Orient Bell!!!!---Targets Huge, just have Patiencee
The total size of Indian
Tiles Industry is approximately 18000 crore of which around 7200 crore is
organized and the remaining is unorganized. The industry is cyclic and is
characterized by high fuel cost, working capital requirement and competition. The
Delhi headquartered Orient Bell is
in the business of manufacturing and selling primarily Ceramic, Vitrified,
Ultra Vitrified and Decorative tiles. In the year 2010 the company Orient Ceramics acquired Bell Ceramics and later on merged with itself
and was renamed as “Orient Bell Ltd”.
They acquired a listed company and merged with it. This is the only such
acquisition in the history of Indian
tile industry. Earlier it used to cater to Northern and Eastern markets but
because of the merger it has now captured the Southern and Western markets
also. The market share of the company has shot up from around 8% to roughly
around 15% just lagging behind Kajaria Ceramics (around 20%) as of 2012. With
this merger the company’s installed capacity has increased from 14 million
square meters to 28.6 million square meters and has now become the fourth
largest company by sales in India. The operational efficient of the company has
also improved from 60-65% to around 80% with little or no investment. The
company is having a strong marketing network of close to 2500 dealers and about
9000 retailers. Orient Bell has now become a pan-India company with 41% of the
sales coming from North, 33% from South, 17% from East and 9% from West.
Financials
The company has recently
announced its Q3 2013 results. The y-o-y results are good as the company has
reported almost 50% growth in topline but all of this has not been translated into
bottomline. The only thing which has been hurting this company has been its 174.80 crore debt (as of Mar 2012).
This has translated into higher interest cost. For the nine months ended Dec
2012 the interest cost has increased to 18.91 crore from 7.57 crore for the
same period last year. Also the company is incurring almost 30% (109.82/337) as
fuel cost for manufacturing tiles. The interest cycle is taking a U-turn as can
be seen from RBI reducing the repo rates and if the company can take some steps
to reduce the debt and restructure the balance sheet by infusing fresh equity
the gearing ratio can be lowered which will help unlock the full potential of
the company. Recently (in February 2013) GAIL has completed 1000 km Dabhol-Bangalore
Gas Pipeline and if the company is able to get
gas from GAIL for their Hoskote (Karnataka), the company should
be able to reduce their fuel cost. We need to keep a watch on this front. Earlier
the company had plans to set up a tiles unit at Kakinada in East Godavari
district of Andhra Pradesh but the management has mentioned that they would be
going slow on this project. One way to reduce the debt can be selling off this
70 acre unit of land. The company has been paying dividend for last so many
years.
Investment
Rationale
Comparing to Kajaria Ceramics
(industry leader) which is available at PE of 14.67(TTM) and 5.09x book value
(as of 3th April 2013), Orient Bell is available at a PE of 6.87(TTM) and 0.62x
book value. If it turnarounds and is able to reduce the debt it will
command a higher PE multiple. If we check the market capitalization to sales
ratio across the ceramics sector this stock is the cheapest amongst all with the
ratio being .17 while Kajaria Ceramics which is the leader in this sector has a
ratio of almost 1. The company plans to achieve three-fold growth by 2015 and is
aiming at a turnover of 1500 crore. Their recent acquisition of Bell Ceramics
which has been reporting losses for last few years) and turning it around within
18 months is a classic example of professional and class management. Any change
in construction sector outlook will also add fire to this script. The promoters
have been mopping up shares even at current market price (Rs 70) which shows
their confidence. Orient Bell is now concentrating on value added premium
segment where competition is less from small players. So all in all it’s a good
buy at current level.