TTK Healthcare Ltd: At the Crossroads

 

TTK Healthcare Ltd.

Grade: TIER 3

Value trigger: Level 3. Management is going to take certain decisions which will put the company on a strong growth path.

Stock: TTK Healthcare Ltd
Description	(Amt)
CMP	562
Market Value	794 cr
PE Ratio (Annualized)	35
Net worth (Sep-2020)	275 cr
Dividend Yield	0.50%

TTK is a very confusing company- Not for analysis point of view but as a company because somehow they don’t seem to be certain about their path. And in all this confusion they have created a mess of products and divisions which are going nowhere. Their portfolio of pharmaceuticals, medical devices and protective devices looks good but I don’t understand what they are doing in deodorant and home care business (Good home Brand-Drain Cleaner, Room Freshener, Scrubbers, Air Freshener Block and Odour Remover) where there already is very stiff competition with established multinational and national brands. I mean they could never spend on marketing and branding like other biggies and there is nothing great about their products. They are just routine products. And then they are also in foods business selling ready to fry snacks!!! It is surprising why management plans these half-hearted useless expansions where they stand nowhere against the competition-neither in terms of product innovation nor in terms of marketing spending. Their investments in these verticals have not shown good results and they are incurring losses or lower profits in these two. On the surface, their consumer business earning PBT of around 18 cr on topline of 181 cr looks good but this figure in mar-2017 was 240 cr and 25 cr respectively. So they are not being able to compete. Same is the fate of food business where turnover has grown at very slow pace from 72 cr in Mar-17 to 88 cr in Mar-20. So why to spend time, energy, efforts and money on such adventures when they have other business verticals with very strong growth potential and where they have done well.

And where they have done well?

Pharma and animal healthcare business: They have done well here. Topline has grown from 190 cr in 2017 to 231 cr and PBT at 21 cr from 13 cr. But they need to expand their product line and they need some path breaking products. They have herbal products like male/female fertility. In animal welfare division they offer products like medicines, tonics and productivity boosters and if you ask me this one is a great high growth opportunity. I feel they should have gone for some acquisitions in pharma and animal welfare segments if they can’t expand these businesses organically. Still, not a bad performance but they need to focus on complex products.

Protective Devices and Sexual wellness division: They have done well in placing Skore in the sexual wellness industry in India. They launched Skore condom in 2012-13 and with some path breaking aggressive marketing and branding they achieved 3^rd position in no time by 2016. In 2012, it had to break its long standing partnership with Reckitt Benckiser for selling Kohinoor and Durex condoms in India because both couldn’t be able to reconcile their dispute. Due to this, TTK lost the rights to Kohinoor (launched in 1979) and Durex (launched in India in 1997). But TTK launched Skore condom with big heart in 2012 and within a period of 4 years, it put behind both Kohinoor and Durex with wide margins. It even outpaced the giant Kamasutra brand. It is now at 3rd place in India behind Manforce and Moods with 10% market share (Manforce has 32%, Moods with 12%). Aggressive marketing and advertising, is the main reason for this success. Its advertising & Sales Promotion expenditure is at 88 cr in 2020 vs 68 cr in 2017 and bulk of it is going towards Skore. Recently it has started spending more on the advertisement of Woodward’s Gripewater (WGW) and it would be interesting to see the impact as WGW has not witnessed much revenue growth in last 4-5 years. At present it is selling around 15 cr condoms.

Actually, although TTK lost the brands of Kohinoor and durex but it never lost its technical prowess in manufacturing high quality condoms. TTK was the first to establish condom plant in India in 1963 and it was to first to install electric testing facility and first to introduce subsidy free condoms in India in 1974. So with its decade old marketing and distribution strengths, Skore was always going to make it big and fast in Indian market.

Recently, Skore has forayed into sexual wellness products and has introduced innovative products like lubes, sprays like pheromone-activated body sprays and gels, Vibrating rings with rechargeable and remote controlled variants (three variants, Skore Shiver, Skore Vybes and Skore Buzzz). These products are selling fast at online portals and these are going to see high growth in India. In fact sexual wellness category is growing at 25% across the globe so one can judge the scope of growth in India where people are opening up on sexual wellness and experiments looking beyond the taboo. Most importantly, online platform are playing a vital role in the search, information, availability and delivery of sexual wellness products not only in urban but rural India also. Online sale of sexual wellness product is going to be the major differentiator in the future high growth of this industry in India. In india condom penetration is still way lower at 6% and a country with vast population the value of condom industry is just around 1200-1300 cr. But this low value points towards a vast untapped market and this is the reason Skore is playing the game aggressively for the market share.

TTK management may look confused when it is about their Eva Deo, Home care and Foods business but in sexual wellness industry their approach and strategy is just top notch. I really like the aggressiveness, strategy, product innovation, disruptive marketing and branding activities of TTK management in establishing and growing Skore brand.

TTK has capacity to manufacture 2 billion condoms a year at its three factories in southern India. Some people compare the performance of Skore with another listed condom player “Cupid Ltd” (female condoms) which is having high margins and profits. But they are not comparable. Cupid is catering to wholesale market supplying to export market and orders from welfare agencies like WHO/UNFPA. But Skore is focusing on branded consumer segment where a lot of investments is required initially in establishing a brand especially in premium segment. Indian sexual wellness industry is still in the initial phase with a long way to go and that’s why one can see brands like Manforce, Durex, Kamsutra spending big on innovative products and marketing. Most of these players are incurring losses as of now but accounting losses are different from business losses. In many cases, accounting losses are business investments from business point of view for accounting does not recognize or value strategy and brand establishment. So big marketing and advertising spend is responsible for the losses of Skore whereas the likes of Cupid does not spend much on these. Hence, over a period of time with growth in volumes and lower requirement of marketing the profits of Skore will see massive growth. TTK is also focusing on getting bulk orders for export markets from agencies like WHO.

Medical device Business: The next big opportunity

Indian medical device market is quite large valued at some 40000-45000 cr but sad point is that we import around 70-90% across various product categories.  Local manufacturing is very poor and it is mainly catering to low tech class 1 (class A) devices. Class 1 devices are those which are having low to moderate risk to the safety and health of the patient like stethoscopes, bandages, dental floss etc. The level of manufacturing complexity is very low so these are low value devices. Class 2 and 3 are relatively much more critical to the health and safety of the patient. Class 3 (Class C) is the most complex with highest risk to the life of the patient. These are the devices which support or sustain the life of the patient like the implantable pacemakers, prosthetic heart valve, ventilators, HIV diagnostic tests etc.

It is shocking that with vast healthcare requirement for a large populous country like India we are importing 70-90% of our total requirements. This shows the neglect by the regulators and government in formulating policies to promote the local manufacturing and also a great opportunity missed by Indian manufacturers due to their own neglect. In fact, this neglect and poor manufacturing prowess appears shameful if we see the highly advanced world class pharma industry in India where India is the global powerhouse in medicine manufacturing. Most of the medical devices which india import from the global giants like GE, Siemens, Phillips are actually coming from China who realized the importance of medical device manufacturing much earlier than India and focused on local manufacturing some 20-30 years back. The current value of industry is Rs. 40000 cr but this is going to grow much bigger in the future with high growth in healthcare industry and demand. For information, the value of chinese medical device industry is somewhere around 4 lac cr to 5 lac cr!!! That’s why I always say that India needs businessmen everywhere not politicians (to make policies for poor people) and bureaucrats.

One of the major drawbacks hurting Indian medical device industry was that Indian medical devices industry was largely unregulated which hurt the investments and export opportunities. Now, Indian government has released The Medical Device (Amendment) Rules, 2020 (“MDR Amendment”) to regulate this market and they have approved stimulus package for promoting the manufacturing in India. (Will cover more on this topic in the next edition on medical device sector).

TTK Chitra heart Valve: For decades, India relied on imports of expensive artificial valve replacements to meet domestic need, but many families whose children developed Rheumatic Heart Disease (RHD) were also among the poorest in India, and could not afford even the heavily discounted price tags of imported valves, which hovered around $1,200 each. And so our children died, or lived drastically shortened and unhealthy lives.

Then TTK Chitra Heart Valve came to their rescue, it was developed painstakingly over 12 years at the Sree Chitra Tirunal Institute for Medical Sciences and Technology in Trivandrum, India, the device is now licensed for manufacture and marketing to TTK Healthcare. TTK valve uses the highest quality materials, features genuine design and material, blood flow resistance reduction, and durability. But in spite of high quality product with 12 year product development cycle with extensive clinical trials, TTK Healthcare still sells each valve for just $315-$400 (Rs. 20000-25000), a price range it has maintained since 1995, even when inflation is high in India. Due to TTK Chitra heart valve, all the MNCs had to lower their prices in order to stay in the Indian market.

TTK Chitra heart valve is the only Class 3 medical device produced in India which is a proof and a testimony to the technical capability in India for manufacturing complex medical devices. In numerous studies conducted, TTK valve has performed equal to other heart valves manufactured by renowned global producers like St. Jude. One recent study conducted in 2020 has established the efficiency of TTK Chitra heart valve equivalent of an imported St Jude Mechanical heart valve at almost half the cost making the prospect of cardiac surgery available to a large number of deserving poor patients. India is home to estimated 20-25 lacs patients with Rheumatic Heart Disease (RHD) which is the leading cause of structural heart valve damage in the country so there is a huge undiscovered and unmet market for heart valve surgery in India.

The Indian Government has designed and working on a massive Medical Insurance Scheme to cover poor families and this is going to create big demand for cost effective products like heart valve and orthopedic implants made by TTK.

TTK healthcare is also into the manufacture of orthopedic implants under the brand "Altius" which is low priced option against costly imports. The products are very good with US FDA cleared designs. As we can see, TTK has done well in medical devices but somehow the hard work is not reflected in the topline numbers and I think it may have been related to these products being looked down upon by Indian people who can afford costly products (doctors/surgeons also don’t take chance and opt for products with very slight medical benefits though at high costs)  and then there are poor people with no capacity to even buy these cost effective products in the absence of no support from government which as I have shared above is going to change and TTK may see high growth for its medical devices.

TTK’s R&D expenditure was around 4 cr (.6% of turnover) which is not bad keeping in view the fact that its NP is meager 20 cr.

So what is going to be the catalyst event for TTK in medical devices business?

They are having around 210 cr cash and I feel time is good for them to deploy this into high growth business of medical device. There is no better time to enter this sector than now. So I think TTK management is going to do something big in this segment this year- may be they will acquire a mid-size company or they are going to make investments for expanding their medical devices business. And if they can do this then we will see high growth happening in this company finally.

Why I feel they can do something big in medical device? Actually if we look at their performance in establishing Skore as a national brand in just 4 years then there is no doubt that they have the capabilities to execute something big taking over the entire industry; establishing a product where marketing and branding is the key and they did it skillfully so i think they can do something big in medical devices keeping in view their vast experience in dealing with this industry for last 20-25 years. The only thing is that they also feel like doing something in this industry. But I feel they don’t have any other choice and so soon we will be hearing something on this.

TTK healthcare has not performed at all in last 10 years and I think it has not given any returns at all but still good thing about them is that they have kept their business out of debt and amid all this surficial non-performance has created a significant consumer brand in Skore which is going to see high growth in the future and even the performance by Skore may be sufficient for a big re-rating. But as most of the value is coming from the future strategic actions taken by the management so treat this as a risky stock (Tier 3).

Summary of Analysis levels Involved in the study of TTK Healthcare:

1. Level 1 (Lower relative valuation) – Not cheap but not high also…just adequate for the current scale.

2. Level 2 ( Industry level growth and restructuring)- Sexual wellness and Medical device industry will see high growth but scale is small for TTK in these and it is not a leader in these segments so no automatic growth for TTK similar to industry growth.

3. Level 3 (Forecasting of management decisions which may result in massive future growth and value unlocking) – So the whole value is coming from the strategy and decision making of the management. Their strategy in growing sexual wellness and acquiring or expanding medical device business are the key growth and valuation catalyst events.

(This article is taken from the Monthly Newsletter of this Blog)

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).