Orient Bell Limited

Stock Opportunities
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This stock has a sales of 700+ cr and market cap of 440cr, PE of 12, EPS of 25 and book value of 130rs, ROCE of 16%, long term debt to equity ratio of 0.34 and relative valuation lesser than peers and from an industry perspective. I have seen Orient bell branding in many ceramic shops in Bangalore and in other places like Tier 2 city and small towns like Hassan/Sakleshpur respectively, looks like they are aggressively expanding. Would love to hear fellow members thoughts on this stock!

Any idea why the shareholding came down from 72% to 57% between Mar 17 to Sept 17?

Disc- Not invested, but started tracking

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Investor presentation put up. Interesting to see the quick repayment of debt and expenditure on brand building - 9 Cr is a one time cost for upgrading dealer boards. This has been very effective in creating awareness as others have mentioned in different cities and I have also seen in some 2nd tier cities.

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Promoter buying is happening on daily basis…It’s a positive sign

Further considering the cheapest valuation among comparable listed players despite having all india presence, it may create quick and furious wealth for its shareholders…

Matter of time…

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YES … Promoter + Porinju Adding regularly
though there is some time left for month ending
still attaching a monthly chart for Clear reference
views invited

orient bell
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In recent quarters,Orient Bell has been able to improve it’s operational parameters extremely well.Cash conversion cycle has continuously improved and is now at par with the industry leaders.Even after a negative pbt in H1,OBL was able to generate 26 cr. ocf.This trend has continued into H2 and company is now debt free.They conducted a concall recently.Some highlights:

-> Restarted one dormant line after a gap of 2-3 years.Undertaking spend of 10 cr. to debottleneck and increase capacity by a little.

-> Design efforts continue and company wants to position itself better in the premium category.

-> Margins lag industry leader because of lower scale of operations and adverse product mix.Ceramic tiles make for 60% of revenue vs. 40% for Kajaria.Company wants to bridge this gap in coming years.

-> In the short term higher fuel and higher freight costs could hurt margins.Management didn’t give any concrete number in this regard.Q4 is anyway more project heavy quarter so qoq margins could contract.

-> Expect to end FY21 at better revenue vs. FY20.Company is now net debt free and expects to maintain strong WC.However,if growth opportunity presents itself OBL won’t shy away from being more lenient to it’s dealers or running a higher inventory.

Management seemed quiet clear on the direction the company wants to take over the coming years.Barring a short term hiccup on operating margins the trajectory over next few years should be upward.At an EV of 330 cr. and a potential to generate 55-60 cr. kind of EBITDA the stock looks cheap to me.The promoters have also been hiking stake in recent quarters.Need to track whether they are able to manage the margin headwinds or if margins will crumble.

Disc.: Invested…views are biased.

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Orient Bell posted superb Q4 results.Company is debt free now with a cash balance of 50 cr+,working capital continues to be very strong(best in the industry) For Q4,company operated at around 87% capacity utilisation.Now that Somany,Kajaria have also reported earnings it’s interesting to note the outperformance of OBL:

Somany has reported 2% volume growth

Kajaria a de-growth of 3%

OBL 1% volume growth for FY21

The whole industry(according to various estimates) degrew in high single digits in FY21.Note that OBL has not compromised it’s WC in doing these numbers.In fact,their B/s is the best they have ever had.This has also been accompanied by margin expansion,mainly led by operating leverage.Going ahead company is contemplating an acquisition or a greenfield expansion.OBL at peak utilisation should be able to do ~850 cr. revenues,with double-digit margins.Stock still trades at an EV of 400 cr.

The short term issues of higher freight cost and lockdowns in Q1 will hurt but given the strong pricing discipline in the industry,players have been able to pass on all cost inflation.We should also see some market share gain for organised players post Q1.While the 8-9 year track record is pathetic,the new management that took over from 2019 has done remarkably well.Management was talking of it’s strong digital initiatives and that they are seeing good traction.OBL added 400 channel partners in FY21 and all these new partners have to undergo an exhaustive screening before being taken on-board.Company expects this partner addition trend to continue.The new team seems to have it’s basics right and if a small player like OBL reports volume growth in an extremely tough year like FY21 with b/s improvement,it speaks volumes about them.

An interesting recent launch: https://www.orientbell.com/tiles/Granalt

Disc.: Added more post Q4…views are biased.

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Orient Bell posted weakish results for Q1.Much of the weakness is attributable to the 2nd wave leading to closures of various stores & boutiques.Company has taken price hikes in-line with the industry.ASP has gone up 6% yoy,60% of this is due to price increases taken rest is genuine.A comparison with Somany,Kajaria:

Somany reported 330 cr revenue vs. 564 cr in Q4,down 40%

Kajaria reported 562 cr vs. 953 cr.,down 40%

OBL 87 cr. vs. 181 cr.,down over 50%

Mgt said Q1 revenue is ~64% of Q4,but they did worse this time due to the 2nd wave.Among the three,OBL was the only one to report a loss.Company has explained multiple times that margins are a function of scale.OBL has the least scale and thus their overall margins are lower,hence the knock when volumes are low is also higher.Company has guided for much higher ad spends.They refused to give any guidance but seemed confident of doing well in FY22.Somany expects the industry to grow at double-digits for the next 4-5 years.OBL’s investor presentation suggests that all lines are operating at 100% utilisation.Company’s b/s is extremely strong & they have the lowest outsourcing from Morbi vs. peers,this is going to change alongwith small capacity additions which will take their peak revenue to 11-1200 cr. on an yearly basis.A run-rate of 250 cr. will be the magic mark here but even at 200 cr. run rate they should be at double-digit margins.At an EV of 450 cr. & potential EBITDA of 100cr+,the stock remains a good bargain.How soon it will happen,or whether it will happen or not is contingent on a lot of factors.Execution is the key and management has it’s basics right.OBL has entered Maharashtra mkt recently & expects quarterly ramp-up there.

Disc.: Invested.Views are biased.

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Few questions Sagar.

  1. How are they going to increase thier topline. There is a serious competition.
  2. Look at Exxaro tiles ltd, they do a 18-20% EBITDA margins on 250 crores of topline. Maybe their ASP is on the higher side.
  3. What has been their past Capacity utilization and what is the industry average.

I’m trying to read and understand what others do. This looks interesting because I agree Kajaria and few of the other names are overvalued.

But should they do a volume business and make their presence felt in the market or sell more of premium tiles?

And if they are at 100% or close to 100% capacity utilization, what is their guidance for capex.

Cant find the conference call transcript. do you have?

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  1. No company sells their product(s) in a vacuum.All companies face competition,the better the market the higher the competition.

  2. Yes Exxaro is interesting since they are doing way better margins than OBL inspite of smaller revenues.Interestingly,their margins for FY21 are even better than Somany’s! One major reason could be higher share of vitrified tiles.Ceramic vs. vitrified tiles,vitrified has much better margins and that’s a key area for OBL to improve upon.Mgt has accepted the same and the mix should continue to improve in the coming years.Exxaro seems to be selling only vitrified tiles.In their pre-IPO call,Exxaro also stated that they were able to get good premium dealers in their early years and that the company has high level of integration in it’s mfg since all activities are done in-house,these factors would also be contributing positively to margins.

  3. Capacity utilization depends on how the industry is doing.So I don’t understand why average utilization rate matters.As of July though,OBL was operating at 100%.Somany would be around 90% and so would’ve been Kajaria.

All companies have taken price hikes to absorb higher gas & fuel costs,so ASP will move higher for OBL as well.I don’t think OBL will be garnering high revenues from their premium segment anytime soon.Other stuff I’ve answered above.

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OBL reported strong set of nos. for the 2nd quarter led by 22% volume growth & 6% value growth.Their investor ppt has excellent details:

The concall ended recently.Some highlights:

→ Continue to see robust demand,ASP is moving up on a monthly basis.30-35% of ASP improvement is on account of price increase rest is higher value tiles.

→ Some years back players at Morbi had got together and indulged in undercutting the market.Most of this was due to non-compliance with tax regulations resulting in lower cost.However,the situation is the polar opposite now & mgt doesn’t see organised players losing ground at all.See no risk of them coming back in the market even with export issues.

→ Company continues to have 90% own manufacturing+JVs,while only 10% is outsourced.The decision on this is taken based on the make of tiles being sold and in demand.

→ Feel Indian tile market is huge and don’t intend to diversify into ancillaries.Export market will fetch low margins if outsourced from Morbi and company has no intention to focus much on that market with own mfg.

→ Added 128 channel partners in Q2.Brand spends have gone up by 2x vs. last year.

→ Opened 23 new OBTBs,shut down 12 poorly performing ones.Thus,net addition of 11.Demand is strong leading to blistering pace of opening.

→ Company continues to improve cost efficiency but major delta in margins will come with higher topline.With current capacities,company can do 200 cr. kind of quarterly run-rate with own mfg.

→ H2 is always better than H1 and even Q2 is one of the leaner quarters.While management has given no concrete guidance,Q3/Q4 being strong quarters looks highly likely(ex- of Covid)

Overall,the management continues to execute well with focus on improving product mix and being cognizant of working capital.Given the scope to improve margins I feel stock looks very good here.8 cr. PAT in a lean quarter should only inch higher in coming quarters.At a marketcap of ~500 cr. and net cash B/S this continues to be one of the cheapest organized tile plays.In Q2,there was a lot of small,small promoter buying as well.

Disc.: Invested.Views are biased.

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any guidance for FY22/23? AND rising Input cost?

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No guidance,they never give any.

On input costs,everything is being passed on in-line with rising costs.

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Strong results from Orient Bell. H2 is better than H1 for the tile industry so can expect a 200 cr topline in Q4. In any case Kajaria has guided for 2x volumes in 5 years and OBL shouldn’t be far behind either. Most heartening to see margins expand qoq and yoy,that too in a quarter where even Kajaria faced margin issues.

feel the stock’s time has come.

Disc: Invested. Views are biased.

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OBL concall was a delight as usual,it’s great to hear such focus and commitment every quarter.Some highlights:

→ Vols grew 6% in Q3,saw a slowdown post Diwali which was contributed to some extent by fairly large price hikes.Company also let go of some project business due to weaker margins.

→ Co. decided to pass on RM inflation completely.In Q4 gas prices have been stable and thus no price hikes have been undertaken.

→ Covid is a short-term blip and see structurally good times for the industry.

→ Confident of maintaining Q3 margins and close the gap further vs. the larger peers.Company has enough margin levers.

→ Aggressive addition of channel partners continued in Q3,with addn of 112 partners.

→ Peak quarterly run rate post capex will be 250-300 cr.

After many quarters I got the sense that the management is more confident of margins than volumes.This is not to say that they will lose market share or anything.In fact,mgt has indicated that Q4>Q3.Personally feel markets will also be happier with a higher focus on improving margins than just on volumes.Lot of good details here:

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Thanks for capturing the concall highlights @sharemarketgen_ . Just want to add a key risk that the management talked about in the concall:

  • The tile players at Morbi are not able to export because of high freight rates. There’s a risk that they may play a “party pooper” and all this export supply gets into the domestic market causing a supply glut.

Also, if one listens to the Q3 concall of Kajaria Ceramics, the management also talks about the current volatile situation in Morbi. They mentioned the following:

  • A few players in Morbi took a few day shutdown as they were not able to export.
  • The price of gas supplied from GSPC has increased and GSPC is also insisting on a minimum 15 day supply contract. This is also causing production challenges for Morbi players.

Based on the above, I think that the situation in Morbi should also be one of the monitorables going forward. It may lead to following possibilities:

  • Some smaller players shutting down (positive for OBL)
  • Tile prices from Morbi further going up (positive for OBL)
  • Export players start selling in the domestic market (negative for OBL).

Would love to hear your thoughts on the above

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4-5 years back Morbi cluster had single-handedly disrupted the tile market causing the stock markets to take note.Kajaria,Somany et al had cracked more than 50% from their highs.However,today with the very high gas prices it’s next to impossible to sell without hiking prices.Somany,Kajaria,OBL have all taken price hikes to offset the gas price inflation.But with a thin brand equity I don’t see how Morbi players will be able to do the same.The earlier disruption was based on undercutting the existing competition,they can’t do that now.The fact that some cos. chose to shutdown for few weeks rather than sell in the domestic market is ample proof of the same.This is the reason org tile makers aren’t too worried.

The only risk for the sector imv is interest rates inching up far higher than prevailing rates,causing a tumble in housing demand and thus the demand for ancillaries.

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Thanks for your insights.
I agree that this time Morbi players may not be able to undercut the organized players, especially because of:

  • thin brand equity
  • organized players enjoying lower gas prices than Morbi because of longer term gas contracts

Something to still watch out for, nevertheless.
Attaching links to 2 recent articles on the current situation in Morbi:

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Some comments from a discussion with a morbi tile manufacturer.

  1. It’s not only the gas prices but container freight has made it difficult to export as of now. As and when things ease out they would focus on exports again. Therefore there was an influx of supply in the domestic space.

2 Earlier morbi players used to capture market share in the domestic space by either giving better working capital terms or margins with a lot of business in cash. Post GST/Covid a lot of the players have transitioned business models to an organized scale. Cash business is now 10-15% so they cannot undercut larger brands by a lot.

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Thanks @sharemarketgen_ for regular updates in thread and notes. RE upcycle if lasts for few years, which all signs and scuttlebutt shows, can make Orient grow many folds from here as well given small size and quality mgmt- small fish in big pond

Some additional Q3 concall notes from @sharemarketgen_ post.

  • Mgmt has a clear focus with what not to do - no exports as not a branded play, no margins dilutive growth stands out

  • Margin profile in ceramics is also attractive vis a vis vitrified

  • Interesting GTM strategy with focus on Digital tech to take on bigger players - which is delivering outcome - traffic 30X own website, good content coverage across social media, multiple mobile app assets etc - industry recognition

  • Leadership team,- MD has picked most of leadership from non Real estate background- a well thought out and out of the box approach- AGM he explained his rational as well. Results are here for all to see. Strategy being execution at scale( COO is mfg and RE operational guy , rest all non RE folks and solid credentials), more here

  • Desire to be recognized- efforts in concall, presentations and interaction is quite helpful to understand culture and strategy

  • Poinju Veliyath ( directly and PMS) has been invested - not key factor but does tells something, one can listen him in AGM call share his thoughts

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  • Valuations are fair,( post current ongoing capex at 250 cr Qtrly run rate can do annualized 1000 cr revenue and 120-130 Cr EBDITA - 6X EBDITA at current mkt cap is 700cr+ ), larger peers trade at 12-20X EBDITA

  • Insider - promoter buying regularly till Dec 21 ( sub 400 price)- small quantities

Invested on Q3 results with small allocation as RE ancillary basket , run up has been pretty swiftand steep post Q3 results

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