Rating: Buy; Target Price: Rs1,270; CMP: Rs904; Upside: 40%
Aspirational, but affordable
We initiate coverage on La Opala RG with a BUY rating and believe the
company will benefit as the largest organised opalware player in
India. Volumes are expected to grow at a CAGR of 21.5% over FY14-17E
on the back of doubling of capacity at the Sitargunj plant, pan India
distribution network, aggressive investment in brand building, focus
on exports, increasing modern trade share with affordable, value for
money product positioning in an otherwise upscale market. Improving
product mix coupled with operating leverage and savings in power cost
will help expand margins. Healthy profitability, strong FCF generation
with reducing working capital and improving return ratios augur well
for the firm in the long term.
$ Timely capacity expansion to fuel growth: We expect the company to
post a CAGR of 21.5% in volumes over FY14-17E as it is planning to
double capacity at the Sitargunj plant from 8,000MT to 16,000MT in
H1FY16 with a capex of Rs600mn. Our interaction with over 50 dealers
across India suggests that affordable pricing along with high product
quality and good dealer commission augurs well for La Opala. The
company has also focused a lot on the packaging of products along with
the release of ~12-15 new designs every year over two tranches as the
bulk of sales happen during the festive season. Pan India network of
135 distributors dedicated to general trade is expected to give the
company an edge over the competition.
$ Focus on premium products to drive profitability: We believe the
shift to premium products under Diva brand will continue as the new
capacity being added at the Sitargunj plant will further aid margins.
Diva brand accounts for 60% of the sales of the company and Crystal
~10%, both premium products with operating margins of ~30% and ~20%
respectively. The share of value for money brand LaOpala reduced to
~30% in FY14. With new capacity expected in FY16 and high demand for
quality opalware products, the company is planning to expand its
distribution reach outside India to the Middle East, Africa and South
East Asia.
$ Strong Financials: We expect sales to grow at a CAGR of 24.8% and
operating profit at 30.3% over FY14-17E led by healthy volume growth
on the back of new 8000MT capacity at the Sitarganj plant from H1FY16.
Despite high A&P spends, operating leverage will help the company
expand operating margins from 28.1% in FY14 to 32% in FY17E. With
increasing profitability and asset turnover, RoE & RoCE will increase
to 36.3% and 31.6% respectively in FY17E. Over the past 5 years, the
company has posted strong FCF on the back of marginal capex and
improving working capital. With reducing D/E ratio, we believe the
company will maintain its ~20% dividend payout going forward.
$ Valuation & Risks: Market leadership positioning in the fast
growing category, strong brand presence, healthy momentum of 24.8%
revenue and 34% PAT CAGR over FY14-17E, increasing margins, strong
balance sheet with FCF generation and improving return ratios make La
Opala attractive in the consumer segment. The stock is attractively
positioned against peers where it trades at FY16E PEG of 0.65x. We
initiate coverage on the stock with a target price of Rs1,270 (22x
Sept 2016E EPS of Rs57.7) and 0.9x PEG given that the full benefit of
the capacity expansion would come only in FY17. Key risks are removal
of anti-dumping duty and delay in capex.
Thanks & Regards
Aspirational, but affordable
We initiate coverage on La Opala RG with a BUY rating and believe the
company will benefit as the largest organised opalware player in
India. Volumes are expected to grow at a CAGR of 21.5% over FY14-17E
on the back of doubling of capacity at the Sitargunj plant, pan India
distribution network, aggressive investment in brand building, focus
on exports, increasing modern trade share with affordable, value for
money product positioning in an otherwise upscale market. Improving
product mix coupled with operating leverage and savings in power cost
will help expand margins. Healthy profitability, strong FCF generation
with reducing working capital and improving return ratios augur well
for the firm in the long term.
$ Timely capacity expansion to fuel growth: We expect the company to
post a CAGR of 21.5% in volumes over FY14-17E as it is planning to
double capacity at the Sitargunj plant from 8,000MT to 16,000MT in
H1FY16 with a capex of Rs600mn. Our interaction with over 50 dealers
across India suggests that affordable pricing along with high product
quality and good dealer commission augurs well for La Opala. The
company has also focused a lot on the packaging of products along with
the release of ~12-15 new designs every year over two tranches as the
bulk of sales happen during the festive season. Pan India network of
135 distributors dedicated to general trade is expected to give the
company an edge over the competition.
$ Focus on premium products to drive profitability: We believe the
shift to premium products under Diva brand will continue as the new
capacity being added at the Sitargunj plant will further aid margins.
Diva brand accounts for 60% of the sales of the company and Crystal
~10%, both premium products with operating margins of ~30% and ~20%
respectively. The share of value for money brand LaOpala reduced to
~30% in FY14. With new capacity expected in FY16 and high demand for
quality opalware products, the company is planning to expand its
distribution reach outside India to the Middle East, Africa and South
East Asia.
$ Strong Financials: We expect sales to grow at a CAGR of 24.8% and
operating profit at 30.3% over FY14-17E led by healthy volume growth
on the back of new 8000MT capacity at the Sitarganj plant from H1FY16.
Despite high A&P spends, operating leverage will help the company
expand operating margins from 28.1% in FY14 to 32% in FY17E. With
increasing profitability and asset turnover, RoE & RoCE will increase
to 36.3% and 31.6% respectively in FY17E. Over the past 5 years, the
company has posted strong FCF on the back of marginal capex and
improving working capital. With reducing D/E ratio, we believe the
company will maintain its ~20% dividend payout going forward.
$ Valuation & Risks: Market leadership positioning in the fast
growing category, strong brand presence, healthy momentum of 24.8%
revenue and 34% PAT CAGR over FY14-17E, increasing margins, strong
balance sheet with FCF generation and improving return ratios make La
Opala attractive in the consumer segment. The stock is attractively
positioned against peers where it trades at FY16E PEG of 0.65x. We
initiate coverage on the stock with a target price of Rs1,270 (22x
Sept 2016E EPS of Rs57.7) and 0.9x PEG given that the full benefit of
the capacity expansion would come only in FY17. Key risks are removal
of anti-dumping duty and delay in capex.
Thanks & Regards
