Early festive season boosts volumes We maintain Hold on La Opala RG: Centrum

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Rating: Hold; Target Price: Rs415; CMP: Rs424; Downside: 2.1%



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.

$ 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.

$ 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.

$ 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.

$ 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.



Thanks & Regards