La Opala RG. Institutional Equities. 1QFY18 Result Update

Transcription

1 1QFY18 Result Update La Opala RG 31 August 2017 Reuters: LAOP.BO; Bloomberg: LOG IN Flattish YoY Performance La Opala RG (LORL) reported revenues of Rs475mn for 1QFY18, up 0.6% YoY, but significantly below our estimate of Rs541mn. We were expecting a higher revenue number despite plant shutdown and destocking because of Goods and Services Tax or GST implementation, given the fact that the Madhupur plant which was shut down is a small plant with a capacity of 5,000tpa as against the bigger Sitarganj plant with a capacity of 16,000tpa and also believed that some of the volume will get transferred to Sitarganj plant. Apart from this, we expected revenues to grow on a lower base as 1QFY17 had witnessed a slight decline on account of reduction in scheme discount for trade channels in 4QFY16. The management stated that Madhupur plant shutdown had an impact of about 45 days and major destocking because of GST at the retailer level resulted in this flattish performance. Total expenses for the quarter were also flattish, up 1.2% YoY at Rs295mn. This resulted in EBITDA remaining flattish YoY at Rs180mn, 45% above our estimate of Rs124mn, with EBITDA margin taking a hit of just 36bps YoY at 37.9%. Interest costs fell 46% YoY and stood at ~Rs1mn for the quarter. Depreciation rose 4.5% to Rs32mn. Other income grew 37% to Rs39mn. Tax rate increased by 371bps to 32.2%. PAT was flat at Rs126mn, 52% above our estimate of Rs83mn. EPS for the quarter was also flat and stood at Rs2.3. Plant shutdown and destocking because of GST impact revenues: The Madhupur plant, which has a capacity of 5,000tpa, was shut for about 36 days during the June 2017 quarter owing to unreasonable demands of the labour union after which it took about 9 days more for the plant to return to normalcy. This resulted in a 45-day impact that led to flattish revenue growth for the quarter. Also, LORL witnessed major destocking because of GST implementation in June 2017, contributing to flattish revenue growth. The management stated that sales in July 2017 have also fallen victim to GST, but it is very positive on achieving good sales volume in the rest of the quarter. So far, the month of August has been pretty decent. Anti-dumping period extended till 2022 which is positive: The anti-dumping duty announced in 2011 for a period of five years was extended by a year and is valid till August The management stated that this has been extended for another four years and will now expire in 2022, enabling the company to tackle global competition and also help in grabbing market share. GST impact is also positive: As regards GST, the company is moving from an indirect tax rate of 25% to 18%, which is extremely positive. Earlier, the company used to pay 2% CST, 12.5% excise duty of which the company got credit to the extent of 3.5% and so the net impact was 9% and average VAT of 14%. It intends to pass this on to customers and expects to grow its markets further through the same. The Sitarganj plant was exempted from excise duty till September 2017, while at the Madhupur plant the company was paying full excise duty. Therefore, GST implementation is a big gain for the company as a whole. Valuation and outlook: The LORL stock is currently under 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 17% 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 25% over FY17-FY19E. We have revised our revenue estimates downwards by 7%/5% and PAT estimates by 11%/13% for FY18/FY19, respectively, owing to lower-than-expected revenue growth for the quarter, but still positive on the stock. Currently, LORL stock trades at 31.2x P/E and 19.8x EV/EBITDA based on FY19E financials. We are participating in AsiaMoney s Brokers Poll We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here UNDER REVIEW Sector: Tableware CMP: Rs481 Sara Jaffer Research Associate sara.jaffer@nirmalbang.com Key Data Current Shares O/S (mn) 55.5 Mkt Cap (Rsbn/US$mn) 26.2/ Wk H / L (Rs) 579/433 Daily Vol. (3M NSE Avg.) 37,587 Price Performance (%) 1 M 6 M 1 Yr La Opala RG (8.4) (3.0) (14.8) Nifty Index (1.9) Source: Bloomberg Y/E March (Rsmn) 1QFY17 4QFY17 1QFY18 YoY(%) QoQ (%) FY16 FY17 YoY (%) Net sales (37.9) 2,557 2, Net raw material costs & purchase of finished goods (34.1) % of sales bps 118bps bps Gross profit (1.4) (38.8) 2,158 2, Gross margin (%) (163bps) (118bps) (341bps) Power, oil & fuel costs (20.5) (1.5) % of sales bps 304bps (69bps) Excise duty (35.8) (45.6) (8.7) % of sales (91bps) (23bps) (33bps) Other expenses (5.3) (61.8) % of sales (162bps) (1,620bps) (106bps) Total expenditure (46.8) 1,692 1, Operating profit (0.3) (14.5) OPM (%) (36bps) 1,037bps (133bps) Interest costs (46.0) (1.0) 10 8 (17.6) Depreciation (9.8) Other income , (38.0) PBT (3.8) Tax Effective tax rate (%) bps 1,032bps bps Adjusted PAT (8.8) (6.4) EPS (Rs) (6.5) (6.4) Note* - 4QFY17 numbers have not been restated as per IND-AS.;

2 Exhibit 1: Financial summary Revenues 1,779 2,233 2,493 2,630 2,925 3,604 YoY (%) EBITDA ,239 EBITDA margin (%) Reported PAT Adj. PAT Diluted EPS (Rs) YoY (%) (6.4) RoCE (%) RoIC (%) RoE (%) P/E (x) P/B (x) EV/ EBITDA (x) Management interaction takeaways Capacity: The capacity of LORL was 13,000tpa before expansion while currently it stands increased by 61% to 21,000tpa. LORL has set up a 8,000tpa brownfield unit at its Sitarganj plant (started operations in November 2015) at a cost of Rs700mn. The 61% increase in capacity was solely financed from the company s internal accruals. Capacity utilisation: Overall capacity utilisation stands at more than 90% 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 approximate cost of Rs200mn-Rs250mn for the same. Distributor and retailer count: LORL currently has more than 200 distributors and ~12,000 retailers. Tax rate: The management stated that the company will have a tax rate of 30% from FY18 onwards. Other income: Other income could witness a 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%. E-commerce has been witnessing good traction and the management sounded fairly positive on the segment and stated that it sees immense potential in it. 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 10%-15% cheaper, while domestic products are priced 25% cheaper. However, European products (Luminarc) are priced 15%-20% higher than LORL s products. As regards Borosil, the company has modern retail presence because of its discount strategy, but LORL maintained that it does not wish to adopt a discount policy and dilute its brand image. New product launches: LORL does not expect to launch any new product in the near future, but will continue to innovate on the design and packaging fronts. 2 La Opala RG

3 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Exhibit 4: Peer comparison Company CMP (Rs) Mkt cap (USD mn) Exhibit 2: Our estimates versus actual performance Y/E March (Rsmn) 1QFY17 4QFY17 1QFY18 YoY (%) QoQ (%) NBIE estimates Variation (%) Net sales (37.9) 541 (12.2) EBITDA (0.3) (14.5) EBITDA (%) (36bps) 1,037bps ,497bps Adjusted PAT (8.8) Exhibit 3: Change in our estimates Y/E March Earlier estimate New estimate Change (%) (Rsmn) FY18E FY19E FY18E FY19E FY18E FY19E Sales 3,150 3,800 2,925 3,604 (7.2) (5.2) EBITDA 1,181 1, ,239 (16.0) (14.5) EBITDA (%) (357bps) (377bps) APAT (10.6) (12.8) P/E (x) EV/EBITDA (x) Sales EBITDA EPS D/E RoCE % RoE % FY17 FY18E FY19E FY17 FY18E FY19E CAGR % CAGR % CAGR % FY17 FY17 FY17 La Opala Borosil Glassworks 9, (6.0) (3.7) Exhibit 5: One-year forward P/E (Rs) 700 (x) Median 44.6 Price Source: Nirmal Bang Research 3 La Opala RG

4 0 Financials Exhibit 6: Income statement Net sales 1,779 2,233 2,493 2,630 2,925 3,604 Growth (%) Raw material costs Staff costs Power costs Other expenses Total expenditure 1,279 1,573 1,627 1,757 1,933 2,364 EBITDA ,239 Growth (%) EBITDA margin (%) Other income Interest costs Depreciation Profit before tax ,225 Growth (%) (3.8) Tax Effective tax rate (%) Net profit Growth (%) (6.4) Exhibit 8: Balance sheet Equity Reserves 872 1,743 2,209 2,625 3,125 3,733 Net worth 978 1,854 2,320 2,736 3,236 3,844 Short-term loans Long-term loans Total loans Deferred tax liability Liabilities 1,214 2,010 2,470 2,844 3,382 3,990 Gross block 1,114 1,145 1,655 1,789 2,042 2,202 Depreciation Net block ,071 1,080 1,198 1,206 Capital work-in-progress Long-term Investments ,332 1,332 1,372 Inventories Debtors Cash Other current assets Total current assets ,241 1,909 Creditors Other current liabilities Total current liabilities Net current assets ,418 Total assets 1,214 2,010 2,470 2,844 3,382 3,990 Exhibit 7: Cash flow EBIT ,087 (Inc.)/dec. in working capital 5 (30) (27) 24 (40) (89) Cash flow from operations Other income Depreciation Deferred liabilities 18 (16) Interest paid (-) (33) (8) (11) (8) (5) (6) Tax paid (-) (108) (140) (192) (200) (308) (369) Dividend paid (-) (62) (86) (120) (131) (186) (249) Extraordinary items Net cash from operations Capital expenditure (-) (176) (55) (466) (136) (250) (183) Net cash after capex Inc./(dec.) in short-term borrowing 4 (63) (18) (60) 39 - Inc./(dec.) in long-term borrowing (150) Inc./(dec.) in preference capital Inc./(dec.) in borrowings (146) (63) (18) (60) 39 - (Inc.)/dec. in investments 74 (901) (52) (378) - (40) Equity issue/(buyback) (0) ) - - Cash from financial activities (72) (412) (70) (437) 39 (40) Others (0) (9) - (2) 1 (1) Opening cash balance Closing cash balance Change in cash balance 83 (87) Exhibit 9: 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) La Opala RG

5 Apr-13 Jun-13 Aug-13 Oct-13 Jan-14 Mar-14 May-14 Aug-14 Oct-14 Dec-14 Mar-15 May-15 Jul-15 Sep-15 Dec-15 Feb-16 Apr-16 Jul-16 Sep-16 Nov-16 Jan-17 Apr-17 Jun-17 Aug-17 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 October 2014 Accumulate November 2014 Accumulate February 2015 Buy May 2015 Buy August 2015 Accumulate November 2015 UR February 2016 UR May 2016 UR August 2016 UR November 2016 UR February 2017 UR May 2017 UR August 2017 UR Rating track graph Not Covered Covered 5 La Opala RG

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