La Opala RG - Aspirational consumer story


(Subash Nayak) #1

General Overview:-

  • Well known name in Indian organized crockery and undisputed leader in premium segment

  • Exporting to multiple country (export contribution ~ 20%, expected to rise to 30%)

  • Just completed capex at Sitarganj facility (Upto 100% increase in capacity), Has another piece of land (worth 20cr) for further expansion

  • Anti dumping duty on cheap Chinese and UAE product for next 5 year will going help La Opala

  • Planning to cater to new segement of supplying products to star hotels

  • Reducing debt level on each and every quarter (50% reduction in debt level in last 4 yrs)

  • Promoter buying shares at it’s lifetime high of 190

Number side Story:

  • Solid past growth record : 3Y sale @23%, 3Y Profit growth @78%, 3Y ROE @22%
  • Healthy divident payout of 18%
  • Expected EPS 15 for FY13, 20 for FY14
  • DE ratio .36 (reducing every year for last 3yr)

Conclusion:-

I had a talk with my wife, and she seems to have a high regard for La Opala RG. It seems these cookwares are present in both my house and my in-laws house :slight_smile: .

Past consistent growth, good ROE of 20+, reducing DE ratio, end of capex, expected 50% increase in export, good dividend payout, promoter increasing their stake by open market purchase at around CMP, Little bit of advantage because of govt policy, aspirational branded consumer story makes it a compelling stock to look at buy.

References:-

Disc: La Opala RG is at around 3% of my portfolio, planning to increase it to 7-8% level of my portfolio in a staggered manner


(Sunil Bakshi) #2

Hi Subash

La Opala is a compelling story. A question: What could be the reason for a big divergence in the revenue growth CAGR and profit Growth CAGR?

Thanks, Sunil


(Subash Nayak) #3

Interest expense has been almost flat between Mar'09 and Mar'12. Hence and Increase in Top line is directly adding to bottom line.

Narration Mar-09 Mar-10 Mar-11 Mar-12
Sales 62.17 74.87 95.96 114.96
Expenses 50.32 61.74 74.75 88.11
Operating Profit 11.85 13.13 21.21 26.85
Other Income 0.06 0.08 0.28 0.18
EBIDT 11.91 13.21 21.49 27.03
Depreciation 4.63 4.28 4.50 4.59
EBIT 7.28 8.93 16.99 22.44
Interest 4.13 4.05 2.68 4.07
Profit before tax 3.14 4.87 14.31 18.37
Tax 0.89 1.71 4.05 5.65
Net profit 0.81 2.77 9.32 12.60

(HG) #4

Hi Subhash,

This looks interesting. I could not find the 2012 Annual report. Do you have access to it?


(Atul Garg) #5

Some statistics about la opala

2012 2011 2010 2009 2008

Revenue

114.96

95.96

74.87

62.16

50.95

EBDIT

26.94

20.59

12.88

10.46

6.96

Depreciation

4.59

4.50

4.28

4.63

3.48

EBIT

22.35

16.09

8.60

5.83

3.48

Operating Margin

19.44

16.77

11.49

9.38

6.83

Fixed Assets

50.62

50.57

53.02

54.00

57.70

Working Capital

16.08

19.33

18.52

20.86

5.54

Total Capital Employed

66.70

69.90

71.54

74.86

63.24

Capital Turnover

1.72

1.37

1.05

0.83

0.81

EBIT/Total Capital Emp

33.51

23.02

12.02

7.79

5.50

RoCE (EBIT/Total Capital)(1-tax_rate)

23.46

16.11

8.41

5.45

3.85

Pros:

The company is constantly improving their operating margin and capital turnover thereby increasing the RoIC.

The market seems to be huge as every house hold needs these products. The market is currently highly un- organized and gradually there is a shift from unorganized to organized players.

Couple of Good Brands: Diva, Crystal, la-opala

Cons:

However the company seems to increase it sales without investing in the business (no increase in the capital employed), which is little concerning. Not sure how long this can continue. Need to better understand their current capacity utilization and plans for expansion ahead.

With little googling, I found the following information about table-ware industry from the link http://www.scribd.com/doc/55066764/72/E-1-Tableware-Industry-in-India

According to this link, the glass tableware market (where la operla operates is around 1200 cr in 2007-2008) and mainly consist of following

Dinnerware

Barware

Beverage ware.

Out of these dinnerware and beverage ware are growing at 20% pa, however that doesnât seem to show in the capital being put by la-opala. This aspect needs to be better understood.

Key growth Drivers:

Sustained demand from increasing middle class with increased disposable incomes.

Key risks:

Scalability of business (Managementâs capability / interest)

Raw material cost and competition is everywhere :)


(HG) #6

Congrats, Subhash - this one has bolted!!


(Subash Nayak) #7

Hi HG,

Nothing special from my side. As you see I have been tracking this from my old ROE, ROCE table days, because of its high ROE, and cheap valuation, and PN Vijaya has recommended this. Had a small holding at 100-110 level, sold out because of low conviction. As usual, this one started upmove few weeks after I sold it. Again encountered this is valuepick blog, and hence took a small position.

In last valuepickr meet (which had happened 18th last month), I had taken responsibility to research into it and post it in valuepickr, which I did after a delay of 2 weeks.

I don’t has much idea of why this sudden upmove in La Opala Counter. I actually hate it, as it won’t let me accumulate in a cheaper price points


(HG) #8

Yes - once it moves up, one does not feel like buying it. I’m in that boat now. After reading what you had posted (aspirational brand, middle class etc.), it reminded me of Cera. Even the ratios are quite comparable -

https://www.edelweiss.in/market/compfundcomp.aspx?co_code=4939,22648

Promoters buying at these levels reminds me of the Ajanta promoters who were buying left, right and center during its rise. Still debating whether to enter or wait. Bought Havell’s as a trading bet in the mean time.


(Rudra Chowdhury) #9

Hi Sunil,

A common-size matrix is usually very useful in finding the reasons for this divergence.

Narration
9-Mar 10-Mar 11-Mar 12-Mar
Sales 100% 100% 100% 100%
Expenses 81% 82% 78% 77%
Operating Profit 19% 18% 22% 23%
Other Income 0% 0% 0% 0%
EBIDT 19% 18% 22% 24%
Depreciation 7% 6% 5% 4%
EBIT 12% 12% 18% 20%
Interest 7% 5% 3% 4%
Profit before tax 5% 7% 15% 16%
Tax 1% 2% 4% 5%
Net profit 1% 4% 10% 11%

Clearly, we can see the profit growth CAGR is boosted by lowering expenses (as %age of sales), lower depreciation and lower interest outgo which are all flowing to the bottomline.


(HG) #10

another report to look at -

http://www.hbjcapital.com/2012/12/multibagger-stock-made-public-la-opala.html


(Subash Nayak) #11

Experience tells me that, there are a bunch of paid research house who blatantly copy stock reco from the value pick guy (with doing suitable filtering) and sell them as their pick. The valuepick guy had recommended this on Jan’11 @ a price of 66.

The negative side of valuepick is that he recommends way too many stocks in a month.

Link: http://www.hbjcapital.com/2012/12/multibagger-stock-made-public-la-opala.html


(Atul Garg) #12

Had a look at the blog mentioned by Subash and found following.

“Recently company completed a major capacity expansion program in its Sitarganj Factory ( upto 100 % increase in production capacity of this unit ) which will start to contribute from this financial year onwards”

Based on the above information, my concern regarding the growth is taken care of (Need to validate the information though). And the way they have reduced the debt in last couple of years speaks well of Management.

I have taken a starting position in la-opala.


(Atul Garg) #13

All in all la-opala seems to be a good story going forward.

what are the key negatives here… things that can go wrong…?


(Subash Nayak) #14

Today, while having a chat by phone with Vivekji, we stumbled upon this fact, that the story of La Opala has good amount of similarity with the story of Hawkins

  1. Same consumption story
  2. Same expansion story
  3. Similar supply side constrains
  4. consistent ROE > 20+

La Opala has added advantage of reducing Debt qtr by qtr basis, a cheap valuation, with known limitation of lower brand recognition, and lesser-size and fragmented Market.


(Rudra Chowdhury) #15

What is the reputation of Mr. Sushil Jhunjhunwala and Mr. Ajit Jhunjhunwala from Kolkata. Vivekji please help us :slight_smile:


(N Sood) #16

I wonder how many of us go looking to buy a La Opala crockery set ? We do go looking for a hawkins or a prestige cooker …so I think there is no comparison.IMHO, there’s just correlle and ‘others’ in this segment.

The Fevicol song would not be the same if it were Vamicol (or jivanjor :))) would it? you’d think the producer sold out to bhartias ! No offence - just kidding to keep a sense of humour among the serious stuff we discuss.

I did have a La Opala tea set in my house once - I got as diwali gift and was duly passed on as a diwali gift :wink:

Though not directly related, Borosil is still something that you go looking for ( and it sells at a pe of 6.5 )

Rest I think there is a lot of imported stuff to choose from and indians have a thing for nicely packed imported stuff selling at high prices in fancy stores ( choose your own MRP in these cases)

So i’d be careful getting in at this point.


(Atul Garg) #17

Thanks to Rudra and Nsood for bringing out some risks. That is the power of collaboration.

Risks:

  • Not a major brand:

    • I agree, La-opala is certainly not Hawkins/prestige. There is no debate on that.
  • Borosil selling very chip:

    • Borosil addresses altogether a different market. They are in the glass containers and not dinners sets specifically. If we have a look at their financials, it gives some idea why they are selling at that pe.
      • Increased capex will drive the OPM down:
    • Well that is true to some extent. How I look at this is if a company with increasing RoIC and 5 yrs Avg RoRC of 125% puts money in business that is good for business. Remember EP.
    • With the way they have handled debt in past does tell that management is very conservative & judicious relative to debt.
  • Limited size opportunity, Not a necessary product:

    • I think, it is other way round. There is a huge growth in opal ware/crystal ware.
    • Home consumption:
      • Bone China and opal ware as different markets, infact opalware is replacing Bone China (In urban homes) like CPVC replacing PVC.
      • Every home needs max of 2-3 cookers but needs a dinner set, a soup set, tea set, sweet-dish set. 4-5 sets easily.
      • Current phase of growth comes from urban homes, Rural can be next big thing.
    • PLC: On top of that I feel PLC for a opalware/glassware is much small compared to a pressure cooker further adding to sustained demand.
    • Gifting: opalware/glassware is the most common gift items being used. None of pressure cookers and bone china caters to this martet.
    • In case of Hotels and caterers, I think bone china is the lead because of the uniformity. They can not afford to have different designs in the cutlery. However if opalware can be modified to be plain and without any designs, this issue can be addressed. This will be another huge market.

Management Quality:

Yes, that is another point that needs to be addressed. I found an article old though (2010), that hints that Ajit and Sushil Jhunjunwala understand the industry and have steered the company really well so far.

http://articles.economictimes.indiatimes.com/2010-01-20/news/28408468_1_la-opala-rg-sushil-jhunjhunwala-ajit-jhunjhunwala

Having said, there are certain questions that need to be answered to develop better conviction

  • The capital structure of the company given the capex

  • More clarity on the market size and some ground work in terms of what sells in the market.

  • Mix of revenues from retail sale and Business sale (hotels)

  • Management quality

In comparison to other picks Atul Auto, Granuels and so on, well I am still grappling with differentiating one business from other in terms of allocation.

One thing to notice though, Atul Auto and Granuels both started in short term portfolio and are backed by extensive discussion.

And I have a feel that la-opala has a much wider and deeper market than Atul Auto.


(Vivek Gautam) #18

The promoters Jhunjhunwalas belong to a small place called Deoghar earlier in Bihar n now in Jharkhand. I checked up with a person who is from the same place on reputation of them. Seems with new generation Sushil taking over its a much better professionally manged company. The mere fact that the co flourished during jungle raj of Lalu in hinterland speaks volumes on the perseverance n FIB of the promoters. Now with new Uttarakahnd state of the art plant with all tax benefits n double capacity coming up the comics set to move into next orbits.

Coming to market size with aspiration levels of Indians going high usage of La Opala sets is bound to increase n as such the size is huge IMHO.

Further the co generates 20% of turnover from exports implies it can with stand competition from China in the international market.

Anti dumping duty is levied on Chinese imports.

Checked with lot of ladies almost everyone is well aware about the brand.

Corelle is definitely a better brand but meant for higher income group n elites.India with its 120 core population ,burgeoning middle class , rapid urbanisation , price sensitivity is an ideal market for La Opala.

Promoters seems to walk the talk which is a big positive. All ratios are good.several veteran investors have taken a position in it.

Market cap of 200 odd crores can surely multiply IMHO


(N Sood) #19

Well if you look at the past data, they took 7 years to double their sales from '03 to '10 from 33 to 74 cr and profits went nowhere. So I’d say these jhunjhunwalas were pretty laid back and something must have changed now.

Maybe it’s because of the new generation son taking over as Vivek mentions.

The other thing that changed is the anti dumping duty. "India has imposed anti-dumping duty on cheap imports of opal glassware from China and the United Arab Emirates for a period of five years.

The duty would be in the range of 41.6-110.17 per cent of the landed cost of consignments from China, while UAE-imported opal glassware would attract duty at 36.73 per cent of the cost.

Opal glassware is a milky white glass used in lighting fixtures and tableware.“The anti-dumping duty imposed shall be levied for a period of five years (unless revoked, superseded or amended earlier) from the date of imposition of the provisional anti-dumping duty, that is, August 9, 2011, and shall be payable in Indian currency,”

That should definitely have been the game changer and is the easiest way to kill competition! However, if there is any change of rule here, the correction will be steep. Companies dependent on import duties cannot be very good investments. I know these things can be amended anytime and you would not even come to know.

With the consumption theme being the flavour of the season who knows where this one might go. Does anyone even know what the heck is opalware? Does anyone care?

Just that I would be wary of running after the next prestige at such valuations. There are enough promising stories at cheaper valuations.


(Vivek Gautam) #20

How come La Opala is able to with stand competition from China as it exports nearly 20 % of its produce? With capacity now increasing the co is confident of increasing exports to 30%.

So dumping or no dumping co has invested a lot in brand and distribution setup which will help them . Anyway thanks to currency movements iports from China have become expensive n likely to remain the same.

One cannot deny that La Opala is a well established brand built over las 20 years which gives them pricing power .

Also the thump rule of a co of 15 years in existence will help them with new generation of promoters with FIB ready to take the co to next orbit.