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TTK’s diversified product range and all-India operations can grow amid soft near-term demand prospects. On higher costs and depreciation charges, we lower our FY23e/FY24e EBITDA/net profit by an average of 5%/9%.

Tepid start to FY23. On the lower base, Q1 FY23 consolidated revenue rose 57% y/y. Q/q though, it slid 10% as (a) standalone revenue was down 7% q/q to Rs5.9bn and (b) its UK subsidiary, Horwood’s revenue was 41% lower q/q to Rs293m, attributable to rising inflation in the UK. The consolidated EBITDA margin dipped 300bps q/q despite a 160bp gross-margin expansion, supported by select price hikes. Staff costs and other manufacturing expenses rose 2% and 9% respectively. With a tax rate of 26%, net income fell 33% q/.

SKU expansion continues. Compared to the outlook for premium products, that for mass-market products seems dull as higher costs hit customers in this category harder. The company added 25 SKUs in Q1 FY23 and plans to add 40 in Q2 FY23. It had 666 Xclusive stores (franchisees) at end-Q1 FY23

Outlook. The company is set to grow faster than the industry and gain market share. However, to factor in the near-term uncertainty, we lower our FY23e/ FY24e EBITDA /net profit 4%/5%. With that, we expect 17%/21% revenue/ PAT CAGRs over FY22–FY24, resulting in the (post-tax) RoCE expanding from 16.5% to 18%. The (post tax) RoIC could rise from 26% to 30%.

Valuation. At the CMP, the stock trades at 38x/29x the FY23e/ FY24e EPS of Rs23.4/30.7. We maintain a Buy rating on it, with a TP of Rs1,137 (37x FY24e EPS of Rs30.7) earlier Rs1,194. The 37x PE is based on its mean PE of 35x.

Risks: Inflation in the USA and Europe could hurt TTK’s growth prospects. And, consistently high inflation in the UK could harm Horwood’s.

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