Wednesday, November 11, 2009

Time to Sell TTK Prestige and Hawkins ?

The unabated rise in aluminium prices and a possible roll back of excise duty cuts could adversely impact profit margins of two large players in the cookware segment — TTK Prestige Ltd and Hawkins Cookers Ltd. In fact, the next two quarters could be a test of brand strength and pricing power, which have helped sustain the jump in profit margins seen in the first two quarters of the current financial year.
Operating profit margins (OPM) for TTK and Hawkins were at 9.6% and 12.1% respectively during FY 2009. This jumped to 12.9% and 20.7% in the June quarter of FY2010, and to 20.8% and 15.5% respectively in the September quarter. Analysts state that the rise in margins is a function of cost rationalistion and also some pipeline low-cost inventory. For TTK Prestige, the ratio of raw material cost/net sales fell from 55.2% in FY2009 to 51.7% in the September quarter. Likewise, for Hawkins, the ratio dropped from 44.8% to 35.9% during the same period.

Also, benefits accrued on account of the government’s stimulus of an across the board excise duty benefit to boost consumption.

In the last one month, though, the price of aluminium, which accounts for 50-55% of the material cost has seen a price increase of around 10%. “How much of the cost increase can be passed on depends on market factors, although history states that we have been able to handle this,” said an official from TTK Prestige.

For now, the two companies have pulled off strategies to maintain a fair share of the market, although there’s stiff competition from the unorganised sector. This hampers the company’s ability to freely pass on any cost increases. Both these companies have a 62-65% slice of the market, leaving the rest to regional players.

Perhaps another judicious strategy which has paid off is that the two companies have expanded the product range to include a host of kitchenware items like non-stick pans, cookers and even electrical appliances. For example, TTK which was only into cookware, now has around 33% of its revenues coming from kitchen appliances.

In fact, both companies have done very well on the earnings front. Hawkins posted an earnings per share (EPS) of Rs 32.5 for the first half of FY2010, against Rs 36.2 during the full year FY2009. Likewise, TTK posted Rs 19 against Rs 20, during the same periods. But a similar performance in the second half of the year is an uphill task.

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