Deal boost for TTK Prestige

Kitchen appliances maker TTK Prestige Ltd announced on Tuesday it had acquired UK-based Horwood Homewares Ltd. The company hasn’t disclosed the deal consideration, but that didn’t stop investors from driving up the TTK Prestige stock by about 4% on Tuesday.

Analysts maintain that the company has been looking for acquisitions for a while now and the fact that there is progress on that front could have brought some cheer.

What does the deal bring to the table? Horwood’s revenues in 2015 were £18 million (around Rs.170 crore today). That works out to about 11% of TTK Prestige’s estimated revenues for fiscal year 2016, according to Bloomberg data.

Analysts from JM Financial Institutional Securities Ltd wrote in a note to clients that Horwood does not have in-house manufacturing capabilities. “This deal is expected to boost utilization over medium term (as TTK replaces 3rd party sourcing with sourcing from Indian plants) and therefore improve margins,” pointed out the brokerage firm.

Horwood earns double-digit Ebitda (earnings before interest, taxes, depreciation and amortization) margin. Its net profit details were not disclosed. Further, even as the deal provides TTK Prestige access to the European markets, it’s worth noting that growth is unlikely to be rapid there, given the subdued macroeconomic environment. In fact, JM Financial says that consumer spending on household goods and services is decreasing in European markets. “In this backdrop, we believe investors may be slightly concerned about the valuation and synergy benefits,” adds the brokerage firm. News flow surrounding that would be crucial.

The stock closed marginally higher on Wednesday, suggesting investors aren’t too bothered for now. Currently, one TTK Prestige share trades at 34 times estimated earnings for this fiscal year. That’s pricey.

Moreover, the company’s revenue growth hasn’t been exactly spectacular. For the nine-months ended December 2015, revenue increased 10.5% year-on-year.

Secondly, competition is a big worry. Rival Hawkins Cookers Ltd’s aggression is a concern, highlights Spark Capital. “Hawkins has registered strong (revenue) growth of 26% y-o-y (year-on-year) in 3QFY16 driven by improved traction in recently launched ceramic-coated inner lid pressure cookers at attractive price points,” pointed out the brokerage firm in a report last month. Further, Hawkins had increased its advertisement spend by 20% year-on-year and dealer discounts by 57% year-on-year in 3QFY16.

Increased aggression by Hawkins is likely to increase the “cost of growth” for TTK Prestige going forward in non-south markets, according to Spark Capital.

So far, though, these worries don’t seem to be reflecting in TTK Prestige’s valuations.