Rating: Hold; Target Price: Rs1,485; CMP: Rs1,323; Upside: 12%
Valuations capture near term upside; downgrade to Hold
We downgrade La Opala RG to Hold on the back of sharp 42% rally in the
stock price in the past 1 month partially led by low liquidity and
strong operating performance as seen in Q1FY15 results. Though we
expect the company to deliver strong earnings CAGR of 33% over
FY14-FY16E, current PEG of 0.9x (vs 0.65x at the time of initiation)
leaves limited headroom for further re-rating. While near term upside
looks capped, we remain positive on the long term prospects of the
company driven by category growth, market leadership, healthy balance
sheet and strong FCF generation, which in our opinion could help it
deliver high returns over the next 3 years.
$ Q1FY15 results in-line with estimates: La Opala posted 30% YoY
growth in revenues on the back of healthy volume growth and 3% pricing
growth as the company had taken a 7% price increase in the Diva brand
from May’14. Operating profit was up 30.6% at Rs107mn with healthy
topline growth and flat margins. During the quarter, the company had
extra Rs22mn expenditure on relining of the furnace at the Sitargunj
plant. PAT was up by 36% at Rs61mn on the back of lower interest cost.
$ Focus on high margin products: Management expects the Divya brand to
contribute 65% of sales by FY15 end compared to 60% currently as
margins for this product are ~30%. Also, the new capacity expected in
Q2FY16 is for the Diva brand which will further help margins expand.
The company has started exports of Diva brand and is expecting Rs200mn
in sales from in FY15E. This will further increase in FY16 once the
new capacity becomes operational. Hence, the company is slowly
increasing its distribution network in the Middle East, Africa and
South East Asia.
$ Capacity addition on track: According to the management the 8,000 MT
capacity addition at the Sitargunj plant is on track and is expected
to be operational in Q2FY16. Rs600mn capex for the incremental
capacity would be funded by Rs550mn preferential allotment accounting
to 4.7% equity dilution. The company is also planning to enter into
borosilicate glass products by the end of FY15 where it would import
the products and sell it as their brand and maintain company level
margins. The current market size of these products is Rs1.5bn and the
company is expected to leverage its brand distribution network for the
same.
$ Downgrade to Hold: We have marginally increased PAT factoring in
higher other income and lower interest cost on the back of recent fund
raising. While we remain confident on category growth, market
leadership position, healthy balance sheet and strong FCF generation,
sharp 42% rally in the stock price in the past 1 month compels us to
downgrade the stock to Hold with a revised target price of Rs1485 (26x
Sep’16E EPS; 1x FY16 PEG). 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.
Thanks & Regards
��
Valuations capture near term upside; downgrade to Hold
We downgrade La Opala RG to Hold on the back of sharp 42% rally in the
stock price in the past 1 month partially led by low liquidity and
strong operating performance as seen in Q1FY15 results. Though we
expect the company to deliver strong earnings CAGR of 33% over
FY14-FY16E, current PEG of 0.9x (vs 0.65x at the time of initiation)
leaves limited headroom for further re-rating. While near term upside
looks capped, we remain positive on the long term prospects of the
company driven by category growth, market leadership, healthy balance
sheet and strong FCF generation, which in our opinion could help it
deliver high returns over the next 3 years.
$ Q1FY15 results in-line with estimates: La Opala posted 30% YoY
growth in revenues on the back of healthy volume growth and 3% pricing
growth as the company had taken a 7% price increase in the Diva brand
from May’14. Operating profit was up 30.6% at Rs107mn with healthy
topline growth and flat margins. During the quarter, the company had
extra Rs22mn expenditure on relining of the furnace at the Sitargunj
plant. PAT was up by 36% at Rs61mn on the back of lower interest cost.
$ Focus on high margin products: Management expects the Divya brand to
contribute 65% of sales by FY15 end compared to 60% currently as
margins for this product are ~30%. Also, the new capacity expected in
Q2FY16 is for the Diva brand which will further help margins expand.
The company has started exports of Diva brand and is expecting Rs200mn
in sales from in FY15E. This will further increase in FY16 once the
new capacity becomes operational. Hence, the company is slowly
increasing its distribution network in the Middle East, Africa and
South East Asia.
$ Capacity addition on track: According to the management the 8,000 MT
capacity addition at the Sitargunj plant is on track and is expected
to be operational in Q2FY16. Rs600mn capex for the incremental
capacity would be funded by Rs550mn preferential allotment accounting
to 4.7% equity dilution. The company is also planning to enter into
borosilicate glass products by the end of FY15 where it would import
the products and sell it as their brand and maintain company level
margins. The current market size of these products is Rs1.5bn and the
company is expected to leverage its brand distribution network for the
same.
$ Downgrade to Hold: We have marginally increased PAT factoring in
higher other income and lower interest cost on the back of recent fund
raising. While we remain confident on category growth, market
leadership position, healthy balance sheet and strong FCF generation,
sharp 42% rally in the stock price in the past 1 month compels us to
downgrade the stock to Hold with a revised target price of Rs1485 (26x
Sep’16E EPS; 1x FY16 PEG). 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.
Thanks & Regards
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