Over the years, TTKP has built strong brand recognition as a leading kitchen appliances company. Besides product innovation in line with changing consumer needs; effective product promotion and positioning have helped the company develop a strong brand which is being associated with trust, safety and reliability. The company has also built an extensive pan India distribution network reaching about 25,000 dealers which is one of the critical factors for a consumer driven industry like kitchen appliances. Apart from the traditional distribution channels such as dealers, authorised redistributors and institutional sales, TTKP has also ventured into the company branded “Prestige Smart Kitchens” (PSK) exclusive outlets. Besides enhancing visibility of the brand, these exclusive retail outlets with modern ambience offer entire range of TTKP’s products under one roof thereby providing convenience and unique shopping experience to the customers.

Favourable demographics + enhanced reach + expansion in product range to sustain growth momentum

Over the past five years, TTKP has posted a strong growth of 28% CAGR in operating income driven by a confluence of growth drivers. Favourable industry dynamics, strong brand recognition, expansion in product profile, and foray in newer markets have been the key factors. We expect the company to continue to ride on this growth momentum driven by favourable industry dynamics –rising disposable income levels, rising consumerism and its strategy to augment its geographical presence especially in newer markets and semi-urban areas while also maintaining its focus on enhancing its product offerings. Overall, we expect this to translate into revenue growth of ~26% CAGR between FY11 and FY14 to Rs. 1,518 crore.

We expect TTKP’s EBITDA to grow at CAGR of 26% between FY11-FY14e from Rs. 122 crore to Rs. 246 crore and net earnings to also post a similar growth during the same period. Given the strong operating cash flows, sizeable cash reserves, we don’t expect any equity dilution to fund the Rs. 210 crore planned capital expenditure programme.

Asset light model + strong brand equity supports high return indicators

At present, TTKP manufactures its traditional products – pressure cookers and non-stick cookware in-house, while it outsources manufacturing of kitchen electric appliances and gas stoves to dedicated vendors and suppliers in India and China. The outsourcing model offers several operational advantages to the company as it allows it to focus on its key strengths in marketing, distribution and product development. Additionally, strong acceptance for company’s products also results in lower working capital engagement (i.e. NWC/OI - 7% in FY10). With strong brand equity (proving pricing flexibility), strong distribution network, low engagement in capital (in capacities and working capital), improving operating leverage, low interest burden and tax incentives (at one of its site), TTKP has been able to post very high RoCEs, ranging between 40-80% in the past. We expect the company to continue to generate high return indicators in the future although some moderation is likely in the


3

With current high levels of capacity utilizations, TTKP has outlined a large capital expenditure towards capacity expansion with a view to cater to increased demand. The company plans to double its capacity of pressure cookers from 4.8 million units to 9.6 million over the next two years. In the non-stick cookware segment, the company also plans to set up a Greenfield manufacturing facility in Gujarat with a capacity of 6 million units per annum.

Competition from unorganised segment and other branded players

Notwithstanding the favourable growth prospects, TTKP continues to face intense competition from unorganized players in most of its business segments. Other branded players are also expanding their product range and with their extensive distribution reach continue to be a significant competition to TTKP. Further, with the company expanding its presence in not so strong markets in North & East and rural markets, it is likely to face pricing pressure from cheaper unorganized players given the high price elasticity in these markets. Although the company’s operating margins have improved considerably over the past two years on back of improving operating leverage, fiscal benefits at its Uttarakhand plans and lower input prices (in FY10), sharp fluctuation in metal prices could exert pressure on company’s margins. That said, strong brand recognition allows the company to pass on the cost increase to end-customers.

4


Market Position And Business Outlook

TTK Prestige (TTKP), part of the Bangalore-based Rs. 1,100 crore TTK group is a branded player in the kitchen appliances segment and enjoys strong market position with over 35-40% market share in the organised pressure cooker and non-stick cookware segment in India. From predominantly being a branded pressure cooker player, TTKP has evolved its business model to emerge as a total kitchen solutions company with presence spread across pressure cookers, non-stick cookware, kitchen electric appliances and gas stoves. With a strategy to have presence across the entire range of kitchen appliances, the company has effectively diversified its revenue mix with pressure cookers now accounting for less than 50% of turnover. Strong growth across segments, regular product innovations and launches and foray in newer markets have helped the company post a healthy growth of 28% CAGR over the past five years (i.e. FY07-11). The high growth momentum is likely to continue in the medium term fuelled by favourable business dynamics, multiple product launches, increasing presence in fast growing kitchen electric appliances segment and increasing distribution reach in not so strong markets in North and East. TTKP has a pan India presence through ~25,000 direct dealers apart from the company branded exclusive retail outlets. The company is particularly strong in Southern and Western parts of the country and has been making in-roads in North & East as well.

Positioned as a leading player in the domestic pressure cooker market with strong brand equity

With over 50 years of presence in manufacturing pressure cookers in India, TTKP is positioned as the leading player in the domestic pressure cooker market with an estimated 35-40% market share of the organised segment. The pressure cooker market in India is estimated at 20 million units p.a. and has been growing at around 8-9% p.a. The market is characterised by low entry barriers and high competitive intensity with 50% of the market dominated by organised players with rest distributed between regional and un-organised players. Among organised players, TTKP and Hawkins are the leading players, collectively accounting for over 80% of the organised segment.

TTKP currently dominates the organised segment with 35-40% market share and its pressure cooker business has grown at a CAGR of 15.1% during the last five years (i.e. FY06-FY10) with majority of this growth being volume driven. Regular product innovations, strong brand and shift towards the organised segment have helped the company’s pressure cooker business in consistently outperforming the market growth over the past five years.

The market for pressure cookers is bifurcated between outer lid and inner lid. Largely influenced by cooking styles and needs, the Southern market is dominated by outer lid pressure cookers, while the Northern market usually prefers the compact inner lid cookers. In volume terms, both TTKP and Hawkins have been posting strong growth over the past five years and enjoy fairly similar scale (in terms volumes) and market share. In terms of geographic mix, TTKP, owing to its presence in outer-lid pressure cooker market is a stronger player in the Southern market with over 60% market share, while Hawkins is much larger player in the Northern & Eastern markets. With increasing disposable income levels and increasing demand from urban middle class young population, the demand for branded products is gaining preference over unbranded products. Further, the shift towards branded

Source: CMIE, Company, ICRA Online Estimates; Graph 1 captures data for a sample of organised players


5

products has also been enabled through various promotional offers/exchange schemes resulting in significant replacement demand in an otherwise durable product with low replacement market. TTKP derives ~25% of its revenues through replacement demand (exchange schemes); 50% of which pertain to exchange towards pressure cookers. As a result, the organised players such as TTKP and Hawkins have been outperforming the industry growth by a healthy margin.

TTKP with its relatively stronger presence in the Southern market has also now made considerable in-roads in the Northern and Eastern market. In order to gain presence in these markets, the company developed and launched the inner-lid pressure cookers in 2005-06 and now has approximately 5% share of the market. From initial volumes of 50,000 units a year, TTKP expects to achieve sales of 750,000 inner lid cookers in FY11e, majority of which are sold in the Northern and Eastern markets. The market for pressure cookers appears to be fairly well penetrated in urban markets with over 90% penetration levels; however, the penetration levels in rural markets appear to be low at ~220 for every

1,000 households. This offers strong potential for growth in rural markets. In this regard, TTKP has put in place a strategy to tap demand in rural markets by involving NGOs and self-help groups. The company has test marketed the new distribution model in certain markets in Andhra Pradesh.

In India, the total number of gas connections stood at 115 million and with estimated 220 million households, the penetration level for gas connected household stands at ~50%. We believe the target to add ~55 million new gas connections by 2015 set by OMCs is likely to be the key growth driver for pressure cooker sales in rural India. On the other hand, demand from urban areas is expected to come largely from upgradation to products with better features and replacement (although pressure cookers have very high durability). Further, considering the changing consumer mindset, increasing brand awareness

and safety consciousness, continued shift to branded products is being witnessed.

6


Emerged as a total kitchen appliances company with presence across a range of products

TTKP over a period of time has transformed its business model from being a pure pressure cooker maker to a company offering a complete range of kitchen appliances as it has been able to effectively extend its ‘Prestige’ brand to cookwares, kitchen electric appliances and modular kitchens thereby rebranding itself as a “Total Kitchen Solutions” company. Although, pressure cookers continue to remain the mainstay for the company with over 47% contribution to turnover, the company has successfully scaled-up its business in other segments that include non-stick cookware, kitchen electric appliances and gas stoves. In FY10, sales from segments other than pressure cookers accounted for 53% of total turnover as compared to 41%

in FY06. In the non-stick cookware segment, the company manufactures and markets entire range of cookwares under its Omega Deluxe, Omega Die-Cast and Omega Select Plus brands. In the kitchen electric appliances segment, the company markets a range of mixer grinders, hand blenders, induction cook tops, toasters, kettles, juicers, coffee makers etc.

In line with the industry trend, TTKP also follows the outsourcing model for manufacturing kitchen electric appliances and gas stoves and has dedicated vendors in India and suppliers in China. At present, the company sources nearly 60% of its requirement from China and balance is met domestically. The outsourcing model offers several operational advantages to the company as it allows the company to focus on its key strengths in marketing, distribution and product development. It further ensures lower capital engagement as vendors invest their own capital for capacity creation besides providing flexibility with respect to managing production in line with trends in demand. Outsourcing to small players also provides tax incentives available to small scale industries.

In line with its strong market position in the pressure cooker segment, TTKP has managed to establish a fairly strong presence (i.e. ~35% market share) in the fast-growing non-stick cookware segment where it has effectively extended its strong brand franchise to offer a complete range of products. The company’s revenues from this segment have grown at a healthy CAGR of 25% over the past five years, contributing ~17% to total turnover in FY10. The company faces competition from whole host of branded players as well non-branded ones with Hawkins, Nirlep, Butterfly and Pigeon being among the other established brands available in the market. We expect this segment to continue to grow at healthy pace driven by growing health consciousness among increasing young middle class population, rising disposable income levels and advent of modern trade.

With a view to transform itself as a complete kitchen solutions provider, TTKP has also marked its presence in the kitchen electric segment of small appliance markets. The small appliances or commonly referred as the brown goods market in India is estimated at ~Rs. 5,900 crore, growing at over 15% over the past five years. Rising income levels, increasing urban households and increasing growth in penetration in rural markets are some of the prominent factors driving demand for small appliances. The major differentiating factor in favour of the kitchen appliances vertical is that these products have a much shorter replacement cycle of 2-3 years, regular product / technology introductions and lower price range in comparison to higher prices consumer durable such as white goods. These factors result in higher volume growth and quicker penetration possibilities.


7

In the initial phase, the demand for electric appliances has been driven by urban markets. But it is now reaching out to the semi-urban and rural markets benefitting from changing lifestyles, rising disposable income levels and improving electricity availability. We expect growth momentum to continue driven by:

Key Growth Drivers – Small Electrical Appliances

• Improving electricity penetration in rural areas to support demand for electrical appliances

• Rising disposable income levels and housing demand among growing urban middle class population

• Shift from unorganised to organised segment with rising disposable income levels

• Relatively low penetration in rural areas for most electrical appliances

Unlike TTKP’s traditional product segment – pressure cookers, the market for brown goods has large number of branded players (both local and foreign brands) with no single player commanding more than 15-20% market share. TTKP ventured in to the kitchen electric appliances segment in 2002-03 and has managed built a Rs.100 crore business over the past 5 years. Bajaj Electrical is the largest player in the small appliances segment; its market share across product categories ranges between 15-30%.

8


Segment-wise key snapshot & TTKP’s market position & strengths

Gas Stoves – (12%)

Kitchen Electric Appliances - (20%)

Trend in TTKP’s Non Stick Cookware Business

Pressusre Cookers - (47%)TTK’s Market Position & Strengths- Leading player in the organised, branded pressure cooker market - Enjoys strong brand equity, benefits from wide distribution reach

Key growth drivers

- Untapped rural market; increasing gas connectivity to 55 mn households - Rising disposable income levels and urbanisation levels

Challenges

- Stiff competition from highly price competitive unorganised segment - Vulnerable to input material price movements

TTKP’s Market Position & Strengths

- Enjoys strong market position with ~35-40% market share - Successfully leveraged on ‘Prestige’ brand to expand its presence

Key growth drivers

- Increasing acceptance among health conscious consumers - Relatively lower product life also results in replacement demand - Favourable demographics; rising consumerism and urbanisation levels

Challenges

- Stiff competition from both organised/branded & unorganised players


- Relatively new entrant & small player; market share ~8-9% - Bajaj Elec. holds strong market position across categories - Regular introductions and brand extension helping the Company - Launched induction tops, gaining traction

Key growth drivers

- Favourable demographics; rising consumerism and urbanisation levels - Relatively lower product life also results in replacement demand - New product introduction with advanced features

Challenges

- Stiff competition cheaper imports, limited scope for differentiation - Establishing wide spread service network is imperative


- Relatively small player; other players enjoy strong brand re-call

Key growth drivers

- Increasing gas connectivity – target 55 mn households by 2015 (50%+) - Increasing urbanisation and rising trend of nuclear families - New product introduction with advanced features

Challenges

- Stiff competition cheaper unorganised segment - Limited scope for differentiation


9

Focus on innovation & regular product launches has strengthened TTKP’s business profile & brand equity TTKP has traditionally been a manufacturer of outer-lid pressure cookers which are predominantly used in the South India. However, with a view to expand its presence to the Northern and North-Eastern markets (where inner-lid pressure cookers are popular), the company initially entered the inner-lid segment through the launch of “Nakshatra” range of inner-lid pressure cookers in the regular and ‘handi’ varieties. It further extended its portfolio of inner-lid pressure cookers during 2009-10 through the launch of “Apple” range of pressure cookers targeted at small urban families (which are currently available only in 3 litre capacities). Apart from being available in the aluminium and the superior hard anodized varieties, these models are also offered in various vibrant colours giving a contemporary look to suit modern kitchens and appeal aesthetic requirements of the new-age home makers.

Business Segment Market Size TTKP’s Competitors Product (Rs. Crore) Market Share

Pressure Cookers 900 `20% Hawkins,Kanchan Outer lid, Inner lid, Pressure Handls 35% (organised United, Bajaj, Havells Omega Deluxe (Induction base, nonNon Stick Cook 618 14% Hawkins, Nirlep stick cookware), Omega Die-Cast (dle-ware 30% (organised) Pigeon, Butterfly, cast cookware, durable, heat retention) Jaipan Omega Select Plus (Residue free, metal spoon friendly)

Home Appliances 2,500 ~4% Bajaj, Butterfly, Preethi, Mixer grinders, Hand Blenders, Rice Philips, Kenstar, Inalsa Cookers, Induction Cook Tops, Electric Kettles, Sandwich Toasters, Ovens, Juicers, Irons, etc.

~5% Sun flame, Bajaj Gas tables, Glass top gas tables, LP GasGas Stoves 1,200 12% (organised) Butterfly stoves

Segment Market Characteristics TTK’s Market Position & Strengths Growing at modest - 8-9% p.a. Market leader with 34-40% share Low entry barriers Wide product portfolioPressure Cookers High competitive intensity as reflected by presence Enjoys strong brand, widespread distribution of large unorganised players (~50%) reach

Non-Stick Cook Growing at relatively higher pace EBITDA margins in excess of 20% Low entry barriers TTK’s market share -35% (organised) Branded players command premium Enjoys strong brand equity; has managed to Highly competitive market leverage the ‘Prestige’ brand well

Home Appliance Fragmented market TTKP’s market share -low No single large player Other players - Philips, Bajaj, Preethi enjoy Branding players a major role higher brand re-call

Gas Stoves Large number of players Wide range of products; presence in both high- No single large player end and basic categories

Source: ICRA Online Research

Table : Market Characteristics

Table : TTKP’s Competitive Grid

Source: ICRA Online Research

10


Table: Major product launches by TTKP

Similarly, on the cookware front, the company has constantly upgraded its ‘Omega’ range of cookwares with innovative features such as ‘metal spoon friendly’ and ‘residue-free’ kitchenware while also maintaining its focus on the aesthetic appeal. However, the company’s portfolio lacks products in the ultra premium category as against Hawkins’ Futura (hard anodized and stainless steel) range of pressure cookers (4 litre pressure cookers priced at ~Rs.3,000). Though, currently the market size for the same is small, increasing incomes and changing lifestyle with growing importance to functionality and visual appeal are likely to drive demand for these products especially in the urban markets.

Extensive distribution reach is imperative for consumer goods; helps differentiate between players

With increasing urbanisation, Tier-II and -III towns are expected to be the key growth drivers over the next few years, which makes extensive distribution network and brand presence critical for consumer goods’ companies. TTKP has a pan India strong network of 25,000 direct dealers as on date. Given its product profile, its network compares fairly well with its closest peers like Hawkins, Bajaj Electrical, and Havells etc.

Company Distributors Direct Dealers TTKP* Direct dealers 25,000 Hawkins 5,000 Bajaj Elec. 5,000 50,000 Havells 4,300 35,000

In terms of market position, TTKP is particularly strong in Southern and Western parts of the country and has been making in-roads in North & East as well. With deep distribution reach and strong brand awareness being the key success factors for a consumer driven industry like kitchen appliances, TTKP has taken suitable measures by foraying into the retail space early in 2003. Apart from the traditional distribution channels such as dealers, authorised redistributors and institutional sales, TTKP ventured into the company branded “Prestige Smart Kitchens” (PSK) outlets. Besides enhancing visibility of the brand, these exclusive retail outlets with modern ambience offer entire range of TTKP’s products under one roof thereby providing convenience and unique shopping experience to the customers. These outlets have been well received by the customers as can be noticed from the increasing trend in the share of revenues being derived from PSK outlets. In line with growing popularity of these outlets, while the company has stepped up the expansion of the PSK outlets across the country, the distribution continues to be heavily skewed towards the south. The number of PSK outlets has increased from 80 in 2005-06 to the current 270 outlets covering over 135 towns in almost 20 states. With the success of PSK outlets, TTKPL has also rolled out “Prestige Lifestyle” and “Prestige Kitchen Boutique” each catering to the high value products (such as chimneys and hobs) and modular kitchens respectively. This has helped TTKPL reposition itself as a lifestyle company from a mere commodity manufacturer.

2005-06

Prestige Nakshatra

(Inner lid), Pressure

Handi, Pressure Kadai,

Duplex gas tables

2006-07

89 new

products

launched in 7

categories

2007-08

45 new products

launched in 5

categories; in all

86 variants

2008-09

New range

of Induction

cook tops

2009-10

“Apple” inner lid cookers, “Microchef” microwave cookers, Induction com-

patible base

cookware

Source: Company


11

Expanding presence in the niche ‘modular kitchen’ segmentWith a view to tap the robust growth prospects in this largely under-penetrated (less than 1% households in India have modular kitchens) segment, the company entered the ‘modular kitchen’ market through specialized modular kitchen boutiques under its “Prestige Kitchen Boutique” retail outlets. Although TTKP has been present in this segment for over five years, the company renewed its focus on this division only during the past two years. At present, TTKP has nine such stores displaying three to four different varieties of modular kitchens for customers to experience and choose a suitable style of modular kitchen.

The residential kitchens market in India is highly unorganized with kitchens mostly being self-designed and accordingly custom fabricated by local carpenters. With growing urbanization and shrinking kitchen space, increasing need is being witnessed for effective utilization of available space so as to make the kitchen more efficient while also maintaining its aesthetic appeal. Further, favourable demographics coupled with rise in housing projects are likely sustain the growth potential in this segment. Notwithstanding the growth prospects, the company faces significant competition in this segment from a large number of players - both domestic as well as international. Apart from domestic players such as Godrej & Boyce (through Godrej Interio), Kitchen Masters, Sleek, Akruti Kitchens & Furniture among others, several international players with strong domain expertise have entered Indian market attracted by the strong growth prospects. Some of the leading foreign brands that have entered India include: Hettich International, Häfele – Kitchen Fittings and Poggenpohl Möbelwerke. While TTKP enjoys certain advantage on account of its strong brand recognition and lower pricing compared to the international players; stiff competition from the significantly cheaper unbranded market continues to remain a challenge. However, low-penetration level augurs favourable prospects for all players.

Real estate foray to provide an upside in the long-runSubsequent to the closure of the pressure cooker manufacturing facility at Bangalore, TTKP has a 6.5 acre surplus parcel of land at Dooravani Nagar, Bangalore. The company has entered into a joint development agreement with Salarpuria’s, a Kolkata-based real estate developer to develop a residential-cum-commercial space at this location. In terms of contract with the developer, TTKP will have rights for 43% of estimated 680,000 sq. ft. of developable, 60% of which will comprise of commercial space. As per the company, the developer has recently secured all necessary government approvals and expects the construction to be spread over a period of 30-36 months. With the project expected to be a combination of housing and commercial space, the company is likely to generate sizeable one-time gain on sale of residential apartments and rental income (for commercial space) from FY15 onwards. The estimated lump sum is expected to be around Rs. 100 crore upon completion of the project in FY15 while the steady rental income would be around Rs. 6-7 crore on an annual basis.

With close proximity to the outer-ring road, national highway (connecting Chennai) and an upcoming metro station (at 1 km from the site), the company expects favourable prospects for both residential as well as commercial office space at the location. In terms of execution, while some comfort may be arrived from the experience of the developer in real estate business, delays and execution risk associated with such projects could a be sensitivity to our estimates. As per the management, TTKP would however not be sharing the development cost with the developer

Expanding capacities to support future growthThe company plans to double its capacity of pressure cookers from 4.8 million units to 9.6 million over the next two years. The company plans to invest around Rs.210 crore over FY11-12 in order to augment capacity. At present, the company’s manufacturing facilities are operating ~70%; capacity addition and expansion plans would ensure adequate capacities for next 3-4 years. In addition to the capacity expansion plans, the company also aims at setting up a Greenfield manufacturing facility in Gujarat for manufacturing non-stick cookware including hard anodized cookers. Given the sizeable cash reserves and strong operating cash flows, we expect the company should be able to fund the capacity expansion largely through internal cash flows, thereby refraining from equity dilution or significant reliance of debt-funding. In FY07, the company had set-up a manufacturing facility at Roorkee (Uttarakhand) for manufacturing inner-lid pressure cookers. The facility at Uttarakhand enjoys fiscal benefits (in form of excise duty and income-tax exemption).

12


Key Concerns

Large pricing differential exists between branded and unorganised players

Among the branded players, owing to the nature of products which offers limited scope for differentiation (in comparable price categories), value perception and brand recognition play a significant role in customer acquisition and retention. Therefore, despite high price competition from the unorganized sector (substantial discount to branded players), aided by strong brand recognition and safety perception, TTKP has been able to maintain its dominance in the pressure cooker industry. Going forward, we expect the company to continue to enhance its market presence through regular product launches, improving brand awareness and enhanced reach.

In addition to competitive prices, local brands also offer better margins to dealers as compared to organised branded players such as TTKP or Hawkins. The branded players however have better pricing power and if required can potentially match the dealer margin. Currently, the local brands are able to achieve lean cost structure due to instance of tax evasion, lower spend on advertising and brand building and cheaper raw materials (as they used pre-used aluminium). However, with the expected introduction of GST, the gap between cost structures of branded and non-branded players is likely to reduce and is likely accelerate the shift in consumer’s preference for branded products vis-a-vis non-branded ones.

Given the high penetration levels for pressure cookers in the urban markets, growth in these markets is likely to be primarily driven by the replacement demand, upgradation to branded products/products with better features. However, significant growth is also expected from the Tier II/III towns and rural households considering lower penetration levels in these markets. This is especially so with the growing interest for branded pressure cookers in the semi-urban/rural markets (owing to better quality and safety perception) and increasing availability of LP gas apart from boost in the rural income driving demand. However, expanding the distribution reach with infrastructural constraints in rural areas remains a challenge. Furthermore, TTKP’s products are likely to face severe competition from the significantly cheaper regional brands/unbranded products especially considering the high price elasticity in the rural markets.


13

Raw material pricesFor TTKP, raw material cost is the major cost component, forming ~52-55% of its operating income. Aluminium, stainless steel and other traded products is the major constituent of the total material cost. Thus, increase in material prices particularly of aluminium and stainless steel can exert pressure on company’s operating margins. However, the impact is limited to an extent given the company’s strong brand equity, which allows it to pass on the increase in material prices to end customers.

Source: Prowess, Company data

TTKP’s operating margins have also benefitted from its improving operating leverage, lower outsourcing of traded good and fiscal incentives available at Uttarakhand plant, which has helped the company gradually shift manufacturing of kitchen electric appliances in-house and reduce dependence on outside vendors. That said, the company is likely to see some pricing erosion and subsequently pressure on margins as it expands in smaller towns and rural markets where price elasticity is likely to be higher.

Source: CMIE, Company annual report Increasing operating Leverage, fiscal benefits & Lower outsourcing have helped improve margins

14


Enhanced penetration together with new launches across product categories to sustain growth momentum

Over the years the company’s revenues have posted steady growth primarily driven by volume expansion across product categories. During the five year period between FY07 and FY11, TTKP’s revenues grew at a CAGR of ~28%. Apart from demand side drivers such as rise in disposable incomes, favourable demographics and growing health consciousness; several company-specific factors such as strong brand presence, foray into newer product categories, product enhancements and improved distribution reach have resulted in accelerated revenue growth for TTKP especially during the past three years. Besides achieving consistent growth in pressure cookers and non stick cookware, the company has been successful in establishing its presence in kitchen electric appliances segment; a product category which is expected to continue the strong growth momentum aided by rising con-sumerism and replacement demand. We expect the company to continue to augment its geographical presence especially in newer markets and semi-urban areas while also maintaining its focus on enhancing its product offer-ings which are likely to aid TTKP in sustaining the growth trend. Overall, we expect this to translate into revenue growth of ~26% CAGR between FY11 and FY14 to Rs. 1,518 crore.

While TTKP’s operating margins have historically been in the range of 9-10%, the company witnessed significant expansion in margins during FY10. Benign raw material prices during most part of the year resulted in healthy operating margin growth to ~15%. Further, despite change in product mix with increased proportion of relatively

Operating margins to stabilise going forward; however, high base effect to moderate EPS growth

Source: ICRA Online estimates

FINANCIAL OUTLOOK


15

low-margin kitchen electric appliances, the company has been able to post steep rise in operating margin aided by improved efficiencies attributed to enhanced scale. In line with the improvement in operating margin; the company’s net margin also improved to 10.3% in FY10 from the 5.6% in FY09 aided by low depreciation and re-duced interest outgo. The company retired most of its debt during FY09 and FY10 resulting in reduced interest burden. During FY11, the company’s margins have further improved primarily owing to large economies of scale apart from stable raw material prices.

Though raw material prices are expected to rise going forward, we expect the company’s operating margins to remain stable cushioned to a certain extent by the improvement in margins in the kitchen electric appliances segment with the commencement of in-house production under this category (which was otherwise outsourced / imported until FY10) from the current fiscal. Further, TTKP is also expected to continue to benefit from scale economics with increased volumes and the company’s strong brand equity, which allows it to pass on the increase in material prices to end customers.

Addition of significant capacities, both in newer product categories and traditional products with a view to cater to increased demand is likely to result in higher depreciation charge in the initial years. However, this is expected to be off-set by the lower tax charge on the Uttarakhand plant thereby maintaining the net margins at similar levels.

Higher base effect coupled with aggressive capital expenditure plans likely to impact profitability indicators

With current high levels of capacity utilizations, the company has outlined a large capital expenditure towards capacity expansion with a view to cater to increased demand. The company plans to double its capacity of pressure cookers from 4.8 million units to 9.6 million over the next two years. In the non-stick cookware segment, the company also plans to set up a Greenfield manufacturing facility in Gujarat with a capacity of 6 million units per annum. The said capacity expansion requiring an estimated capital expenditure of Rs.210 crores is expected to be incurred over a period of three years. Given the sizeable cash reserves and strong operating cash flows, we expect that the company should be able to fund the requirement largely

through internal cash flows, thereby refraining from equity dilution or significant reliance of debt-funding. Though some moderation in profitability indicators is likely owing higher base (on account of increased networth through accumulated earnings and partial debt-funding for the capital expenditure), the same are expected to remain sound supported by corresponding growth in operating accruals.

COMPANY PROFILE

Incorporated in 1955, TTK Prestige Limited (TTKP) is the flagship company of the Bangalore-based Rs. 1,100 crore TTK Group, positioned as one of the leading kitchen appliances company in India. TTKP, commenced operations as a traditional pressure cooker manufacturer, and has since evolved into a ‘Total Kitchen Solutions’ company offering wide range of products spanning pressure cookers, non-stick cookware, kitchen hoods (chimneys), hobs, gas stoves, and several other kitchen electrical appliances. While the company’s traditional product segments (pressure cookers and cookware) continue to contribute to majority of TTKP’s revenues, over the years, non-traditional product segments such as kitchen electrical appliances and gas stoves have displayed a strong growth momentum. Recently, TTKP has also forayed into modular kitchens, wherein the company offers kitchen designs and fittings based on customer requirements. Currently, the company is also jointly developing a residential-cum-office space in Bangalore which is expected to generate recurring revenues upon completion.

16


Company Name TTK Prestige LimitedConstitution Public Limited Company, went public in 1994

Sector/Industry Consumer goods – Kitchen appliances

Year of Incorporation 1955

Registered Office Plot No. 38, SIPCOT Industrial Complex

Hosur, Tamil Nadu - 635 126

Plant Location Hosur, Coimbatore (in Tamil Nadu), Roorkee (in Uttarakhand)

Shareholding Pattern Promoters – 74.91%

(as on March 2011) Foreign Institutional Investors – 6.27%

Domestic Institutional Investors – 5.05%

Others – 13.77%

Auditors M/s. S. Viswanathan

Bankers Canara Bank and Bank of Baroda

Board of Directors Mr. T.T. Jagannathan Executive Chairman

Mr. T.T. Raghunathan Vice Chairman

Mr. S. Ravi Chandran Managing Director

Mr. K. Shankaran Director & Whole-time Sectretary

Dr. (Mrs.) Latha Jagannathan Non Executive Director

Mr. Ajay I. Thakore Independent Director

Mr. R. Srinivasan Independent Director

Dr. (Mrs.) Vandana Walvekar Independent Director

Mr. D.K. Krishnaswamy Independent Director

Mr. Arun K. Thiagarajan Independent Director

Subsidiaries Prestige Housewares (India) Limited

Associates TTK Healthcare

The company markets and sells its products through direct dealers, authorised re-sellers (in small towns), modern retail stores and institutional clients such as CSDs. It has a wide distribution network comprising of over 25,000 direct dealers further supported by 270+ Prestige Smart Kitchen network outlets spread across 20 states. The company also has launched large format stores ‘Prestige Kitchen Boutique’ and ‘Prestige Life Style’ to market its modular kitchen range and high-value products respectively. The company has three manufacturing facilities located at Hosur, Coimbatore (in Tamil Nadu) and Roorkee (in Uttarakhand) and is planning to set-up a green field manufacturing facility primarily for non-stick cookware in Gujarat.

The company is run by third-generation entrepreneur, Mr. T.T. Jagannathan who is presently the chairman of the company and is supported by Mr. T.T. Raghunathan (Vice Chairman) and Mr. Ravi Chandran as the Managing Director. TTK group also has presence in businesses like consumer durables, pharmaceuticals, health care, and biomedical devices. The company is listed on both BSE and NSE with promoters currently holding 75% equity.

GOVERNANCE AND MANAGEMENT STRUCTURE

TTKP has a 10 member Board consisting of five independent directors, of which three directors are on the audit committee of the company. The promoters own 75% stake in the company and are closely involved in the running the business supported by a professional management team. There have been no material qualifications by auditors in recent periods. The disclosure levels in TTKP’s annual report are adequate and are broadly in line with those followed by the industry.

Annexure I: Company Factsheet


17

Rs. Crore FY09A FY10A FY11A FY12e FY13e FY14eNet sales 398.3 505.2 763.6 1,006.2 1,248.3 1,508.0Other related income 3.0 3.4 - 6.7 8.3 10.0Total net revenue 401.3 508.6 763.6 1,012.9 1,256.6 1,518.0

EBITDA 39.3 78.1 121.7 161.1 202.2 245.8Depreciation 3.5 3.6 4.3 6.4 7.3 8.1EBIT 35.8 74.5 117.4 154.7 194.9 237.7Interest expenses 7.3 3.5 0.8 8.0 8.8 5.4Other income 0.5 0.4 4.3 3.7 3.9 7.0PBT 29.0 71.4 120.9 150.4 189.9 239.3PAT 22.4 52.4 83.8 106.7 133.2 167.3Minority interest - - - - PAT (concern share) 22.4 52.4 83.8 106.7 133.2 167.3No of shares (in Crore) 1.13 1.13 1.13 1.13 1.13 1.13DPS 5.8 11.7 14.6 17.5 17.5 23.3EPS 19.8 46.3 74.0 94.2 117.7 147.8 CEPS 22.8 49.5 77.7 99.9 124.1 155.0

Annexure II: P&L Estimates

Annexure III: Balance Sheet Estimates

Assets (Rs. Crore) FY09A FY10A FY11A FY12e FY13e FY14eNet fixed assets 33.7 38.3 91.4 232.8 266.2 274.1Capital Work in Progress 23.7 23.5 - 20.0 21.0 23.0Total net fixed assets 57.4 61.9 91.4 252.8 287.2 297.1Total Long-Term Investments 0.4 0.4 22.6 22.6 22.6 25.0

Cash and Bank Balances 10.9 44.0 53.5 31.8 60.6 143.2

Receivables 48.9 60.3 74.7 119.1 147.7 178.4Inventories 50.3 61.3 105.0 145.1 178.3 216.9Loans & Advances 6.1 4.4 20.8 27.6 34.3 41.4Other Current Assets 15.2 38.2 57.4 76.1 94.4 114.1Total Assets 189.2 270.3 425.5 675.2 825.1 1,016.1

Liabilities (Rs. Crore) FY09A FY10A FY11p FY12e FY13e FY14eNet worth 82.5 122.0 191.5 278.4 391.8 532.7Minority interest - - - - - -Total Debt 20.7 2.8 2.2 92.2 62.2 32.2Deferred Tax Liability 3.1 3.1 3.3 3.3 3.3 3.3 Trade Creditors 31.1 49.3 76.9 102.4 125.8 153.1Other Current Liabilities and Prov. 31.6 43.3 80.1 106.3 131.8 159.3

Total liabilities 189.2 270.3 425.5 675.2 825.1 1,016.1

18


Annexure IV: Cash Flow Estimates

Annexure V: Key Financial Ratios

Cash flows (Rs. Crore) FY09A FY10A FY11A FY12e FY13e FY14ePBT 29.0 75.4 120.4 150.4 189.9 239.3Taxes paid 6.6 23.0 36.6 43.7 56.7 72.0Depreciation 3.5 3.6 4.3 6.4 7.3 8.1Change in net working capital 11.7 9.3 (11.0) (40.5) (20.2) (22.6)Cash flow from operating activities 37.6 65.3 77.0 72.6 120.3 152.8

Investments 0.0 0.0 (22.2) 0.0 0.0 (2.4)Capital expenditures (6.4) (8.0) (33.8) (167.8) (41.7) (18.0)Cash flow from investing activities (6.4) (8.0) (56.0) (167.8) (41.7) (20.5)

Equity Raised / (Buyback) 0.0 0.0 0.0 0.0 0.0 0.0Loans Raised / (Repaid) (3.2) (17.9) (0.6) 90.0 (30.0) (30.0)Others (Including Extra-ordinaries) 0.0 4.0 (0.6) 0.0 0.0 0.0Dividend (4.6) (6.6) (13.2) (16.5) (19.8) (19.8)Cash Flow from Financing activities (7.8) (20.5) (14.3) 73.5 (49.8) (49.8)

Cumulative cash flow 23.3 36.7 6.6 (21.7) 28.8 82.6Opening Cash Balance 10.6 10.9 44.0 53.5 31.8 60.6Closing Cash Balance 10.9 44.0 53.5 31.8 60.6 143.2

Key Financial Ratios FY09A FY10A FY11A FY12e FY13e FY14eGrowth indicators Sales Growth 23.4% 26.9% 51.1% 31.8% 24.1% 20.8%EBITDA Growth 19.6% 98.8% 55.9% 32.4% 25.5% 21.6%EPS Growth 41.7% 134.3% 59.7% 27.4% 24.8% 25.6%Cash EPS Growth 12.7% 116.7% 57.1% 28.5% 24.3% 24.8%

Profitability indicators EBITDA Margin 9.8% 15.3% 15.9% 15.9% 16.1% 16.2%EBIT Margin 8.9% 14.6% 15.4% 15.3% 15.5% 15.7%PAT Margin 5.6% 10.3% 11.0% 10.5% 10.6% 11.0%RoE 30.0% 51.3% 53.4% 45.4% 39.8% 36.2%ROCE 41.7% 84.3% 80.4% 57.5% 50.3% 49.9%

Liquidity ratios Debtor (days) 43 43 35 43 43 43 Inventory (days) 70 71 82 85 85 85 Net working Capital/Sales 11.0% 6.9% 6.0% 8.5% 8.5% 8.5%

Capitalization Ratios Total Debt/ Equity 0.3 0.0 0.0 0.3 0.2 0.1 Interest coverage 5.4 22.5 160.1 20.2 22.9 45.5 Total Debt/EBITDA 0.5 0.0 0.0 0.6 0.3 0.1

Valuation Ratios Price/Sales 6.65 5.25 3.49 2.63 2.12 1.76 Price/Earnings 119.22 50.88 31.86 25.01 20.03 15.95 Price/Book Value 32.34 21.87 13.93 9.59 6.81 5.01 EV/EBITDA 68.20 33.66 21.51 16.94 13.20 10.40


19

MUMBAIMr. L. ShivakumarMobile: 98210864903rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025Ph : +91-22-30470000, 24331046/53/62/74/86/87Fax : +91-22-2433 1390E-mail: [email protected]

GURGAONMr. Vivek MathurMobile: 9871221122Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002Ph: +91-124-4545300, 4545800Fax; +91-124-4545350E-mail: [email protected]

ICRA Limited

CORPORATE OFFICEBuilding No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350

REGISTERED OFFICE1105, Kailash Building, 11th Floor,26, Kasturba Gandhi Marg,New Delhi – 110 001Tel: +91-11-23357940-50Fax: +91-11-23357014

KOLKATAMs. Anuradha RayMobile: 9831086462A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata-700020.Tel: +91-33-22876617/ 8839, 22800008, 22831411Fax: +91-33-2287 0728E-mail: [email protected]

AHMEDABADMr. Animesh BhabhaliaMobile: 9824029432907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006Tel: +91-79-26585049/2008/5494, Fax:+91-79- 2648 4924E-mail: [email protected]

CHENNAIMr. Jayanta ChatterjeeMobile: 9845022459Mr. D. VinodMobile: 99406480065th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai-600035.Tel: +91-44-45964300, 24340043/9659/8080Fax:91-44-24343663 E-mail: [email protected]@icraindia.com

PUNEMr. Sameer MahajanMobile: 98813007725A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune-411 020Tel : +91- 20- 25561194, 25560195/196, Fax : +91- 20- 2553 9231E-mail: [email protected]

BANGALOREMr. Jayanta ChatterjeeMobile: 9845022459‘The Millenia’, Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore - 560 008 Tel: +91-80-43326400, Fax: +91-80-43326409E-mail: [email protected]

HYDERABADMr. M.S.K. AdityaMobile: 9963253777301, CONCOURSE, 3rd Floor, No. 7-1-58, Ameerpet, Hyderabad 500 016.Tel: +91-40-23735061, 23737251Fax: +91-40- 2373 5152E-mail: [email protected]

20


ICRA ONLINE LIMITED Corporate Office 107, 1st Floor, Raheja Arcade Plot No. 61, Sector-XI, CBD Belapur, Navi Mumbai Maharashtra-400614. Ph : +91-22-67816163 (Direct); 67816100 Fax : +91-22-27563057

Investor Desk: [email protected] www. icraonline.com

Disclaimer: Although reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. ICRA grades are not a recommendation to buy, sell or hold any securities of the graded entity.

This Report is solely for the personal information of the authorized recipient in India only. The information contained in this report shall in no way either directly or indirectly be reproduced, redistributed, communicated in any form whatsoever to any other person both within India or outside India. Nor is it permissible for the information to be disseminated or copied in whole or in part, for any purpose whatsoever.

Disclosure: The ICRA Equity Research Service is a mandate-based, paid service. In this case, ICRA or ICRA Online has received both the mandate and the research fee from the entity reported on.

TTK Prestige 20110518

Documents

Transcript of TTK Prestige 20110518