Orient Bell Limited

Stock Opportunities
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Thanks.As usual a comprehensive post.OBL has many margin levers and I feel that aspect is still underappreciated.Company has the least outsourcing vs. peers,scale is lower and operating leverage is yet to kick in. Q3 volume growth was only 6% so margin gain/protection has been due to complete RM pass through and thus better ASP.

Now that all peers have reported,time to see what transpired:

Somany- 5% volume growth,yoy margins down ~200 bps.

Kajaria- 14% volume growth,yoy margins down 500 bps.

OBL- 6% volume growth,yoy margins flat.

Inspite of being a smaller player,OBL was able to completely pass on higher costs without volumes falling off a cliff. Somany passed on 80-85%,not 100%.

So post Q3,Orient is clearly standing out.Management has been very level headed in all calls and hasn’t overpromised or been flashy.These guys have prepared the company for long term health.

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Would margins also be better yoy because of a better mix (lower outsourced sales, higher in-house high-value sales)? Only gas prices are high yoy, all other RM is still at normal prices. If the mix is better, then even if gas prices fall and Morbi (and eventually the larger players) start cutting domestic prices, Orient’s average realisation would broadly still hold and hence the margin’s could actually be better in the quarters ahead.

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Some RM imports at industry level from Ukraine, could explain recent price action, assuming Orient doesn’t import hence dont get impacted

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Gas prices rising isn’t good news for anyone in the industry.We saw how in Q3 vols got impacted due to price hikes.While it seems the current surge won’t last very long the short term impact seems to be getting discounted in the stocks.

Kajaria,Somany are both off by 30% from their ATH.

Orient has fallen the least,inspite of big outperformance(up 54% YTD)

While it was very hard to let go,at 900 cr marketcap I figured the upside is very limited.Even more so in the face of reducing valuations of the larger peers.If all is hunky dory again,gas prices fall to Q3 type levels and so on I think OBL can do 45-50 cr. PAT in FY23(not conservative estimates) So stock was 18-20x 1 year fwd.Post the fall Somany is at similar levels.Then on an absolute basis,there are many opps at <18-20x fwd.

Market seems to be voting in favour of OBL for now since they were the only ones to pass on 100% of their costs.However,if they do so then volumes will again take a knock.There was an interesting message floating around that Morbi cos. are looking at using Propane rather than LNG.But approvals,etc. will take a long time so it won’t be happening anytime soon.

Disc.: Reduced my holding significantly in the recent surge.

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49

Key levers for Orient to protect margins without disturbing demand

  • Alternative source energy- spot buying like they are doing from IEX( 10-15% savings)- signs of non conventional mgmt team - every company can do this but question is how many actually do it.
  • Keep utilization high - Q3 it was about 91%, as hinted in article they are seeing traction for Organized players and hence need stable prices, in other words protecting demand I.e. high utilization
  • Q3 mkt spend was quite elevated( per deck and call) - this is something they can tinker with in fragile times
  • Q3 was bit affected by Delhi construction bans, some corona lock downs - not an issue in this qtr - again should help on utilization

Yes the peers have corrected a lot from top narrowing valuations gap, difficult to explain opposite move by Orient in last month( delivery volume was low as well though volume was very high) , however at 100 cr EBDITA possibly next year at full capacities( including upcoming), they are at 7.5X EBDITA , strength in chart says something- good move for high allocation cases on some profit booking like @sharemarketgen_ called out, zooming out for few years when real estate cycle is just starting , meaningful journey hopefully ahead of us.

Infact this would be time to see if truly their biz model is differentiated, resilient and competitive or just another tile manufacturer.( relative to industry peers)

Invested - small allocation

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Company will probably end FY22 with revenues around 650-60 cr.At current margins,100 cr EBITDA means sales of ~1000 cr. in Fy23.Not impossible but unlikely.On the other hand,if they are able to use their margin levers and optimistically see a 100-200 bps margin expansion that would still imply revs of 850-900 cr. The current environment is pretty uncertain and to make any such estimates with conviction would be a folly.I agree that eventually with utilization of new capacities the potential EBITDA should be north of 100 cr but highly unlikely that this will happen in FY23 itself imho.

Buying from exchanges will help to some extent but there will still be a margin hit just lesser(assuming Kajaria Somany are not doing the same)

All said and done if one has a long enough horizon then certainly there is a lot of upside from these levels as well.I won’t mind re-entering post another double-digit cut from here.

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Thanks @sharemarketgen_ , though my holdings were small, it was a good experiment ( and associated learnings) on profit booking at higher levels and try out opportunistic re-entry as swings can be pretty wild on margins compression esp being microcap, expected in Q4 - industry wide issue.

Interesting that Promoter is buying from mkt at current prices, ESOP policy is fair to investors ( by not issuing at exorbitant discounts),

https://www.bseindia.com/xml-data/corpfiling/AttachLive/ED9D5635_DED7_4E7F_911F_2329F0AC344B_155428.pdf

450-480 range seems like a good support on charts, though microcaps not necessarily tend to follow technical patterns by book.

Plan to add in dips.

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Orient Bell posted very strong set of numbers for Q4. EBITDA margins were the biggest surprise,stock was rewarded with a 20% UC on good volumes today. Concall highlights:

→ added 365 channel partners in FY22.

→ Full year revenues don’t reflect the true potential since Q1 was adversely hit,still managed to do 30% revenue growth.

→ ASP growth of 11% and volume growth of 17% for the FY.70% of the rise in ASP was contributed by price hikes,rest was premiumization of sales volume.ASP is now Rs. 266/m2 vs. 239,Q4 was 276.

→ Morbi continues to struggle with high gas prices,lot of small players are facing WC issues.Company is open to inorganic opps if something comes up.

→ Company had started using propane in Q4 but now the price differential is almost nil.Gas & propane prices are at par.

→ Have been taking price hikes in-line with costs,the trend of cost inflation has continued in Q1 but have taken a 4-5% hike already.

→ Management doesn’t see any adverse impact of higher interest rates or higher prices.The total contribution of tiles in the cost of construction of a house is a meagre 1% nationally.Since last many years,tile prices were suppressed due to unorg sector being more prominent.This is normalizing now & higher prices maybe here to stay.

→ Seeing good traction on the website,traffic was up 3.3x yoy in March,2022

→ Expanding capacity by 15-18% via debottlenecking & putting up new lines. 42 cr capex will be funded by internal accruals. WC & cash flows remained strong in FY22.

Since other cos have reported,here’s a comparison of Q4 performance:

Kajaria- 2% vol growth,margins down 200 bps qoq

Somany- 4% vol de-growth,margins down 300 bps qoq

Orient Bell- 4% vol growth,margins up 200 bps qoq

For the 2nd quarter running not only has OBL outperformed on volume growth it has also clearly outperformed on margins. The gas situation is probably the worst that it can get and to be able to report a margin expansion is an amazing achievement. However,the management was very guarded on both margins and volumes. They didn’t even share peak revenue with expanded capacities,though it seems Q4 margins should be sustainable. Kajaria has guided for a volume growth of 15-20% in Fy23. Somany guiding for 20%+ volume growth.

seeing the recent trend OBL should be able to do atleast this much.

Disc.: Invested. Views are biased.

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Orient Bell Q4FY23 Concal Summary

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