India I Equities Consumer Durables Update 19 June 2012 TTK Prestige Capacity addition and alliances to aid growth; Buy Our interaction with the TTK s management has led us to reiterate its strengths. Its strategic partnership with Schott, alliances with World Kitchen, Meyer Corp and Vestergaard Frandson reiterated its focus on kitchen appliances. Management has guided to 30-35% revenue growth in FY13, and a 15-16% EBIDTA margin. We maintain a Buy. Strategic partnership with Schott. TTK has announced an alliance with Schott, Germany, to market high-end induction cooktops and gas stoves made up of high-end glass, under the brand Prestige Premia, positioned as premium products with prices ranging from `5,000 to `15,000. Recent developments. TTK has announced an alliance with World Kitchen and Meyer Corp, under which it will market premium storageware and cookware. It also announced business collaboration with Vestergaard Frandson, Switzerland, enabling TTK to enter the fastgrowing domestic water-filter sub-segment. Segment-wise performance and guidance. Revenue growth across all categories has been strong, with kitchen electrical appliances registering the highest growth of 76%. Management expects FY13 revenue growth to come at 30-35% and plans to launch 100 products during the year. It plans to focus on induction cooktop sales (0.93m units sold in FY12). Annual report analysis. FY12 debt was `597m (contrasted with FY11 s `22m); FY12 gross block was `2bn (`0.9bn in FY11). The rises in gross block and debt stemmed from capacity expansions for pressure cookers ` and cookware, and land purchased at Gujarat to set up fresh capacity. On the rise in inventory, working capital days inched up from 12 in FY11 to 21 in FY12. Valuation. At our DCF-based target of `3,637, TTK trades at 20x FY14e earnings and 2.1x EV/sales. Risks: slow demand, rise in input costs. Relative price performance 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000 Jun-11 Aug-11 Source: Bloomberg Rating: Buy Target Price: `3,637 Share Price: `3,023 Key data TTKPT IN/TTKL.BO 52-week high / low `3659 / `2151 Sensex / Nifty 16860 / 5104 3-m average volume US$11.1m Market cap `34bn / US$607m Shares outstanding 11.3m Shareholding pattern (%) Mar 12 Dec 11 Sep 11 Promoters 74.9 74.9 74.9 - of which, Pledged - - - Free Float 25.1 25.1 25.1 - Foreign Institutions 8.9 8.4 6.8 - Domestic Institutions 5.3 4.3 5.8 - Public 10.9 12.4 12.5 Oct-11 Dec-11 Feb-12 Sensex Apr-12 TTKPT Jun-12 Key financials (YE Mar) FY10 FY11 FY12 FY13e FY14e Sales (`m) 5,079 7,636 11,034 14,370 18,462 Net profit (`m) 497 842 1,134 1,484 2,029 EPS (`) 43.8 74.2 100.0 130.9 179.0 Growth (%) 122.0 69.4 34.7 30.9 36.8 PE (x) 65.3 40.9 30.2 23.1 16.9 PBV (x) 27.6 17.9 12.0 8.4 6.0 RoE (%) 50.2 53.1 47.6 42.9 41.5 RoCE (%) 61.8 74.0 61.6 52.2 54.3 Dividend yield (%) 0.3 0.4 0.5 0.7 1.0 Net gearing (%) (33.2) (26.8) 13.1 3.9 (28.6), Anand Rathi Research Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities
Quick Glance Financials and Valuations Fig 1 Income statement (`m) Year-end: Mar FY10 FY11 FY12 FY13e FY14e Net revenues 5,079 7,636 11,034 14,370 18,462 Revenue growth (%) 26.6 50.3 44.5 30.2 28.5 - Op. expenses 2,646 4,098 6,179 8,047 10,283 EBIDTA 774 1,253 1,720 2,242 3,009 EBITDA margin (%) 15.2 16.4 15.6 15.6 16.3 - Interest expenses 35 44 56 81 50 - Depreciation 36 43 62 110 149 + Other income 11 43 31 87 111 - Tax 230 366 499 653 893 Effective tax rate (%) 30.5 30.4 30.6 30.6 30.6 Reported PAT 524 838 1,134 1,484 2,029 +/- Extraordinary items 40 (6) - - - +/- Minority interest - - - - - Adjusted PAT 497 842 1,134 1,484 2,029 Adj. FDEPS (`/share) 43.8 74.2 100.0 130.9 179.0 Adj. FDEPS growth (%) 122.0 69.4 34.7 30.9 36.8, Anand Rathi Research Fig 2 Balance sheet (`m) Year-end: Mar FY10 FY11 FY12 FY13e FY14e Share capital 113 113 113 113 113 Reserves & surplus 1,128 1,801 2,738 3,956 5,588 Net worth 1,242 1,915 2,851 4,070 5,701 Minority interest 28 22 597 657 107 Total debt - - - - - Def. tax liab. (net) 31 33 68 68 68 Capital employed 1,301 1,970 3,516 4,795 5,876 Net fixed assets 640 914 2,300 3,322 3,437 Investments 4 226 4 4 4 - of which, Liquid 4 226 39 - - Net working capital 217 294 988 971 698 Cash and bank balance 440 535 223 498 1,737 Capital deployed 1,301 1,970 3,516 4,795 5,876 Net debt (33.2) (26.8) 13.1 3.9 (28.6) WC days 21.3 12.2 21.2 24.9 16.5 Book value (`/sh) 109.7 169.1 251.8 359.5 503.6, Anand Rathi Research Fig 3 Cash-flow statement (`m) Year-end: Mar FY10 FY11 FY12 FY13e FY14e PAT 524 838 1,134 1,484 2,029 + Non-cash items 36 44 98 110 149 Cash profit 560 882 1,232 1,594 2,178 - Incr./(Decr.) in WC (159) 77 694 (17) (273) Operating cash-flow 719 804 538 1,612 2,451 - Capex 80 317 1,448 1,132 264 Free cash-flow 639 488 (911) 479 2,187 - Dividend 132 164 199 265 398 + Equity raised 3 0 2 - - + Debt raised (179) (6) 574 60 (550) - Investments - 222 (222) - - - Misc. items - - - - - Net cash-flow 331 96 (312) 274 1,239 + Op. cash & bank bal. 109 440 535 223 498 Cl. cash & bank bal. 440 535 223 498 1,737, Anand Rathi Research Fig 4 Ratio analysis @ `3,023 Year-end: Mar FY10 FY11 FY12 FY13e FY14e P/E (x) 65.3 40.9 30.2 23.1 16.9 P/B (x) 27.6 17.9 12.0 8.4 6.0 EV/sales (x) 6.7 4.4 3.1 2.4 1.8 EV/EBITDA (x) 43.8 26.8 20.1 15.4 10.8 RoAE (%) 50.2 53.1 47.6 42.9 41.5 RoACE (%) 61.8 74.0 61.6 52.2 54.3 Dividend yield (%) 0.3 0.4 0.5 0.7 1.0 Dividend payout (%) 25.2 19.6 17.5 17.9 19.6 RM to sales (%) 52.1 53.7 56.0 56.0 55.7 Ad-spend to sales (%) 8.2 7.0 6.5 7.0 7.0 EBITDA growth (%) 97.0 62.0 37.3 30.3 34.2 EPS growth (%) 122.0 69.4 34.7 30.9 36.8 PAT margin (%) 9.8 11.0 10.2 10.3 10.9 Volume growth (%) - - - - - Realization growth (%) - - - - -, Anand Rathi Research Fig 5 PE band Fig 6 FY12 revenue breakdown (`) 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 TTK 20x 16x 12x 8x 4x Kitchen Electrical appl 30% Gas Stoves 9% Others 4% Cookers 37% 0 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Cookware 20% Source: Bloomberg, Anand Rathi Research Anand Rathi Research 2
Strategic partnership with Schott TTK Prestige recently entered into an alliance with Schott, a German specialty glass producer and technology company. Under the alliance, they have jointly launched a range of world-class high-quality cooking appliances under the brand Prestige Premia. Prestige Premia offers highly efficient high-end induction cookers with high-quality Schott Ceran glass ceramic panels and gas stoves made from Schott tempered flat glass. Products have been customized for Indian users and will be positioned in the premium category. Prices of the Prestige Premia brand products will range from `5,000 to `15,000. Fig 7 Prestige Premia product portfolio Market potential According to TTK, the current market size for induction cooktops is 4m units. Given rising income levels, improving lifestyles and mounting demand for brand-named products, the company expects demand for induction cooktops to increase significantly, to ~16m units by 2016. It expects to generate significant sales in this category. Prices for the induction cooktops would be upwards of `5,000. The FY12 market size for gas stoves was estimated at ~`13bn. The gasstove sub-segment has been continuously evolving with customer preference for high-end stoves on the rise (average realisation per unit for TTK has risen from `1,306 in FY06 to `2,529 in FY11). Through its alliance with Schott, TTK has introduced gas stoves made from Schott tempered-glass to cater to this premium segment. Prices of such gas stoves would range from `5,500 to `15,000. About Schott Headquartered in Germany, Schott is an international technology group with more than 125 years experience in specialty glasses and materials. It is renowned across the world for its quality ceramics and glass products. Many of Schott s products are number one in the world. These products find application in sectors such as household appliances, solar power, pharmaceuticals, electronics, optics, etc. Schott is a $4bn group employing 17,000 people across the world and is owned by the non-profit Carl Zeiss Foundation. Schott came to India in 1998 and operates in categories such as electronics, consumer appliances, optics, specialty glass tubings, etc. Anand Rathi Research 3
Recent tie-ups; management guidance Recent tie-ups and developments TTK has been actively seeking to broaden its product range, focusing on the kitchen segment by introducing products or through tie-ups. During the year, it announced three major tie-ups with Meyer Corp., World Kitchen and the Vestergaard Frandson Group. Details of these tie-ups and further developments are: 1 The agreement with World Kitchen, USA, enables it to enter the highend tableware/cookware and storeware sub-segments. TTK s products would include international brands such as Corelle, Corning, Pyrex, Vision and Snap. Except for Corelle, all the other products will sport the Prestige brand. Sales of these products have commenced from Jun 12. 2 The collaboration agreement with the Vestergaard Frandson Group of Switzerland enables it to enter the fast-growing domestic water-filter sub-segment. TTK will assemble products at its unit coming up in Gujarat, India, and expects to start marketing them in early FY14. 3 Under the tie-up with Meyer Corp., USA, TTK will market cookware of the brands Circulon, Anolon, Farberware, Rachael Ray, Paula Deen, SilverStone and KitchenAid. 4 Its agreement with Bialetti Industries, Italy, gives it the latter s pressure cooker and cookware manufacturing plants in India. Bialetti outsources stainless steel pressure cookers from TTK. Opportunity for TTK According to the management, the combined market size for the products TTK markets is estimated at ~`85bn. TTK expects significant growth in induction cooktops over the next 2-3 yrs since this is a new and better way of cooking. The company sold 0.93m induction cooktops during FY12. Fig 8 Product-wise market size (`85bn combined market size) Gas stoves 16% Mixer grinders 23% Induction cooktops 12% Rice cookers 5% Chimneys 7% Wet grinders 6% Small appliances 8% Non stick cookware 8% Pressure cookers 15% Source: Industry It also expects to launch 100 products this year. Advertising expenditure for FY13 is expected to be ~7% of sales. TTK also expects to add at least another 110 PSK stores in FY13. Management has guided to 30% revenue growth, with a 15-16% EBITDA margin. Revenue from the JV with World Kitchen and Meyer Corp. is expected to come at `0.6bn in FY13 and `1.1bn in FY14. (We have not factored this into our projections). Anand Rathi Research 4
FY12 Annual Report analysis Key takeaways from the annual report During the year TTK introduced around 60 products pressure cookers, induction cooktops, mixer-grinders, rice cookers, gas stoves and other small electric appliances. It continues to consolidate and expand its Prestige Smart Kitchen retail network. Coverage has expanded to another 26 towns. Net addition to the number of stores in FY12 was 77. The number of outlets at end-fy12 was 356. The network now covers 21 states and 179 towns. The company has already embarked on a strategy to reduce dependence on imports for some finished goods. For this, it is setting up a manufacturing plant in western India. This step should help reduce working capital needs. Overall capital expenditure for the three years commencing Apr 10 was planned at around `3bn; of this, around `1.9bn has been incurred till Mar 12. The company plans to expend the rest in FY13. Once the capex is completed, TTK would have sufficient installed capacity for pressure cookers and cookware to cater to growth for the next 4-5 years. Balance sheet Net D/E was 13.1%, compared to a negative 26.8% in FY11 due to debt having been raised to fund present capex plans. The company plans to repay the debt by FY14. Fig 9 Key Balance Sheet items (`m) FY11 FY12 Remarks Share capital 113 113 No shares issued during the year (incl. ESOPs) Reserves & surplus 1,801 2,738 Debt 22 597 Increase in debt on account of loans to fund capex. `420m to be repaid in FY13 Deferred Tax Liab (net) 33 68 Capital employed 1,970 3,516 Gross Fixed Assets 892 2,029 Addition of land for Gujarat capacity, New plant & Less: Depreciation 473 522 machinery taken to expand cooker and cookware Net Fixed Assets 419 1,507 capacities at existing plant locations Capital Work in Progress 495 794 Ongoing capacity expansion at Gujarat Investments 226 4 Reduced to fund capex Current Assets Inventories 1,050 1,749 Manufactured and traded goods worth `1,283m, compared to `746m in FY11 Debtors 747 1,060 Primarily due to higher sales Loans and Advances 779 1,495 Mainly due to increase in advance income tax of `1,136m, compared to `648m in FY11 Cash 535 223 Reduced to fund capex Current Liabilities and Provisions Liabilities 1,422 1,958 Higher due to increase in sundry creditors and increase in other expenses Provisions 862 1,362 Increase in provision for taxation (`1,120m, compared to `656m in FY11) Capital deployed 1,970 3,516 Anand Rathi Research 5
Working capital The major increase in current assets arose due to higher inventory. Inventory turnover days have climbed from 40 in FY11 to 46 in FY12 due to the increase in inventory of traded goods, from `482m in FY11 to `870m in FY12. During this period, inventory for manufactured goods rose from `264m to `414m. Inventory of raw materials, stores and spares and work-in-progress increased to `466m (compared to `304m in FY11). During the year manufacturing capacity for pressure cookers was increased at its present plants, from 4.8m units to 8m units. Also, during the year the company sold off liquid investments to fund its ongoing capex plans. Fig 10 Product-wise inventory breakdown (`m) FY11 FY12 % Change Cookers 185 337 82.40 Cookware 127 251 98.03 Kitchen electrical appliances 280 485 73.22 Gas stoves 82 95 15.92 Others 73 116 58.93 Total 746 1,283 72.02 Working capital ratios On the increase in inventory, working capital days for the current year increased to 21 days. Debtor days decreased from 32 in FY11 to 30 in FY12. Ahead, the company plans to reduce dependence on imported goods and improve its working-capital management. Fig 11 Working capital days FY08 FY09 FY10 FY11 FY12 Debtor turn days 49.9 43.7 39.2 32.2 29.9 Inventory turn days 77.6 50.5 40.1 39.8 46.3 Creditor days 115.2 97.5 103.1 103.5 99.8 WC turn days 69.7 40.4 21.3 12.2 21.2 P&L FY12 net revenue was `11bn, 44.5% higher yoy. The share of revenue from kitchen electrical appliances has risen from 25% in FY11 to 30% in FY12, while the proportion from cookers has declined from 41% to 37%. He gross profit margin declined to 44% due to higher raw material costs and the rising proportion of the kitchen electrical appliances segment. Its own manufactured and domestically-sourced products contributed 62% of the turnover, against 70% the previous year. Net profit was `1,134m, compared to `838m in FY11. Anand Rathi Research 6
Fig 12 Key P&L items (`m) FY11 FY12 Remarks Revenue 7,636 11,034 Cost of revenue 4,098 6,179 Gross profit 3,538 4,855 Gross margin (%) 46.3 44.0 Lower margin due to increase in traded goods Employee expenses 530 730 One-time wage settlement at Hosur along with more human resources has led to the increase Other expenses 1,754 2,405 Advertising expenses: `714m (`528m in FY11) EBIDTA 1,253 1,720 EBIDTA margin (%) 16.4 15.6 Lower margins due to forex fluctuations and the higher share of kitchen electrical appliances - Interest 44 56 Does not include bank charges of `47m in FY12 for loans taken for capex - Depreciation 43 62 + Other income 43 31 - Tax 366 499 Tax rate (%) 30.3 30.6 PAT 838 1,134 PAT margin (%) 10.9 10.2 In FY12, TTK reported strong revenue growth across product categories. Revenue in the core business (pressure cookers), at `4.1bn, has grown 30.4%. Kitchen electrical appliances, at `3.4bn, registered the highest revenue growth, of 76.3%. Given the fresh capacity and steady demand for TTK s products, management expects 30-35% revenue growth in FY13. Product-wise volumes and realisations Fig 13 Volume and Realisations, by sub-segment Volumes sold (units) FY11 FY12 % growth Realisation Value (`m) Volumes sold Realisation Value Volume Realisation Value (`/unit) (units) (`/unit) (`m) Cookers 3,718,903 852 3,169 4,450,463 928 4,132 19.7 9.0 30.4 Cookware 3,543,132 435 1,540 5,059,354 444 2,247 42.8 2.2 45.9 Kitchen electrical appliances 1,355,523 1,423 1,929 2,206,439 1,541 3,401 62.8 8.3 76.3 Gas stoves 319,651 2,529 809 357,913 2,817 1,008 12.0 11.4 24.7 Anand Rathi Research 7
Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures on subject companies Rating and Target Price History (as of 19 June 2012) 3,600 2,700 TTK Prestige 1 2 Date Rating TP (`) Share Price (`) 1 5-Mar-12 Buy 3,647 2,837 2 9-May-12 Buy 3,637 3,102 1,800 900 0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 Jun-12 The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below. Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10% Anand Rathi Research Ratings Distribution (as of 09 May 2012) Buy Hold Sell Anand Rathi Research stock coverage (121) 73% 14% 13% % who are investment banking clients 6% 6% 0% Other Disclosures This report has been issued by Anand Rathi Share & Stock Brokers Limited (ARSSBL), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARSSBL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARSSBL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed. If this report is made available in Hong Kong by, or on behalf of, Anand Rathi Financial Services (HK) Limited., it is attributable to Anand Rathi Financial Services (HK) Limited., Unit 1211, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. Anand Rathi Financial Services (HK) Limited. is regulated by the Hong Kong Securities and Futures Commission. Anand Rathi Financial Services Limited and Anand Rathi Share & Stock Brokers Limited are members of The Bombay Stock Exchange Limited, and the National Stock Exchange of India. 2012 Anand Rathi Share & Stock Brokers Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited. Additional information on recommended securities/instruments is available on request.