TTK Prestige may be hit by a structural slowdown

Expanding distribution network will lead to more marketing costs and pressure on margin, says analyst
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First Published: Thu, Jan 17 2013. 07 23 PM IST
Operating profit margin narrowed 170 basis points to 14.2% from a year ago. Photo: Aniruddha Chowdhury/Mint
Operating profit margin narrowed 170 basis points to 14.2% from a year ago. Photo: Aniruddha Chowdhury/Mint
Updated: Thu, Jan 17 2013. 11 59 PM IST
Kitchen appliances maker TTK Prestige Ltd reported better-than-expected sales growth in the December quarter but fell short on the margin front, which led to a sharp sell-off in the stock, which fell 7%.
Operating profit margin narrowed 170 basis points (bps) to 14.2% from a year ago. Even sequentially, margins declined 60 bps because of higher advertisement spends and more discounts during the festival season. As a result, other expenditure grew 210 bps over last year.
One basis point is one-hundredth of a percentage point.
Moreover, the low margin appliance segment grew 41% compared with tepid 7% year-on-year (y-o-y) growth in the previous quarter which weighed on the overall operational profitability. Appliance sales make up almost half of the total sales.
Net sales grew around 31% y-o-y to Rs.445 crore compared with a tepid 11% growth in the December quarter, helped by robust sales from the non-south markets and exports. Revenue from Tamil Nadu and Kerala fell on average by 17% in the December quarter. Southern markets make up around 50% of the total revenue for this quarter. Company director K. Shankaran said, “We may grow between 23-25% in FY13 if non-southern markets make up for poor growth in Tamil Nadu which is suffering from electricity problems and lower agricultural output because of poor rains.”
The power situation in southern states is not expected to recover anytime soon unless the government implements reforms in the state power utilities and mitigates fuel shortages. Due to power woes, the management will focus aggressively on expanding distribution network and on growing in northern India, leading to more marketing costs and pressure on margin, said Nitesh Sharma, mid-cap analyst from Espirito Santo Securities Ltd. The management, in a conference call with analyst, said margins would remain under pressure if economic growth stays weak.
Net profit grew 28% to Rs.44 crore because of a one-time tax benefit at the Roorkee plant. The growth in the first nine months stood at 23.8%. Currently, the stock is trading at 26 times one year forward price-to-earnings multiple and given the growth headwinds, further upside in the near term looks unlikely.
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First Published: Thu, Jan 17 2013. 07 23 PM IST
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