La Opala RG. Institutional Equities. 4QFY17 Result Update UNDER REVIEW. Revenues Soar, But Margins Take A Hit. Sector: Tableware CMP: Rs536

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1 4QFY17 Result Update La Opala RG 11 May 217 Reuters: LAOP.BO; Bloomberg: LOG IN Revenues Soar, But Margins Take A Hit La Opala RG (LORL) reported revenues of Rs761mn for 4QFY17, up 41% YoY. The stellar growth can be attributed to two reasons. Firstly, the company was severely hit by demonetisation in 3QFY17, but witnessed demand revival by the end of December 216 and sales picked up. Secondly, the company launched two new products under its Diva brand - Quadra and Sovrana - in December 216 which received a huge positive response, thereby contributing to 4QFY17 revenue growth. Total expenses for the quarter were up 65% YoY and stood at Rs554mn, mainly driven by the sharp increase in advertisement and promotion expenses from Rs14mn to Rs113mn (1,232bps increase as a percentage of sales). This resulted in EBITDA remaining flattish YoY at Rs27mn, 11% below our estimate of Rs233mn, and EBITDA margin taking a hit of 1,75bps YoY at 27.2%. Interest costs fell 55% YoY and stood at ~Rs1mn for the quarter. Depreciation rose 28.6% to Rs35mn. Other income declined 5% to Rs~2mn. Tax rate increased by 176bps to 21.9%. PAT was hit 5.3% YoY and stood at Rs135mn, 3% below our estimate of Rs139mn. EPS for the quarter stood at Rs2.4 compared to Rs2.6 in the same quarter a year ago. For FY17, the company reported revenue growth of 5.5% to Rs2,63mn and PAT decline by 6.4% to Rs55mn. Margins for the year contracted 148bps and stood at 33.2%. Margins take a hit: Total expenses for the quarter were up 65% YoY and stood at Rs554mn, mainly driven by the sharp increase in advertisement and promotion expenses from Rs14mn to Rs113mn (1,232bps increase as a percentage of sales). New product launches under the Diva brand led to additional promotional expenses coupled with incentives given by the company to its distributors and dealers at the end of the year on achievement of certain targets. Also, the company had reduced scheme discounts for trade channels by 15% in 4QFY16 as a result of which advertisement and promotion expenses were significantly low during that quarter compared to 4QFY17. Besides advertisement and promotion expenses, changes in inventory to the tune of Rs12mn led to a significant increase in expenses for the quarter. This resulted in EBITDA margin taking a hit of 1,75 bps YoY at 27.2%. Anti-dumping duty expected to continue: The anti-dumping duty announced in 211 for a period of five years was extended by a year and is now valid till August 217. The management is hopeful that this duty will be extended for another four years. Also, LORL is quite confident of surviving in the absence of such a duty owing to its robust distributor and retailer network apart from strong brand recall. Valuation and outlook: The LORL stock is currently under our review owing to extremely stretched valuation, but its growth story is still intact. LORL, the largest organised crockery player in India, is expected to report a healthy 2.1% revenue CAGR (FY17-FY19E) on the back of increased capacity, strong brand recall, better pricing when compared with the products of multinational companies (MNCs), favourable demographic changes and a rise in nuclear families. Better product mix and reduction in manufacturing costs will drive margins, while its zero debt and strong cash flow will drive net profit CAGR by 33.7% over FY17-FY19E. We have revised our revenue estimates by 2.1%/4.4% and PAT estimates by 8.8%/2.6% for FY18/FY19, respectively, owing to strong demand and higher other income. Currently, LORL stock trades at 3.4x P/E and 18.9x EV/EBITDA based on FY19E financials. UNDER REVIEW Sector: Tableware CMP: Rs536 Sara Jaffer Research Analyst sara.jaffer@nirmalbang.com Key Data Current Shares O/S (mn) 55.5 Mkt Cap (Rsbn/US$mn) 29.7/ Wk H / L (Rs) 612/433 Daily Vol. (3M NSE Avg.) 25,14 Price Performance (%) 1 M 6 M 1 Yr La Opala RG.6 (3.4) (6.7) Nifty Index Source: Bloomberg Y/E March (Rsmn) 4QFY16 3QFY17 4QFY17 YoY (%) QoQ (%) FY16 FY17 YoY (%) Net sales ,493 2, Net raw material & purchase of finished goods % of sales Power, oil & fuel costs (1.5) % of sales A&P (5.6) % of sales Other expenses % of sales Total expenditure ,629 1, Operating profit (33.3) OPM (%) Interest costs (54.7) (38.4) 1 8 (17.6) Depreciation Other income (49.5) (28.2) 15 9 (38.) PBT (3.1) (38.2) (3.8) Tax (22.1) Effective tax rate (%) Adjusted PAT (5.3) (41.5) (6.4) EPS (Rs) (5.3) (6.4) Source: Company, Nirmal Bang Research

2 Exhibit 1: Financial summary Revenues 1,779 2,233 2,493 2,63 3,15 3,8 YoY (%) EBITDA ,181 1,45 EBITDA margin (%) Reported PAT Adj. PAT Diluted EPS (Rs) YoY (%) RoCE (%) RoIC (%) RoE (%) P/E (x) P/B (x) EV/ EBITDA (x) Source: Company, Nirmal Bang Research Management interaction takeaways Revenue break-up: Contribution of Diva/La Opala/Solitaire brands stood at 73%/8%/19%, respectively, in 4QFY17 in value terms. Capacity: The capacity of LORL was 13,tpa before expansion while currently it stands increased by 61% to 21,tpa. LORL set up 8,tpa brownfield unit at its Sitarganj plant (started operations in November 215) at a cost of Rs7mn. The 61% increase in capacity was solely financed from the company s internal accruals. Capacity utilisation: Overall capacity utilisation stands at more than 75% currently. The management expects full utilisation of capacity in FY18. Capex: The management stated that one of LORL s plants will go in for realignment this year. Every two years the furnace needs to be realigned and LORL is therefore taking this opportunity to increase the capacity by 25%. The company will incur an approximate cost of Rs2mn-Rs25mn for the same. Distributor and retailer count: LORL currently has more than 2 distributors and ~12, retailers. Tax rate: The management stated that the company will have a tax rate of 3% from FY18 onwards. Other income: Other income could witness a possible boost owing to the redemption of fixed maturity plans or FMPs and revaluation of other income at fair market price as per IND-AS guidelines. Modern retail and e-commerce: Modern retail accounts for ~14%-15% of LORL s sales whereas e- commerce accounts for ~2%-3%. Exports: Currently, exports account for ~15% of LORL s sales and the management is working aggressively to scale up the same. Key regions in focus are Latin America, Africa, Middle-East and South- East Asia. Competition: LORL believes Corelle products are priced 2x that of its own products and thus do not compete directly. The management stated that Chinese products are priced 1%-15% cheaper, while domestic products are priced 25% cheaper. However, European products (Luminarc) are priced 15%-2% higher than LORL s products. New product launches: LORL does not expect to launch any new products in the near future, but will continue to innovate on the design and packaging front. Management s view on Goods and Services Tax (GST) impact in 1QFY18: The management stated that it is too early to comment on how GST will pan out. One area of concern could be the decline in stock at the dealer level likely in June La Opala RG

3 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Exhibit 2: Our estimates versus actual performance Y/E Mar (Rsmn) 4QFY16 3QFY17 4QFY17 YoY (%) QoQ (%) NBIE estimates Variation (%) Net sales EBITDA (33.3) 233 (11.3) EBITDA (%) (1,75bps) (1,976bps) 38.6 (1,141bps) Adjusted PAT (5.3) (41.5) 139 (3.1) Source: Company, Nirmal Bang Research Exhibit 3: Change in our estimates Y/E March Earlier estimate New estimate Change (%) (Rsmn) FY18E FY19E FY18E FY19E FY18E FY19E Sales 3,84 3,64 3,15 3, EBITDA 1,63 1,217 1,181 1, EBITDA (%) bps 472bps APAT Source: Company, Nirmal Bang Research Exhibit 4: One-year forward P/E (Rs) 7 (x) Median 43.4 Price Source: Nirmal Bang Research 3 La Opala RG

4 Financials Exhibit 5: Income statement Net sales 1,779 2,233 2,493 2,63 3,15 3,8 Growth (%) Raw material costs Staff costs Power costs Other expenses Total expenditure 1,279 1,573 1,627 1,757 1,969 2,35 EBITDA ,181 1,45 Growth (%) EBITDA margin (%) Other income Interest costs Depreciation Profit before tax ,94 1,45 Growth (%) (3.8) Tax Effective tax rate (%) Net profit Growth (%) (6.4) Source: Company, Nirmal Bang Research Exhibit 7: Balance sheet Equity Reserves 872 1,743 2,29 2,625 3,25 3,939 Net worth 978 1,854 2,32 2,736 3,316 4,5 Short-term loans Long-term loans Total loans Deferred tax liability Liabilities 1,214 2,1 2,47 2,844 3,462 4,196 Gross block 1,114 1,145 1,655 1,789 2,42 2,22 Depreciation ,2 Net block ,71 1,8 1,191 1,2 Capital work-in-progress Long-term Investments ,332 1,332 1,332 Inventories Debtors Cash ,113 Other current assets Total current assets ,356 2,145 Creditors Other current liabilities Total current liabilities Net current assets ,63 Total assets 1,214 2,1 2,47 2,844 3,462 4,196 Source: Company, Nirmal Bang Research Exhibit 6: Cash flow EBIT ,4 1,298 (Inc.)/dec. in working capital 5 (3) (27) 24 (57) (58) Cash flow from operations ,24 Other income Depreciation Deferred liabilities 18 (16) Interest paid (-) (33) (8) (11) (8) (9) (6) Tax paid (-) (18) (14) (192) (2) (328) (423) Dividend paid (-) (62) (86) (12) (131) (188) (249) Extraordinary items Net cash from operations Capital expenditure (-) (176) (55) (466) (136) (25) (183) Net cash after capex Inc./(dec.) in short-term borrowing 4 (63) (18) (6) 39 - Inc./(dec.) in long-term borrowing (15) Inc./(dec.) in preference capital Inc./(dec.) in borrowings (146) (63) (18) (6) 39 - (Inc.)/dec. in investments 74 (91) (52) (378) - - Equity issue/(buyback) Cash from financial activities (72) (412) (7) (437) 39 - Others - (9) - (2) 1 (1) Opening cash balance Closing cash balance ,113 Change in cash balance 83 (87) Source: Company, Nirmal Bang Research Exhibit 8: Key ratios Y/E March FY14 FY15 FY16 FY17 FY18E FY19E Per share (Rs) EPS Book value Valuation (x) P/E P/sales P/BV EV/EBITDA EV/sales Return ratios (%) RoIC RoCE RoE Margins (%) EBITDA PBIT PBT PAT Turnover ratios Asset turnover (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt-equity Interest coverage Growth (%) Sales EBITDA PAT (6.4) Source: Company, Nirmal Bang Research 4 La Opala RG

5 Apr-13 Jun-13 Aug-13 Oct-13 Jan-14 Mar-14 Jun-14 Aug-14 Oct-14 Dec-14 Mar-15 May-15 Aug-15 Oct-15 Dec-15 Mar-16 May-16 Jul-16 Sep-16 Dec-16 Feb-17 May-17 Rating track Date Rating Market price (Rs) Target price (Rs) 17 September 213 Buy October 212 Buy November 213 Buy February 214 Buy February 214 Buy February 214 Buy March 214 Buy May 214 Buy July 214 Buy August 214 Accumulate October 214 Accumulate October 214 Accumulate November 214 Accumulate February 215 Buy May 215 Buy August 215 Accumulate November 215 UR February 216 UR May 216 UR August 216 UR November 216 UR February 217 UR May 217 UR Rating Track Graph Not Covered Covered 5 La Opala RG

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