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 2017. 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 2017. 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 +91-22-3926 8239 Key Data Current Shares O/S (mn) 55.5 Mkt Cap (Rsbn/US$mn) 26.2/408.9 52 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) 11.3 12.5 Source: Bloomberg Y/E March (Rsmn) 1QFY17 4QFY17 1QFY18 YoY(%) QoQ (%) FY16 FY17 YoY (%) Net sales 472 764 475 0.6 (37.9) 2,557 2,689 5.2 Net raw material costs & purchase of finished goods 90 149 98 9.2 (34.1) 399 511 28.2 % of sales 19.1 19.5 20.7 163bps 118bps 15.6 19.0 341bps Gross profit 382 615 376 (1.4) (38.8) 2,158 2,177 0.9 Gross margin (%) 80.9 80.5 79.3 (163bps) (118bps) 84.4 81.0 (341bps) Power, oil & fuel costs 60 83 66 10.6 (20.5) 282 278 (1.5) % of sales 12.6 10.9 13.9 126bps 304bps 11.0 10.3 (69bps) Excise duty 11.9 14.0 7.6 (35.8) (45.6) 64 58 (8.7) % of sales 2.5 1.8 1.6 (91bps) (23bps) 2.5 2.2 (33bps) Other expenses 130 321 123 (5.3) (61.8) 948 969 2.2 % of sales 27.5 42.1 25.9 (162bps) (1,620bps) 37.1 36.0 (106bps) Total expenditure 291 554 295 1.2 (46.8) 1,692 1,816 7.3 Operating profit 181 210 180 (0.3) (14.5) 864 873 1.0 OPM (%) 38.3 27.5 37.9 (36bps) 1,037bps 33.8 32.5 (133bps) Interest costs 2.4 1.3 1.3 (46.0) (1.0) 10 8 (17.6) Depreciation 30 35 32 4.5 (9.8) 90 125 39.0 Other income 28.4 1.8 38.9 37.1 2,047.8 15 9 (38.0) PBT 176 176 186 5.5 5.7 779 749 (3.8) Tax 50 38 60 19.1 58.5 192 200 4.0 Effective tax rate (%) 28.5 21.9 32.2 371bps 1,032bps 24.7 26.7 201bps Adjusted PAT 126 138 126 - (8.8) 587 550 (6.4) EPS (Rs) 2.3 2.4 2.3 - (6.5) 10.6 9.9 (6.4) Note* - 4QFY17 numbers have not been restated as per IND-AS.;
Exhibit 1: Financial summary Revenues 1,779 2,233 2,493 2,630 2,925 3,604 YoY (%) 15.6 25.6 11.6 5.5 11.2 23.2 EBITDA 500 660 866 873 992 1,239 EBITDA margin (%) 28.1 29.6 34.7 33.2 33.9 34.4 Reported PAT 300 417 587 550 685 857 Adj. PAT 300 417 587 550 685 857 Diluted EPS (Rs) 5.7 7.5 10.6 9.9 12.3 15.4 YoY (%) 31.2 32.9 40.6 (6.4) 24.6 25.1 RoCE (%) 40.0 36.5 36.0 29.2 29.3 30.4 RoIC (%) 40.1 50.1 59.4 49.9 54.3 63.5 RoE (%) 34.9 29.5 28.1 21.7 22.9 24.2 P/E (x) 85.0 64.0 45.5 48.6 39.0 31.2 P/B (x) 26.1 14.4 11.5 9.8 8.2 6.9 EV/ EBITDA (x) 51.1 39.2 29.8 29.0 25.2 19.8 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
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 472 764 475 0.6 (37.9) 541 (12.2) EBITDA 181 210 180 (0.3) (14.5) 124 45.1 EBITDA (%) 38.3 27.5 37.9 (36bps) 1,037bps 22.9 1,497bps Adjusted PAT 126 138 126 - (8.8) 83 51.7 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 1,450 992 1,239 (16.0) (14.5) EBITDA (%) 37.5 38.2 33.9 34.4 (357bps) (377bps) APAT 766 983 685 857 (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 471 409 48.6 39.0 31.2 29.0 25.2 19.8 17.0 19.1 24.9 0.00 29.0 22.0 Borosil Glassworks 9,345 338 16.8 20.2 18.2 12.1 24.6 19.8 4.6 (6.0) (3.7) 0.07 3.8 20.1 Exhibit 5: One-year forward P/E (Rs) 700 (x) 70 600 500 400 300 200 100 0 60 50 40 30 20 10 0 Median 44.6 Price 30 35 40 45 50 Source: Nirmal Bang Research 3 La Opala RG
0 Financials Exhibit 6: Income statement Net sales 1,779 2,233 2,493 2,630 2,925 3,604 Growth (%) 15.6 25.6 11.6 5.5 11.2 23.2 Raw material costs 403 409 399 511 578 697 Staff costs 218 262 322 346 380 464 Power costs 242 244 282 278 330 382 Other expenses 415 658 625 623 645 821 Total expenditure 1,279 1,573 1,627 1,757 1,933 2,364 EBITDA 500 660 866 873 992 1,239 Growth (%) 21.5 32.1 31.1 0.9 13.6 24.9 EBITDA margin (%) 28.1 29.6 34.7 33.2 33.9 34.4 Other income 11 9 15 9 140 144 Interest costs 33 8 11 8 5 6 Depreciation 70 103 90 125 134 152 Profit before tax 408 558 779 749 993 1,225 Growth (%) 25.7 36.7 39.7 (3.8) 32.5 23.4 Tax 108 140 192 200 308 369 Effective tax rate (%) 26.5 25.1 24.7 26.7 31.0 30.1 Net profit 300 417 587 550 685 857 Growth (%) 31.2 39.2 40.6 (6.4) 24.6 25.1 Exhibit 8: Balance sheet Equity 106 111 111 111 111 111 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 142 79 61 1 40 40 Long-term loans - - - - - - Total loans 142 79 61 1 40 40 Deferred tax liability 94 78 89 106 106 106 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 383 495 585 709 844 996 Net block 731 650 1,071 1,080 1,198 1,206 Capital work-in-progress 22 56 10 12 10 33 Long-term Investments 1 902 955 1,332 1,332 1,372 Inventories 283 292 404 339 349 392 Debtors 215 233 257 328 366 475 Cash 91 4 9 18 399 886 Other current assets 105 151 134 114 127 117 Total current assets 695 680 805 798 1,241 1,909 Creditors 35 45 45 42 48 59 Other current liabilities 200 232 325 337 351 432 Total current liabilities 235 277 370 379 399 492 Net current assets 460 403 435 420 842 1,418 Total assets 1,214 2,010 2,470 2,844 3,382 3,990 Exhibit 7: Cash flow EBIT 430 557 776 748 858 1,087 (Inc.)/dec. in working capital 5 (30) (27) 24 (40) (89) Cash flow from operations 435 527 749 772 817 998 Other income 11 9 15 9 140 144 Depreciation 70 103 90 125 134 152 Deferred liabilities 18 (16) 11 17 - - 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 332 389 541 584 593 670 Capital expenditure (-) (176) (55) (466) (136) (250) (183) Net cash after capex 156 334 75 448 342 487 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) 553 - -) - - Cash from financial activities (72) (412) (70) (437) 39 (40) Others (0) (9) - (2) 1 (1) Opening cash balance 8 91 4 9 18 399 Closing cash balance 91 4 9 18 399 886 Change in cash balance 83 (87) 5 9 382 486 Exhibit 9: Key ratios Y/E March FY14 FY15 FY16 FY17 FY18E FY19E Per share (Rs) EPS 5.7 7.5 10.6 9.9 12.3 15.4 Book value 18 33 42 49 58 69 Valuation (x) P/E 85.0 64.0 45.5 48.6 39.0 31.2 P/sales 14.3 12.0 10.7 10.1 9.1 7.4 P/BV 26.1 14.4 11.5 9.8 8.2 6.9 EV/EBITDA 51.1 39.2 29.8 29.0 25.2 19.8 EV/sales 14.4 11.6 10.3 9.6 8.5 6.8 Return ratios (%) RoIC 40.1 50.1 59.4 49.9 54.3 63.5 RoCE 40.0 36.5 36.0 29.2 29.3 30.4 RoE 34.9 29.5 28.1 21.7 22.9 24.2 Margins (%) EBITDA 28.1 29.6 34.7 33.2 33.9 34.4 PBIT 24.2 25.0 31.1 28.4 28.5 30.2 PBT 22.9 25.0 31.3 28.5 28.5 34.0 PAT 16.9 18.7 23.5 20.9 20.5 23.8 Turnover ratios Asset turnover (x) 1.5 1.1 1.0 0.9 0.9 0.9 Avg. inventory period (days) 80 67 89 69 65 60 Avg. collection period (days) 43 38 37 45 45 47 Avg. payment period (days) 10 10 10 9 9 9 Solvency ratios (x) Debt-equity 0.1 - - - - - Interest coverage 13.1 66.3 69.6 93.1 168.8 169.9 Growth (%) Sales 15.6 25.6 11.6 5.5 11.2 23.2 EBITDA 21.5 32.1 31.1 0.9 13.6 24.9 PAT 31.2 39.2 40.6 (6.4) 24.6 25.1 4 La Opala RG
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 87 114 7 October 2012 Buy 96 114 12 November 2013 Buy 112 134 14 February 2014 Buy 129 174 15 February 2014 Buy 129 174 17 February 2014 Buy 129 174 12 March 2014 Buy 140 174 14 May 2014 Buy 176 211 4 July 2014 Buy 181 211 14 August 2014 Accumulate 243 254 9 October 2014 Accumulate 337 353 10 October 2014 Accumulate 340 353 7 November 2014 Accumulate 424 458 9 February 2015 Buy 365 433 13 May 2015 Buy 382 446 14 August 2015 Accumulate 530 590 16 November 2015 UR 574-5 February 2016 UR 641-17 May 2016 UR 558-22 August 2016 UR 582-16 November 2016 UR 533-8 February 2017 UR 478-11 May 2017 UR 536-31 August 2017 UR 481 - Rating track graph 700 600 500 400 300 200 100 0 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, 2014. (Registration No: INH000001436-19.08.2015 to 18.08.2020). 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 8017 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830 Atul Vitha Dealing Desk atul.vitha@nirmalbang.com +91 22 3926 8071 / +91 22 3926 8226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010 6 La Opala RG