Weak quarter; fundamentals remain intact
TTK Prestige (TTK) reported a weak 3.5% growth in revenues in Q1FY20 owing to tepid demand conditions, especially in the rural segment. EBITDA margin declined 27bps YoY to 13%. However, barring the direct rural business (7-8% of sales) and absent a big institutional order which was there in Q1FY19, the aggregate growth was 17% in Q1FY20. TTK remains focussed on channel and product diversification, which should yield results in tandem with eventual demand recovery. Channel tightening measures to institutionalise more control on secondary sales is a long-term positive step. We upgrade the stock to ADD from Hold with a revised target price of Rs6,668 (earlier: Rs7,152) based on 35x FY21E P/E (DCF earlier).
* Weak Q1FY20 performance driven by macros. TTK attributed the weak 3.5% topline growth to general slowdown in the economy amidst liquidity issues, which has been more pronounced for the rural sector, a key thrust area for TTK. This has been compounded by delayed monsoons. Cooker segment was impacted the most with a 7% YoY decline while cookware/appliances/others grew by 5%/10%/12% respectively. Horwood (UK subsidiary) continued to be impacted (7% YoY decline in sales) from economic uncertainty in the UK surrounding Brexit.
* 17% YoY growth ex-rural and one-off big institutional order in Q1FY19 is encouraging. As per the management, barring the direct rural business (7-8% of sales) and absent big institutional order which was there in Q1FY19, the aggregate growth was 17% YoY in Q1FY20. This essentially underlines that company-specific efforts of the sales channel and product diversification continues to yield results, especially considering that TTK has not reduced prices unlike competition.
* Robust long-term growth outlook: Management plans to double the company’s domestic revenues over next five years capitalising on both organic and inorganic growth opportunities. Increased demand for kitchen products in rural markets with addition of 80mn new kitchens under the government’s Ujwala Yojana and new product categories are expected to drive growth. Additional capacity will come into effect in FY20, which should help launch 120 SKUs during the year. Also, the rural segment (7-8% mix) will continue to grow much faster (100% growth was witnessed in FY19) in the long term. Prestige Xclusive chain increased to 574 stores, contributing significantly to total sales, and the company will keep adding 75-100 stores ever year
* Upgrade to ADD with a target price of Rs6,668 based on 35x FY21E PE. We now factor-in ~13.5% topline growth with ~14.5% EBITDA margin for TTK in FY20E/FY21E. This builds-in a gradual business recovery over the remainder of FY20 driven by new launches and channel diversification. TTK continues to possess a long term 15% growth potential with 15% EBITDA margin.
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