La Opala RG. Institutional Equities. Road-show Update ACCUMULATE. Sector: Tableware CMP: Rs337 Target Price: Rs353 Upside: 5% 9 October 2014

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1 Road-show Update Institutional Equities La Opala RG 9 October 2014 Reuters: LAOP.BO; Bloomberg: LOG IN We held a road-show recently with Mr. Ajit Jhunjhunwala, joint managing director of La Opala RG (LORL), to know the company s business plans and future prospects. With the launch of new products and doubling of capacity at its Sitarganj plant, we have increased our net profit estimate by 7% for FY17. We expect LORL to report a 35.3% net profit CAGR over FY14-FY17E. With better visibility on future growth prospects, we have increased our target multiple from 25x to 30x and factored in average EPS of FY16E/FY17E (Rs11.8) as against FY16E EPS earlier. Consequently, we have increased our target price on LORL from Rs254 earlier to Rs353, while retaining Accumulate rating on it. Key highlights are as follows: LORL, which started manufacturing opal glass in 1989, was making only opal glass crockery until The company launched its crystal range of products under the brand name Solitaire in Crystal Solitaire products are hand-made art crafts, meant mainly for export to the US, France and Italy. The company launched its premium range of opalware under the brand name Diva in 2008 by setting up a plant at Sitarganj in Uttarakhand. The company built up its brand Diva by signing in noted actress Bipasha Basu for two-and-half years followed by ace fashion designer Manish Malhotra and spending aggressively on advertisements. LORL has now changed its marketing strategy from celebrity endorsement to product endorsement. Currently, La Opala is perceived as a value-for-money brand, while Diva and Solitaire are known as premium brands. Products of LORL compete with established international brands like Corelle of the US, Luminarc of France, Bormioli Rocco of Italy and RAK of the UAE. La Opala is 60%- 80% cheaper than Corelle, 60% cheaper than Luminarc, 55% cheaper than Bormioli Rocco and 30% cheaper than RAK, in line with quality bone china products, but 25%/40%/50% expensive compared to stainless steel/melamine/polypropylene dinner sets, respectively. India imposed anti-dumping duty on import of opal glassware from China and the UAE for a period of five years, effective December The duty is in the range of 41.6% % of the landed cost of the consignment from China, while opal glassware from the UAE attracts duty at 36.73% of the cost, which benefited LORL during FY12 to FY14. However, even if anti-dumping duty is removed, it won t have a substantial impact on pricing as LORL has become one of the low-cost producers and the Indian rupee has also depreciated against the US dollar over the past three years. LORL is already exporting its products to the Middle East and African markets where it competes with others players including Chinese suppliers. As per the management, because of internal company-specific problem the competition (in terms of imports) has reduced from Corelle, Luminarc etc. World Kitchen, which has brands like Corelle, was doing very good with its earlier distributor. However, after the expiry of its 10-year contract with the distributor, World Kitchen tied up with TTK Prestige to distribute its Corelle brand in South India and non-corelle products across India in Corelle was perceived as a premium product and meant to be sold in mall/modern retail format, while most products of TTK Prestige were sold in cutlery/hardware shops, which are not ideal for selling premium crockery like Correlle. Hence, the tie-up with TTK Prestige didn t last for more than a year. World Kitchen made a fresh move by appointing an importer in each zone to cater to the Indian market. As the company does not have any manufacturing facility in India, LORL has an edge over it. As per industry estimate, Correlle s revenue declined from ~Rs600mn in FY13 to ~Rs550mn in FY14. Similarly, Luminarc promoted its low-cost brand RAK aggressively, which cannibalised its premium brand Luminarc. Further, with the expanded capacity LORL was able to supply good quality products at attractive prices in the past two years and as a result, Luminarc closed down its Indian operations. ACCUMULATE Sector: Tableware CMP: Rs337 Target Price: Rs353 Upside: 5% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com Ruchita Maheshwari ruchita.maheshwari@nirmalbang.com Key Data Current Shares O/S (mn) 55.5 Mkt Cap (Rsbn/US$mn) 18.7/ Wk H / L (Rs) 349/90 Daily Vol. (3M NSE Avg.) 91,061 One-Year Indexed Stock Performance Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 LA OPALA Price Performance (%) 1 M 6 M 1 Yr La Opala RG Nifty Index (3.8) Source: Bloomberg NSE CNX NIFTY INDEX Please refer to the disclaimer towards the end of the document.

2 Currently, LORL has total capacity of 13,000tpa spread across its plants at Madhupur in Jharkhand (5,000tpa - 4,000tpa for La Opala and 1,000tpa for Crystal) and 8,000tpa at Sitarganj (for Diva). After a gap of many years, LORL increased its capacity by 44.4% in July 2013 by going for brownfield expansion of 4,000tpa at its Sitarganj plant at a cost of Rs230mn. The company is further increasing its capacity at Sitarganj plant from 8,000tpa to 16,000tpa at a capex of Rs650mn by October LORL will fund the capex requirement from internal accruals. It has raised Rs550mn via preferential allotment of equity shares at a price of Rs1,100/share to Westbridge Capital. As per the management, the Rs650mn capex can generate revenue of Rs1,600mn-Rs1,650mn. On account of brownfield expansion, costs are lower at Rs650mn instead of Rs1,000mn for greenfield expansion. LORL can further expand capacity by 8,000tn through the low-cost brownfield route, if required. Thus, the return on incremental capital is expected to remain healthy. LORL is looking at product extension and plans to sell tumblers (water glasses, juice glasses, wine glasses etc) and also bake & serve products. The market size of tumblers is around R6bn-Rs7bn and currently Yera (Alembic Glass) and Luminarc are the main players in this business. With the Alembic Group s focus on its other businesses, Yera is losing market share. The market size of bake and serve products is small, at Rs0.35bn, where Borosil is the main player. LORL will outsource the manufacture of these products and leverage on the brand equity of La Opala and its distribution reach. LORL is targeting EBITDA margin of 15% in outsourced items. This will significantly improve revenue and RoCE of LORL going forward. LORL has already identified the supplier for bake and serve products and plans to launch these products from January LORL is looking for the right partner for tumblers and will finalise it in FY15, which is expected to contribute to revenue in FY16. Introduction of new price points: In order to generate more demand, LORL created two new price points last year. The price point of Rs650 (6-piece dinner set) meets the requirement of a small family comprising two members, while the price point of Rs999 (10-piece dinner set) addresses the requirement of a family comprising four members. This helps the company to combat the slowdown and also address the needs of nuclear families. Improved focus on gifting: In order to drive additional revenue from gifting, particularly during the festivals like Diwali, Onam, Pongal etc, LORL recently launched a price-point of Rs250-Rs350, which includes 2-4 serving bowls or decorative bowls used for gifting chocolates or meant for any other purpose. Trade margin: Distributors get 10% and retailers/dealers receive 25%. For LORL, ex-factory realisation is 60%, after accounting for various taxes (5%) and trade margin (35%). Modern retail accounts for 15% of revenue, with LORL offering 35%-37% margin to modern retail (combined margin of distributor and retailer). Institutional sales account for 5%-6% of total revenue. In modern retail, LORL does business with players like D-mart, Future Group, Bharti Walmart etc, barring Shoppers Stop. Shoppers Stop wants sell or return policy, which is not acceptable to LORL as the company operates on 100% sale basis only. Cost of production is lower at Sitarganj plant compared to Madhupur plant. Also, all future expansion will be in Diva range of products where the margin is higher and, therefore, consolidated margin is expected to improve. Capacity utilisation: Madhupur plant (5,000tpa) - 100%, Sitarganj plant (8,000tpa) - 80%. The furnace of LORL s 4,000tpa plant at Madhupur runs on electricity (as against furnace oil earlier) since August 2014, which is expected to result in annual power and fuel savings amounting to Rs30mn. In addition, raw material consumption is lower in an electric furnace compared to an oil-fired furnace, as it reduces evaporation. Competition: As per the management, revenue of Corelle declined this year, while Luminarc is also losing market share. As per our market research, we found that LORL s products were slightly inferior to Luminarc earlier but with capacity expansion and latest technology at its Sitarganj plant, the product quality is now in line with Luminarc. As LORL is able to offer the same quality with better pricing than Luminarc, it is gaining market share at the expense of the latter. LORL was only opal glass manufacturer earlier, but 15 months ago, the Hopewell Group based in Jaipur, Rajasthan, set up an 8,000tpa opal glass facility based on Chinese technology at cost of ~Rs650mn. Its products are 25% cheaper than La Opala and marketed under the Lara brand. As per LORL s management, the plant is taking time to stabilise because of 2 La Opala RG

3 technical problems and operates at only 40% of its capacity. However, according to recent media reports, the plant is shut currently because of technical problems. LORL gets favourable prices for raw materials if the payment is made within a week. As a result, creditor days are low and consequently, net working capital requirement stood at 20.7% in FY14. For LORL, breakage losses are very low at 0.2%-0.3%. LORL forayed into on-line marketing and tied up with Jabong last year. However, recently Jabong closed down its home furnishing business. The company entered into a tie-up with Flipkart and Amazon last month. LORL signed an agreement where these on-line marketing companies will not offer more than a 10%-12% discount on its products. In addition, Flipkart and Amazon have to take a hit if they are not able to sell the products. This sort of tie-up will help LORL in maintaining its fair price-point across segments as well as across sale-points. Out of its two plants, the furnace at Sitarganj plant was realigned in May 2014 and the furnace at Madhupur plant will be realigned in July Realigning takes one-and-a-half months, and production stands suspended for that period. In order to reduce supply constraints, LORL will create additional inventory for this purpose. As per management, the La Opala crockery/crystal segment is expected to grow 10%-15%, while LORL is expected to grow 25%, at least for the next three years, on the back of doubling capacity at Sitarganj plant. The strong revenue growth in FY14 was on account of LORL gaining market share, competition moderating from organised players like Corelle, Luminarc etc, and also from unorganised players, the shift in consumers preference from the unorganised segment to the organised segment and aggressive advertisement expenditure. As per the management, advertisement expenditure is likely to remain high at 12%-13% in FY15E/FY16E to improve brand equity and gain market share from rivals. Generally, 65% of LORL s advertisement budget is allocated to television and 35% to newspapers. LORL is making conscious efforts to increase its distribution network. Currently, it has 125 distributors as against 100 distributors around six months ago. The company has doubled its distributor strength over the past three years. LORL has 12,000 retailers currently from 10,000 retailers in February The company has its presence in more than 500 towns. LORL improved its distribution network across regions. To cite an example, the company increased the distributors in Mumbai from two to seven. With better distribution strength, markets like Mumbai and Gujarat reported over 100% revenue growth in 1HFY15. LORL has tied up with a Spanish company called Pyrex to manufacture the products meant for microwave ovens and bakeries, serving bowls etc. The company will outsource these products and sell them in India. LORL ventured into this segment as it is not cluttered and complements its existing product line. As per the management, the next phase of growth will come from exports. LORL is increasing its export markets contribution to revenue. Currently, LORL exports its products to the Middle East, Africa and Latin America. The company is aiming at exports worth Rs1,000mn in the next five years. LORL expects a 50% growth in exports because of a low base every year and will export only its Diva product range. 1Q is the weakest quarter, while 2Q and 3Q account for 55%-60% of its revenue. 2Q and 3Q were the best quarters earlier, but now seasonality has reduced with the introduction of new products and increased market penetration. LORL is witnessing good demand from the catering segment. It has set up a separate division to look after this segment. Currently, LORL has exclusive distributors to meet the demand from the catering segment. Its distributors in Kolkata and Jaipur are garnering fairly good revenue from this segment. LORL is looking at aggressively adding new distributors to meet the demand from this segment. The demand from caterers can vary from 3,000 pieces to 25,000-30,000 pieces. LORL earns Rs20mn-Rs30mn from this segment. Currently, Correlle is doing very well in this segment because of its highly break-resistant products. Geographic revenue break-up: Northern region accounts for ~27%-28%, southern region contributes 23%-24%, western region accounts for ~22% and the eastern region contributes 21%. Earlier, the western region posed a challenge to LORL because of weak manpower etc. LORL is aggressively focusing on the western region and has increased its distribution reach in the region. To cite an example, it increased the distributors in Mumbai from two earlier to seven, which helped in gaining traction in the western region. With better distribution reach, markets like Mumbai and Gujarat reported more than 100% revenue growth 3 La Opala RG

4 in 1HFY15. By March 2015, LORL expects the western region to occupy the number 2 slot in terms of geography-wise revenue break-up. In the southern region, LORL is strong in Kerala, but in Chennai (Tamil Nadu) it is weak. Currently, LORL caters to four different price segments - La Opala (economy segment), Diva Classic, Diva Ivory and Diva Designer Collection (catering to basic, medium and premium segments, respectively). Diva Classic enjoys a 35% premium to La Opala, Diva Ivory (a 15% premium to Diva Classic) and Diva Designer Collection (a 15% premium to Diva Ivory). FY14 EBITDA margin: Diva: 32%-33%, Crystal: 27%-28%, La Opala: 16%-17%, Exports: 17%-18%. Cost of production is lower at Sitarganj plant compared to Madhupur plant. Also, all future expansion will be in the Diva range of products where the margins are higher and, therefore, consolidated margin is expected to improve. Exhibit 1: Financials Y/E March (Rsmn) cons. FY12 FY13 FY14 FY15E FY16E FY17E Revenue 1,150 1,539 1,779 2,272 2,834 3,658 YoY (%) EBITDA ,126 EBITDA (%) Reported PAT Adj. PAT FDEPS (Rs) YoY (%) RoCE (%) RoIC (%) RoE (%) P/E (x) P/B (x) EV/EBITDA (x) La Opala RG

5 Oct-09 Oct-09 Jan-10 Jan-10 Apr-10 Apr-10 Jul-10 Jul-10 Oct-10 Oct-10 Jan-11 Jan-11 Apr-11 Apr-11 Jul-11 Jul-11 Oct-11 Oct-11 Jan-12 Jan-12 Apr-12 Apr-12 Jul-12 Jul-12 Oct-12 Oct-12 Jan-13 Jan-13 Apr-13 Apr-13 Jul-13 Jul-13 Oct-13 Oct-13 Jan-14 Jan-14 Apr-14 Apr-14 Jul-14 Jul-14 Oct-14 Oct-14 Oct-09 Oct-09 Jan-10 Jan-10 Apr-10 Apr-10 Jul-10 Jul-10 Oct-10 Oct-10 Jan-11 Jan-11 Institutional Equities Apr-11 Apr-11 Jul-11 Jul-11 Oct-11 Oct-11 Jan-12 Jan-12 Apr-12 Apr-12 Jul-12 Jul-12 Oct-12 Oct-12 Jan-13 Jan-13 Apr-13 Apr-13 Jul-13 Jul-13 Oct-13 Oct-13 Jan-14 Jan-14 Apr-14 Apr-14 Jul-14 Jul-14 Oct-14 Oct-14 Exhibit 2: One-year forward P/E band (Rs) x 26x 22x 18x 14x 10x (x) Source: Nirmal Bang Institutional Equities Research Exhibit 3: One-year forward EV/EBITDA band (Rsbn) x x x 8.0 9x x (x) Source: Nirmal Bang Institutional Equities Research 5 La Opala RG

6 Financials Exhibit 4: Income statement Y/E March (Rsmn) FY12 FY13 FY14 FY15E FY16E FY17E Net sales 1,150 1,539 1,779 2,272 2,834 3,658 Growth (%) Raw material costs Staff costs Power & fuel costs Others Total expenditure 882 1,128 1,279 1,605 1,982 2,533 EBITDA ,126 Growth (%) EBITDA margin (%) Other income Interest costs Gross profit ,180 Growth (%) Depreciation Profit before tax ,074 Growth (%) Tax Effective tax rate (%) Net profit Growth (%) Extraordinary items (1) Adjusted PAT Growth (%) Exhibit 6: Balance sheet Y/E March (Rsmn) FY12 FY13 FY14 FY15E FY16E FY17E Equity Reserves ,754 2,241 2,893 Net worth ,865 2,352 3,004 Short-term loans Long-term loans Total loans Deferred tax liability Liabilities 865 1,104 1,214 1,989 2,519 3,228 Gross block 820 1,028 1,191 1,513 1,770 1,979 Depreciation Net block ,134 1,236 Capital work-in-progress Long-term Investments Inventories Debtors Cash ,266 Other current assets Total current assets ,311 1,751 2,466 Creditors Other current liabilities Total current liabilities Net current assets ,009 1,376 1,982 Total assets 865 1,104 1,214 1,989 2,519 3,228 Exhibit 5: Cash flow Y/E March (Rsmn) FY12 FY13 FY14 FY15E FY16E FY17E EBIT ,019 (Inc.)/dec. in working capital (59) (20) 5 (82) (107) (157) Cash flow from operations Other income Depreciation Deferred liabilities (4) Interest paid (-) (41) (42) (33) (12) - - Tax paid (-) (57) (96) (108) (180) (251) (331) Dividend paid (-) (25) (43) (62) (71) (78) (91) Extraordinary items Net cash from operations Capital expenditure (-) (46) (197) (176) (308) (259) (210) Net cash after capex Inc./(dec.) in short-term borrowing (13) (2) 4 (142) - - Inc./(dec.) in long-term borrowing (26) 39 (150) Inc./(dec.) in preference capital Inc./(dec.) in borrowings (39) 36 (146) (142) - - (Inc.)/dec. in investments - (74) Equity issue/(buyback) - - (0) Cash from financial activities (39) (37) (72) Others (2) (1) (0) Opening cash Closing cash ,266 Change in cash (1) Exhibit 7: Key ratios Y/E March FY12 FY13 FY14 FY15E FY16E FY17E 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 margin PBIT margin PBT margin PAT margin Turnover ratio Asset turnover ratio (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt-equity Interest coverage Growth (%) Sales EBITDA PAT La Opala RG

7 Rating track Date Rating Market price (Rs) Target price (Rs) 17 September 2013 Buy October 2012 Buy November 2013 Buy February 2014 Buy February 2014 Buy February 2014 Buy March 2014 Buy May 2014 Buy July 2014 Buy August 2014 Accumulate October 2014 Accumulate La Opala RG

8 Institutional Equities Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai Board No. : /1 Fax. : La Opala RG