INDIA La Opala RG Hold 7 November 2014 Early festive season boosts volumes We maintain Hold on La Opala RG and believe the rally in the stock price captures new capacity additions along with steady margin expansion leaving little room for disappointment. While Q2FY15 results were ahead of expectations, we believe it will be difficult to maintain these growth levels as the bulk of growth was due to early festive season compared to last year. While we continue to like the strong pricing power and healthy balance sheet, valuations at 30.8x FY17E PE leave no upside for new buyers in the near term. Net Sales COGS Employee Expenses Admin & Other Exp EBITDA EBITDA margin (%) Depreciation & Amm. PBT Tax Adjusted PAT Q1FY15 QoQ (%) Q2FY15E Var (%) 569 85 66 248 170 29.8 26 148 37 111 398 90 51 144 113 28.2 18 86 27 59 42.9 (5.4) 28.0 72.1 51.0 160 bps 419 86 59 167 107 25.6 19 88 27 61 35.8 (0.7) 11.0 48.7 58.6 429 bps 537 115 66 195 161 29.9 20 141 42 98 6.1 (25.8) (0.7) 27.4 5.8 (8) bps 72.9 88.1 68.4 81.3 FY13 FY14 FY15E FY16E FY17E Rs310 Diluted Shares O/S(mn) 55.5 Previous Rating Hold Mkt Cap (Rsbn/USDmn) 23.5/383.1 6M 1Yr LOG IN 31.6 146.4 278.7 Nifty 4.9 24.5 52 Wk H / L (Rs) 436.3/89.6 5 Year H / L (Rs) 436.3/4.8 Daily Vol. (3M NSE Avg.) 90824 32.0 Shareholding pattern (%)* Jun-14 Mar-14 Dec-13 Sept-13 68.2 68.2 68.1 68.1 FIIs 5.7 5.5 4.9 3.8 DIIs 2.2 2.2 1.9 1.9 23.9 24.2 25.1 26.2 Promoter Others Source: BSE, *as on 5 November 2014 Revenue growth trend 50 42.9 40 31.2 30.3 (%) 30 22.4 19.4 20 13.6 7.3 10 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q4FY13 0 Source: Company, Centrum Research Earning Revision FY15E FY16E Particulars (Rs mn) New Old Old Chg (%) Sales 2,342 2,237 4.7 2,956 2,763 7.0 EBITDA 701 689 1.8 908 864 5.1 EBITDA Margin (%) 29.9 30.8 (86) bps 30.7 31.3 (56) bps PAT-adj. 449 449 0.0 572 557 2.7 Chg (%) New Source: Centrum Research Estimates Centrum vs. Bloomberg Consensus* Particulars (Rs mn) FY15E Centrum BBG Sales FY16E Var (%) Centrum BBG Var (%) 2,342 2,218 5.6 2,956 2,680 10.3 EBITDA 701 651 7.7 908 794 14.4 PAT 449 409 9.9 572 509 12.5 BUY SELL HOLD Target Price (Rs) Centrum Target Price (Rs) 3 0 1 292 415 Bloomberg Consensus* 5.2 Variance (%) 41.9 *as on 5 November 2014; Source: Bloomberg, Centrum Research Estimates 12.7 Source: Company, Centrum Research Y/E Mar (Rsmn) 55.5 Previous Target *as on 5 November 2014; Source: Bloomberg, Centrum Research Maintain Hold: we have increased our revenue estimates factoring in high volume growth in H1FY15 and further price hikes in FY16. Margins have been reduced marginally on the back of higher A&P spends. We maintain Hold rating with a revised target price of Rs415 (30x FY17E EPS; 0.8x FY17 PEG) capturing the upside from the new capacity where the full benefits would flow in FY17E where as previously we valued the company at 26x Sep’16. Key upside risks to our estimates are stronger than expected volume growth and healthy margin expansion while downside risks are removal of anti-dumping duty and delay in new capacity additions. YoY (%) LOG IN 2.1% Curr Shares O/S (mn) 1M A&P spends to increase and mute margin expansion: While we believe there is little incremental room for gross margin expansion, packaging cost which accounts for ~7% of sales can marginally reduce further with the decline in crude prices. Management is expected to spend ~13% (earlier guidance 11-12%) of revenues on A&P to gain incremental market share from unorganized segments and invest the margin gains in the business. With high volume growth and price hikes in FY16E, we expect operating leverage to help the company expand margins despite high A&P spends. Q2FY14 Rs424 Bloomberg Code Price Performance (%)* Focus on volume growth: Company is focusing on volume growth and has started to export opalware products to create a base for expected capacity addition from H2FY16. It is also focusing on e-commerce and has signed contracts with Flipkart and Amazon which are expected to start from November end at pre-decided discount pricing. New product designs from Dec’14 and plans to launch premium designs in square plates from FY16 will further help the company boost volume growth. Company is also considering the import of Borosilicate products from Q4FY15 offering a potential of Rs300mn over 3 years. Q2FY15 Rs415 Key Data CMP* Dowinside Q2FY15 results highlights: La Opala posted healthy 43% YoY growth in revenues on pre-festive season demand and early festive season compared to last year. Price hike in the Diva brand further helped in ~4% price growth for the company as Diva brand contributed 65% of revenues while exports were at 15%. Operating profit was up 51% at Rs170mn with 160bps margin expansion on the back of gross margin expansion of 766bps with improvement in plant efficiencies and 100% capacity utilization. PAT was up by 59% at Rs111mn with healthy revenue growth. Y/E Mar (Rs mn) Target Price Q2FY14 Earning Revision Q1FY14 Consumer AAnkit Kedia, [email protected]; 91 22 4215 9634 Revenue YoY (%) EBITDA EBITDA (%) Adj. PAT YoY (%) EPS (Rs) RoE (%) RoCE (%) PE (x) EV/EBITDA (x) 1,539 1,779 2,342 2,956 3,768 33.8 15.6 31.7 26.2 27.5 412 500 701 908 1,178 26.8 28.1 29.9 30.7 31.3 229 300 449 572 769 80.2 30.9 49.9 27.5 34.4 4.1 5.4 8.1 10.3 13.9 35.3 34.9 31.3 27.0 28.8 28.7 28.9 28.5 26.1 28.0 103.6 79.1 52.8 41.4 30.8 55.2 45.4 33.0 25.7 19.4 Source: Company, Centrum Research Estimates Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet Valuation Exhibit 1: Sensitivity Analysis Gross Margins (%) Sensitivity Analysis - FY16E EPS Volume Growth -2% -1% Base 1% 2% -2% -1% Base 1% 2% 41.3 42.4 43.5 44.7 45.8 43.1 44.2 45.4 46.5 47.6 44.9 46.1 47.7 48.4 49.5 46.7 47.9 49.1 50.2 51.4 48.5 49.7 50.9 52.1 53.2 Source: Centrum Research Estimates Exhibit 2: Rolling forward EV/EBITDA chart Exhibit 3: Rolling forward P/E chart 25 40 20 30 15 20 10 10 5 Mean Mean - Std Dev Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10 Oct-09 Oct-08 Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10 Oct-09 Apr-09 Oct-08 EV/EBITDA Mean + Std Dev Apr-09 0 0 P/E Mean Mean + Std Dev Mean - Std Dev Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates Exhibit 4: Comparative Valuations Company Mkt Cap (Rs mn) CAGR FY14-FY16E (%) Rev. EBITDA Margin (%) PE (x) EBITDA PAT FY14 FY15E FY16E FY14 EV/EBITDA (x) FY15E FY16E FY14 FY15E FY16E RoE (%) FY14 Div Yield (%) FY15E FY16E FY14 FY15E FY16E LA Opala RG* 23,549 28.97 34.8 38.2 28.1 29.9 30.7 79.1 52.8 41.4 45.4 33.0 25.7 34.9 31.3 27.0 0.2 0.3 0.4 Kajaria Ceramics 44,587 22.8 25.4 32.5 15.3 15.7 16.0 35.3 28.0 21.5 10.3 13.3 10.5 27.9 26.1 26.4 0.6 0.7 0.9 Havells India 180,852 12.0 19.9 26.2 9.6 10.3 11.0 40.5 31.7 25.4 15.0 19.4 16.1 28.7 30.5 30.7 1.0 1.1 1.4 Berger Paints 132,989 17.5 22.2 25.2 11.3 11.8 12.2 53.3 42.8 34.1 19.0 25.7 21.0 24.1 24.7 26.2 0.6 0.7 0.8 VIP Industries 16,174 12.1 28.5 19.3 8.5 9.3 11.2 28.1 27.9 19.6 18.0 16.3 11.9 21.2 19.3 25.2 1.5 1.8 2.5 TTK Prestige 45,333 17.7 22.8 21.9 12.6 12.8 13.7 40.1 35.5 27.2 21.7 22.8 17.7 22.8 20.1 22.1 0.5 0.6 0.8 Page Industries 98,624 27.7 27.1 29.0 21.4 21.1 21.2 64.0 49.3 38.5 29.5 31.4 24.6 61.2 58.4 56.2 0.7 0.9 1.1 Astral Polytechnik 40,474 26.8 25.8 36.7 14.5 13.9 14.3 52.4 39.2 28.1 17.7 21.3 16.5 27.7 25.9 27.9 0.1 0.2 0.4 Bajaj Electricals 28,817 16.3 117.5 NA 2.0 6.3 7.1 (539.8) 22.3 14.5 40.1 10.6 7.9 (0.7) 16.7 21.5 0.5 0.9 1.2 Whirlpool of India 68,035 18.6 30.5 40.8 8.0 9.2 9.7 55.3 35.4 27.9 11.7 20.7 16.5 18.1 22.8 23.1 0.0 0.0 0.0 Relaxo Footwear 31,211 19.4 21.1 28.7 12.2 12.3 12.5 47.5 37.2 28.7 13.3 NA NA 26.7 25.2 26.8 0.1 0.2 0.2 Symphony 67,571 32.7 37.7 38.1 23.6 24.9 25.5 72.9 49.8 38.3 39.3 30.0 30.0 37.2 42.6 44.4 0.5 1.0 1.1 Source: Bloomberg consensus, *Centrum Broking 2 La Opala RG Quarterly financials, Operating Metrics and Key Performance Indicators Exhibit 5: Quarterly Financials Y/E Mar (Rs mn) Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Total Income 502 399 322 398 570 489 419 569 COGS Staff cost Admin & other expenses Power A&P Expenses Total Expenditure 100 54 58 74 69 356 73 53 61 67 29 283 87 46 39 47 21 240 90 51 42 54 48 286 123 62 57 70 91 403 96 59 77 72 46 351 86 59 70 59 38 312 85 66 68 75 105 399 EBITDA Depreciation EBIT Interest Other Income Exceptional Item PBT Total tax Reported PAT Adj PAT 145 15 131 11 3 0 122 30 93 93 116 14 102 10 1 0 93 30 63 63 82 15 67 10 2 0 60 15 45 45 113 18 95 11 2 0 86 27 59 59 167 19 148 8 5 0 145 34 110 110 138 19 119 4 2 0 117 32 85 85 107 19 88 3 3 0 88 27 61 61 170 26 144 1 5 0 148 37 111 111 71.7 82.5 110.5 31.2 91.7 227.9 19.4 49.3 61.1 7.3 18.4 31.9 13.6 14.9 18.8 22.4 18.6 34.7 30.3 30.6 35.9 42.9 51.0 88.1 80.0 29.0 26.0 18.5 81.8 29.2 25.5 15.9 72.9 25.5 21.0 14.0 77.4 28.2 23.8 14.8 78.5 29.3 26.0 19.4 80.3 28.3 24.4 17.5 79.5 25.6 21.0 14.6 85.0 29.8 25.3 19.5 Growth % Revenue EBIDTA Adj PAT Margins % Gross Margin EBIDTA EBIT Adj PAT Source: Company, Centrum Research Exhibit 6: Assumptions Assumptions Volume Growth % FY12 FY13 FY14 FY15E FY16E FY17E 18.5 30.0 14.0 26.0 24.0 25.0 Source: Company, Centrum Research Estimate 3 La Opala RG Financials Exhibit 7: Income Statement Exhibit 9: Balance Sheet Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E Y/E March (Rs mn) Net Sales Growth (%) Employee Cost %of Sales Material cost %of Sales Admin & other expenses % of sales EBIDTA EBIDTA Margins (%) Depreciation Interest expenses PBT for operations Other income Exceptional item PBT Provision for tax Effective tax rate (%) Net Profit 1,539 33.8 189 12.3 327 21.2 612 39.7 412 26.8 56 42 314 10 325 96 29.5 229 1,779 15.6 218 12.2 403 22.7 658 37.0 500 28.1 70 33 397 11 408 108 26.5 300 2,342 31.7 274 11.7 481 20.5 886 37.8 701 29.9 99 8 594 25 619 170 27.5 449 2,956 26.2 337 11.4 631 21.4 1,080 36.5 908 30.7 132 8 767 28 795 223 28.0 572 3,768 27.5 412 10.9 799 21.2 1,379 36.6 1,178 31.3 140 5 1,034 35 1,069 299 28.0 769 Share Capital Preference Share Capital Reserves & Surplus Total Shareholders Funds Source: Company, Centrum Research Estimates Exhibit 8: Key Ratios Y/E March Growth ratios (%) Revenues EBIDTA Adj Net Profit Margin ratios (%) EBIDTA Margins PBIT Margins PBT Margins PAT Margins Return Ratios (%) ROCE RoNW RoIC Turnover Ratios (Days) Inventory period Collection period Payment period Net Working Capital Solvency Ratio Debt-equity Net Debt-equity Current ratio Interest coverage ratio Dividend Dividend (Rs) Dividend yield (%) Dividend Payout (%) Per Share (Rs) Basic (end pt) EPS - Rep FDEPS (Adjusted) Basic (end pt) EPS - Adj FDEPS (Reported) CEPS Book Value Valuations (x) PER P/BV EV/EBIDTA EV/Sales M-cap/Sales FY13 FY14 FY15E FY16E FY17E 33.8 53.4 80.2 15.6 21.3 30.9 31.7 40.2 49.9 26.2 29.5 27.5 27.5 29.8 34.4 26.8 23.1 21.1 14.9 28.1 24.2 22.9 16.8 29.9 25.7 26.4 19.2 30.7 26.2 26.9 19.4 31.3 27.6 28.4 20.4 28.7 35.3 26.7 28.9 34.9 28.1 28.5 31.3 31.5 26.1 27.0 27.4 28.0 28.8 33.5 73 44 56 70 58 44 34 76 75 45 50 79 100 45 50 103 100 45 50 104 0.3 0.2 1.9 8.5 0.1 0.1 2.9 13.1 0.0 (0.3) 2.4 75.3 0.0 (0.2) 2.8 96.9 0.0 (0.3) 3.5 207.7 0.7 0.2 19.0 1.0 0.2 20.7 1.3 0.3 18.8 1.6 0.4 18.2 2.3 0.5 19.0 4.3 4.1 4.3 4.1 5.4 14.0 5.7 5.4 5.7 5.4 7.0 18.5 8.1 8.1 8.1 8.1 9.9 34.0 10.3 10.3 10.3 10.3 12.7 42.5 13.9 13.9 13.9 13.9 16.4 53.7 103.6 30.5 55.2 14.8 14.7 79.1 23.1 45.4 12.7 12.7 52.8 12.6 33.0 9.9 9.7 41.4 10.1 25.7 7.9 7.7 30.8 8.0 19.4 6.1 6.0 FY13 FY14 FY15E FY16E FY17E 106 0 635 741 106 0 872 978 111 0 1,777 1,888 111 0 2,245 2,356 111 0 2,868 2,979 Loan Funds Capital Reserve on Consolidation Minority Interest Deferred Tax Liabilities Total Capital Employed 208 0 0 75 1,024 142 0 0 94 1,214 0 0 0 94 1,982 0 0 0 94 2,450 0 0 0 94 3,073 Fixed Asset Gross Block Less:- Accumulated Depreciation Net Block Capital WIP Total fixed assets Investments 989 351 639 9 647 75 1,114 383 731 22 753 1 1,314 481 833 50 883 500 1,764 613 1,151 50 1,201 300 1,864 753 1,111 50 1,161 300 Inventory Debtors Loans & advances Other Current Assets Cash & bank balances Total current assets 308 186 68 24 8 594 283 215 81 24 91 695 481 289 117 24 95 1,006 810 364 148 24 112 1,458 1,032 465 188 24 543 2,252 292 302 1,024 235 460 1,214 407 599 1,982 508 950 2,450 640 1,613 3,073 FY13 FY14 FY15E FY16E FY17E 325 56 66 446 (40) 406 (86) 320 408 70 (16) 462 (75) 387 (90) 297 619 99 (17) 701 (136) 565 (170) 394 795 132 (20) 908 (334) 574 (223) 351 1,069 140 (30) 1,178 (231) 947 (299) 648 (224) (74) 1 (297) (138) 74 11 (53) (228) (499) 25 (702) (450) 200 28 (223) (100) 0 35 (65) 46 (36) 0 (28) (19) (66) (33) 0 (62) (161) (142) (8) 545 (84) 311 0 (8) 0 (104) (112) 0 (5) 0 (146) (151) 4 83 3 17 432 Current liabilities and provisions Net current assets Mis Expenses Total Source: Company, Centrum Research Estimates Exhibit 10: Cash Flow Y/E March (Rs mn) CF from operations Profit before tax Depreciation & amortisation Others CF before WC changes Working capital changes Cash inflow from operations Income tax paid Cash from Operations Cash from investing Capex Investments Others Cash from investing Cash from financing Borrowings/ repayments Interest paid Equity/ Share Capital Dividend & Dividend Tax Cash from financing Net change in cash Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates 4 La Opala RG Appendix A Disclaimer Centrum Broking Limited (“Centrum”) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. 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