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 +91-22-3926 8239 Key Data Current Shares O/S (mn) 55.5 Mkt Cap (Rsbn/US$mn) 29.7/459.4 52 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 2.5 1.3 19.3 Source: Bloomberg Y/E March (Rsmn) 4QFY16 3QFY17 4QFY17 YoY (%) QoQ (%) FY16 FY17 YoY (%) Net sales 539 661 761 41.2 15.1 2,493 2,63 5.5 Net raw material & purchase of finished goods 49 13 149 23. 14.6 399 511 28.2 % of sales 9.1 19.7 19.6 - - 16. 19.4 - Power, oil & fuel costs 83 72 83.6 15.5 282 278 (1.5) % of sales 15.3 1.9 1.9 - - 11.3 1.6 - A&P 13.5 89.7 112.8 735. 25.8 345 326 (5.6) % of sales 2.5 13.6 14.8 - - - - Other expenses 189 148 29 1.4 4.8 63 643 6.6 % of sales 35.1 22.4 27.4 - - 24.2 24.4 - Total expenditure 334 35 554 65.6 58.1 1,629 1,757 7.9 Operating profit 25 31 27 1.2 (33.3) 864 873 1. OPM (%) 38. 47. 27.2 - - 34.7 33.2 - Interest costs 2.8 2.1 1.3 (54.7) (38.4) 1 8 (17.6) Depreciation 27 32 35 28.6 1. 9 125 39. Other income 3.6 2.5 1.8 (49.5) (28.2) 15 9 (38.) PBT 178 279 173 (3.1) (38.2) 779 749 (3.8) Tax 36 49 38 5.3 (22.1) 192 2 4. Effective tax rate (%) 2.2 26.6 21.9 - - 24.7 26.7 - Adjusted PAT 142 23 135 (5.3) (41.5) 587 55 (6.4) EPS (Rs) 2.6 2.4 2.4 (5.3).2 1.6 9.9 (6.4) Source: Company, Nirmal Bang Research
Exhibit 1: Financial summary Revenues 1,779 2,233 2,493 2,63 3,15 3,8 YoY (%) 15.6 25.6 11.6 5.5 27.3 2.6 EBITDA 5 66 866 873 1,181 1,45 EBITDA margin (%) 28.1 29.6 34.7 33.2 37.5 38.2 Reported PAT 3 417 587 55 766 983 Adj. PAT 3 417 587 55 766 983 Diluted EPS (Rs) 5.7 7.5 1.6 9.9 13.8 17.7 YoY (%) 31.2 32.9 4.6-6.4 51. 28.3 RoCE (%) 3.1 27.8 27.6 21.7 25.3 26.5 RoIC (%) 29.5 37.5 44.8 36.6 42.7 48.3 RoE (%) 34.9 29.5 28.1 21.7 25.5 26.7 P/E (x) 95.1 71.5 5.9 54.3 39. 3.4 P/B (x) 29.1 16.1 12.9 1.9 9. 7.4 EV/ EBITDA (x) 57.1 44. 33.5 32.7 23.8 18.9 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 217. 2 La Opala RG
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 539 661 761 41.2 15.1 64 25.9 EBITDA 25 31 27 1.2 (33.3) 233 (11.3) EBITDA (%) 38. 47. 27.2 (1,75bps) (1,976bps) 38.6 (1,141bps) Adjusted PAT 142 23 135 (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 3,8 2.1 4.4 EBITDA 1,63 1,217 1,181 1,45 11.1 19.1 EBITDA (%) 34.5 33.4 37.5 38.2 32bps 472bps APAT 74 815 766 983 8.8 2.6 Source: Company, Nirmal Bang Research Exhibit 4: One-year forward P/E (Rs) 7 (x) 7 6 5 4 3 2 1 6 5 4 3 2 1 Median 43.4 Price 3 35 4 45 5 Source: Nirmal Bang Research 3 La Opala RG
Financials Exhibit 5: Income statement Net sales 1,779 2,233 2,493 2,63 3,15 3,8 Growth (%) 15.6 25.6 11.6 5.5 19.8 2.6 Raw material costs 43 49 399 511 586 712 Staff costs 218 262 322 346 46 49 Power costs 242 244 282 278 29 32 Other expenses 415 658 625 623 688 828 Total expenditure 1,279 1,573 1,627 1,757 1,969 2,35 EBITDA 5 66 866 873 1,181 1,45 Growth (%) 21.5 32.1 31.1.9 35.3 22.8 EBITDA margin (%) 28.1 29.6 34.7 33.2 37.5 38.2 Other income 11 9 15 9 63 114 Interest costs 33 8 11 8 9 6 Depreciation 7 13 9 125 141 152 Profit before tax 48 558 779 749 1,94 1,45 Growth (%) 25.7 36.7 39.7 (3.8) 46. 28.4 Tax 18 14 192 2 328 423 Effective tax rate (%) 26.5 25.1 24.7 26.7 3. 3.1 Net profit 3 417 587 55 766 983 Growth (%) 31.2 39.2 4.6 (6.4) 39.4 28.3 Source: Company, Nirmal Bang Research Exhibit 7: Balance sheet Equity 16 111 111 111 111 111 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 142 79 61 1 4 4 Long-term loans - - - - - - Total loans 142 79 61 1 4 4 Deferred tax liability 94 78 89 16 16 16 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 383 495 585 79 85 1,2 Net block 731 65 1,71 1,8 1,191 1,2 Capital work-in-progress 22 56 1 12 1 33 Long-term Investments 1 92 955 1,332 1,332 1,332 Inventories 283 292 44 339 356 392 Debtors 215 233 257 328 394 475 Cash 91 4 9 18 469 1,113 Other current assets 15 151 134 114 137 165 Total current assets 695 68 85 798 1,356 2,145 Creditors 35 45 45 42 49 59 Other current liabilities 2 232 325 337 378 456 Total current liabilities 235 277 37 379 427 515 Net current assets 46 43 435 42 928 1,63 Total assets 1,214 2,1 2,47 2,844 3,462 4,196 Source: Company, Nirmal Bang Research Exhibit 6: Cash flow EBIT 43 557 776 748 1,4 1,298 (Inc.)/dec. in working capital 5 (3) (27) 24 (57) (58) Cash flow from operations 435 527 749 772 983 1,24 Other income 11 9 15 9 63 114 Depreciation 7 13 9 125 141 152 Deferred liabilities 18 (16) 11 17 - - 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 332 389 541 584 662 828 Capital expenditure (-) (176) (55) (466) (136) (25) (183) Net cash after capex 156 334 75 448 412 645 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) - 553 - - - - Cash from financial activities (72) (412) (7) (437) 39 - Others - (9) - (2) 1 (1) Opening cash balance 8 91 4 9 18 469 Closing cash balance 91 4 9 18 469 1,113 Change in cash balance 83 (87) 5 9 451 644 Source: Company, Nirmal Bang Research Exhibit 8: Key ratios Y/E March FY14 FY15 FY16 FY17 FY18E FY19E Per share (Rs) EPS 5.7 7.5 1.6 9.9 13.8 17.7 Book value 18 33 42 49 6 73 Valuation (x) P/E 94.7 71.2 5.6 54.1 38.8 3.2 P/sales 16. 13.3 11.9 11.3 9.4 7.8 P/BV 29. 16. 12.8 1.9 9. 7.3 EV/EBITDA 56.9 43.8 33.3 32.5 23.7 18.8 EV/sales 16. 12.9 11.6 1.8 8.9 7.2 Return ratios (%) RoIC 29.5 37.5 44.8 36.6 42.7 48.3 RoCE 3.1 27.8 27.6 21.7 25.3 26.5 RoE 34.9 29.5 28.1 21.7 25.5 26.7 Margins (%) EBITDA 28.1 29.6 34.7 33.2 37.5 38.2 PBIT 24.2 25. 31.1 28.4 33. 34.2 PBT 22.9 25. 31.3 28.5 34.7 37. PAT 16.9 18.7 23.5 2.9 24.3 25.9 Turnover ratios Asset turnover (x) 1.5 1.1 1..9.9.9 Avg. inventory period (days) 8 67 89 69 65 6 Avg. collection period (days) 43 38 37 45 45 45 Avg. payment period (days) 1 1 1 9 9 9 Solvency ratios (x) Debt-equity.1..... Interest coverage 13.1 66.3 69.6 93.1 118.2 22.8 Growth (%) Sales 15.6 25.6 11.6 5.5 19.8 2.6 EBITDA 21.5 32.1 31.1.9 35.3 22.8 PAT 31.2 39.2 4.6 (6.4) 39.4 28.3 Source: Company, Nirmal Bang Research 4 La Opala RG
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 87 114 7 October 212 Buy 96 114 12 November 213 Buy 112 134 14 February 214 Buy 129 174 15 February 214 Buy 129 174 17 February 214 Buy 129 174 12 March 214 Buy 14 174 14 May 214 Buy 176 211 4 July 214 Buy 181 211 14 August 214 Accumulate 243 254 9 October 214 Accumulate 337 353 1 October 214 Accumulate 34 353 7 November 214 Accumulate 424 458 9 February 215 Buy 365 433 13 May 215 Buy 382 446 14 August 215 Accumulate 53 59 16 November 215 UR 574-5 February 216 UR 641-17 May 216 UR 558-22 August 216 UR 582-16 November 216 UR 533-8 February 217 UR 478-11 May 217 UR 536 - Rating Track Graph 7 6 5 4 3 2 1 Not Covered Covered 5 La Opala RG
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Research desk. Nirmal Bang group 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. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. 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. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, 214. (Registration No: INH1436-19.8.215 to 18.8.22). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 3926 817 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 823, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 81/811, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 812/813, +91 22 6636 883 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : 91 22 3926 8/1; Fax. : 22 3926 81 6 La Opala RG