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Demand lower than anticipated; downgrade to ADD

Result Synopsis

TTKPT revenue declined 15.4% on yoy basis. Revenue decline can be attributed to1) lower discretionary spends amid high inflation, 2) Wallet share has been diverted to other avenue like travel, hospitality and entertainment resulting in lower spends for kitchen, 3) Shifting of festive season by few days also impacted Q2 revenues and 4) Exports have remained weak affected by the global economic slowdown. Gross margins have improved on yoy basis, sequentially it has contracted by ~21bps as there have been excessive discounting by certain brands which resulted in company having to respond, leading to margin erosion. Company is confident of better 2H demand aided by the festive season and base being favorable the company has not indulged into discounting and will selectively in taking on competition and will ensure that profitability is not compromised on permanent basis. Given the muted demand environment and lower margin trajectory on back of intense competition, we downgrade the Stock to ADD with the PT of Rs882. TTKPT is looking to increase the capacity by way of automation which will enable it to improve the margin once demand returns

We now expect FY23-25E growth trajectory of 6% revenue CAGR vs the earlier expectation of 9%. With margins also expected to be 13.8% by FY25. We now estimate FY23-25E EBITDA and PAT CAGR of 8% and 11% respectively. We however remain positive on the stock in longer run as company has been able to protect its margin and market share despite challenging environment, with company is confident of better 2H performance in 2H. We continue to value the company at 40x FY25 EPS and arrive at a revised PT of Rs882 with ADD rating.

Result Highlights

* Topline – Revenue was lower than estimates with revenue declining by 15.4% yoy. All segments except other has seen double digit decline, while others which consist on new products has seem growth of 21%.

* Margins – Company EBITDA margin at 12.1% was lower by 263bps on yoy basis, while on sequential basis it is up by 36bps. Negative operating leverage has resulted in lower EBITDA margins.

* Exports – The global slowdown in developed markets has had impact on exports. Exports for the quarter stood at Rs183mn vs Rs173mn marginally growing by 6%. Company expects exports to pickup from Q3 onwards.

* Judge brand – The repositioning of the Judge brand is progressing as per plan though the positive impact of this change will be more visible over the next couple of quarters. The company is phasing out inventory with the old packaging and replace with new packaging and SKU.

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