Orient Ceramics & Industries Ltd - Poised for growth through retail expansion and capacity additions - CRISIL Research

Delhi-based Orient Ceramics and Industries Ltd (Orient) manufactures ceramic and vitrified tiles. We assign Orient a fundamental grade of '3/5', indicating that its fundamentals are 'good' relative to other listed securities in India. We also assign a valuation grade of '5/5', indicating that the market price has 'strong upside' from the current levels.

Healthy growth prospects in tiles industry, shift in consumer preference bode well

The tiles industry is expected to grow at a healthy rate driven by huge investments in the end-user segments such as housing, hospitality and infrastructure. CRISIL Research expects the tiles industry to grow at 12-14% to ~Rs 155 bn over the next two years. Also, a change in consumer preference from mosaic and natural stones to ceramic tiles along with an increase in disposable income and urbanisation spell good tidings for the industry.

Established player in the organised market; steady growth in the past

Orient is an established player in the organised market with a manufacturing capacity of 14 mn sq. meters (sq. mt). It has a market share of 3.1% in the highly fragmented tiles industry compared to the leader, Kajaria Ceramics, who has a market share of 5.1%. Orient has a strong presence in the Northern and Eastern markets with a network of ~900 exclusive dealers. The company had witnessed steady revenue growth of 10.2% through FY07-10. However, this was lower compared to industry growth of ~12%, mainly due to limited retail presence and less focus on advertising and marketing.

New launches, retail expansion and capacity additions to augment growth

In December 2009, Orient launched two brands – Europa, a high-end product in ceramic tiles, and Stiler, a wall highlighter. These products have been received well in the market. The company also plans to improve its retail presence by opening ~100 stores in FY11. It has significantly increased its focus on marketing, advertising and branding. The company also plans to enhance its capacity over the next two-three years to meet the growing demand. We believe these initiatives position Orient for a strong growth going ahead.

Revenues to grow at a two-year CAGR of ~18%, RoE to increase to 22% in FY12

We expect revenues to grow at a two-year CAGR of 17.8% to Rs 3.5 bn in FY12 supported by strong growth in the ceramic tiles segment on account of new product launches. EBITDA margins are expected to improve to 14.4% in FY12 from 13.9% in FY10 driven by increase in realisations from the launch of high-end brands. EPS is expected to increase from Rs 10.9 in FY10 to Rs 17.4 in FY12. RoE is expected to improve from 20.1% in FY10 to 22.2% in FY12.

Larger presence of unorganised players leads to high competition in the industry

The tiles industry is highly fragmented. The unorganised players have a 55% market share. This coupled with the growing capacities of organised players will lead to high competition in the industry as they all fight for a larger share of the market pie. We believe Orient will have limited flexibility to increase realisations as a result of high competition.

Valuation - the current market price has strong upside

We have used the discounted cash flow method to value Orient. Based on this method, the fair value is Rs 132 per share. At this fair value, the stock trades at multiples of 9.1x FY11 and 7.6x FY12 earnings. We initiate coverage on Orient with a valuation grade of '5/5', indicating that the market price has 'strong upside' from the current levels.

Source : Equity Bulls

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