TTK Prestige (TTKPT) delivered on growth — 21% in Q3/16% in 9M — on continued volume growth, strong festive season sales and recouping lost sales (due to floods) in Kerala. Premiumisation and stringent cost controls led to 100 bps y-o-y margin expansion and PAT growth of 30% year-on-year (y-o-y). The management targets organic growth of 15% over five years and has built a war chest of Rs 3 billion for synergetic acquisitions. While growth profile (15% CAGR FY18-21E) and RoCE (25%) are impressive, valuation at 39x/34x FY20/21E is daunting. Implied IRR at 8% is also worrisome, especially as it bakes in 15%/16% revenue/earnings growth and 16% FCFF growth through FY35 and 5% terminal value thereafter. Buying TTKPT at CMP implies growth expectation of 20%+ and exit multiple of >30x over 5 years, which is difficult for us to pencil in. Downgrade to ‘SELL’ (TP Rs 6,810; 30x FY21E EPS).

The management sounded buoyant and expects market share gains across categories on the back of innovation-led product launches and enhanced customer experience at revamped ‘Prestige Xclusive stores’. Rural demand (high double-digit growth currently) is expected to grow faster than urban demand (single digit growth currently) over the next 3-5 years aided by government initiatives such as Ujjawala Yojana and affordable housing. It targets doubling the domestic turnover organically over next 5 years. It is proactively seeking inorganic opportunities both within and outside India, but it has not narrowed down on any particular acquisition targets yet.

Revenue at Rs 550 crore grew 21% y-o-y on (1) volume uptick aided by strong rural demand, (2) 3-4% price hikes, (3) festive season sales, (4) recouping of lost sales in Kerala (Q2 impacted by floods), (5) improvement of product mix and (6) robust growth on e-commerce platform. Domestic market grew 23% y-o-y led by double-digit growth in most markets (including Tamil Nadu which was partially affected by Gaja cyclone and deficient monsoon), while exports grew 14% y-o-y.

Gross margin improved 10 bps y-o-y to 42.9% and Ebitda margin 100 bps y-o-y to 15.5%.