INSUBCONTINENT EXCLUSIVE:
Centrum Broking has a buy call on La Opala RG with a target price of Rs 340.
The current market price of La Opala RG is Rs 243.25.
Time
period given by the brokerage is one year when La Opala RG price can reach the defined target
View of the brokerage on the company:Q1FY19 result ahead of expectation: Total revenues were flat at Rs551mn on the back of healthy volume
growth and new capacity addition of 4000MT from April’18
Operating profit was up 36 per cent to Rs245mn (25 per cent above expectation) with 596bps operating margin expansion to 44.5 per cent on
steep gross margin expansion due to increase in inventory
Power cost was up 57 per cent YoY on new capacity while other expenses were up 29 per cent YoY
PAT was up 15 per cent to Rs145mn (12 per cent above expectation)
Other income was down 50 per cent on lower treasury income.
New capacity to boost volumes: During the quarter the company expanded its
capacity by 4,000MT in its Satarganj plant taking the total capacity to 25,000MT
This helped the company post high double digit volume growth during the quarter
We believe this volume growth will get better in the festive season given the affordable pricing for the dinner set
Further our interaction with the management suggests that the new green field capacity of 11K MT is on track and would be commissioned in
H2FY20 taking the total capacity 36K MT
Significant under penetration of the opalware products coupled with growing distribution would drive growth for the category and
company.
Management focus on category growth and not margins: While the operating margins for the company was up 596bps to 44.5 per cent
during the quarter, management maintained that the full year margins would be about 40 per cent range given the significant investments they
would do in brand building
While gross margins would remain high on stable RM prices, higher sales contribution of premium products such as Sovrana and Quadra,
operating margins would remain muted on higher AP spends and expanding distribution reach
Competition intensity continues to remain high which would mute price hikes
Hence the management would focus on volume growth and not margins.
Maintain BUY: We have cut our revenues by about 1 per cent each for
FY19E/FY20E marginally lower volume growth
Operating profit has been cut by 2.5 per cent/4.4 per cent for FY19E/FY20E factoring in higher AP spends and marginally higher cost on new
capacity addition while PAT has been cut by 3.4 per cent/8 per cent on lower operating profit coupled with lower other income
We maintain our BUY rating with a TP of Rs340 and value the company on adjusted OCF to EV yield based on five year average cash flows
Key downside risks could be increasing competitive intensity coupled with delay in commissioning of new plant.
