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Spark Capital: Kitchen Appliances - Medium term headwinds to persist for structurally growing industry




Spark Capital Advisors(India) Private Limited


01 Apr 2014





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Kitchen Appliances - Medium term headwinds to persist for structurally growing industry The kitchen appliances market, which had witnessed robust growth over the past few years has been witnessing headwinds with multiple factors including lower disposable income among consumers, urban slowdown and geography specific issues. South Indian markets were particularly impacted due to two consecutive years of weak monsoon in Tamil Nadu, freebies of TN government (Rs. 60bn splurged out in the last three years with Rs. 20bn of additional spend expected in 2014 as per state budget), political unrest in Andhra Pradesh and power deficit situation faced by these states (including Karnataka). While we believe medium term demand environment is expected to remain subdued, long term prospects for the industry will continue to remain upbeat due to factors like demographic change among consumers, increasing nuclearisation, improving standard of living and shift from unorganized to organized markets. TN government freebie distribution – a near-term dampener with long term opportunity - Distribution of 18mn pieces of free mixer grinders, table top wet grinders and table fans (worth ~Rs. 80bn) by the TN government as a part of its 2011 election manifesto is rapidly expanding the market for these product and is expected to create replacement demand opportunity over a 3-4 year time-frame. We expect branded players, especially incumbents, in the TN market to benefit from this progressively. However the immediate growth for branded players will continue to hurt in these products especially in the states of Tamil Nadu and in the neighboring states of AP & Karnataka. South weakness expected to prevail – Below normal North East monsoon in Tamil Nadu over the past two years (lower by 16% and 33% in ‘12 and ’13) has impacted crop output and is likely to keep demand muted in FY15. Secondly, impact of power deficit (~20% across all three major southern states in Mar-May’13) continues to be felt in the region. Also, geo-political unrest in Andhra Pradesh (Telangana issue) has dragged down the industrial activity. While our channel checks indicate that gradual recovery is being witnessed, we expect overall growth in the near term to remain subdued Competitive intensity increasing gradually – Entry of new players in the kitchen appliance market has increased, with both foreign and domestic players launching new products across various segments. While market position of existing players is unlikely to be challenged due to their brand recognition and strong distribution reach, we expect incremental growth to be dented due to new competition. Comparative analysis among top players – A comparative analysis among leading listed kitchen appliance players – TTK Prestige (TTKPT), Hawkins (HAWK) and Butterfly Gandhimathi (BGAL) - indicates TTKPT emerging as a clear leader in terms of variety in products, distribution reach/network and resultant revenue mix and margins. Our stock views and recommendation – While we believe TTKPT’s diversified product portfolio, continuous product innovation, strong distribution network and export initiatives are strong positives, near term growth momentum will be impacted which could result in the stock to underperform. We initiate coverage on the stock with a ‘SELL’ Rating. This note also features our management meet update with BGAL (not rated) who is aspiring to become a pan-India player with expansion of product portfolio and distr...

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