LA OPALA RG LTD : A CLASSIQUE !!!

Scrip Code: 526947 / LAOPALA

CMP:  Rs. 577.90 ;   Market Cap: Rs. 3,207.35 Cr; 52 Week High/Low: Rs. 670 / Rs. 313.60.

Total Shares: 5,55,00,000 shares; Promoters : 3,60,87,500 shares – 65.02 %; Total Public holding : 1,94,12,500 shares – 34.98 %; Book Value: Rs. 41.41; Face Value: Rs. 2.00; EPS: Rs. 9.94; Dividend: 65.00 %; P/E: 58.17 times; Ind. P/E: 47.45; EV/EBITDA: 84.65 times.

Total Debt: Rs. 7.86 Cr; Enterprise Value: Rs. 3,214.80 Cr.

LA OPALA RG LIMITED: La Opala RG Limited was founded in 1987 and is headquartered in Kolkata, India. La Opala RG Limited manufactures, sells, and exports lifestyle products in India and internationally. The company offers opal glass tableware products, such as plates, bowls, dinner sets, cup-saucer sets, coffee mugs, coffee cups, tea sets, soup sets, pudding, and dessert sets; and crystal-ware products comprising barware, vases, bowls, and stemware. It provides its products under La Opala, Diva, and Solitaire brands. The company had declared splits in face value of its shares from Rs. 10 to Rs. 2 in May 2014 and gave bonus of 1:1 in March 1994 and again 1:1 bonus in August 2006. Company manufacture’s glass and glassware products like plates, bowls, dinner sets, cup-saucer sets, coffee mugs, coffee cups, tea sets, soup sets, pudding and dessert sets; its crystal ware products comprises of barware, vases, bowls and stemware. Company’s brands include LaOpala, Diva, and Solitaire. The company’s manufacturing facilities are in Madhupur (Jharkhand) and Sitarganj (Uttarakhand). In 1999, Radha Glass and La Opala merged to become La Opala RG Limited. The Company is one of the largest organised crockery players in India with an installed capacity 13,000 MT TPA as on 31 March 2014. LaOpala, currently exports its brands to more than 40 countries which includes US, UK, Singapore, South Korea, Australia, New Zealand and Spain as well as the Middle East, Africa, Latin America and the ASEAN region. La Opala Rg Ltd is locally compared with Asahi India, Hindustan National Glass Ltd, Borosil Glass, Saint-Gobain Ltd, Gujarat Borosil, Haldyn Glass, Nile Ltd, Swiss Glascoat, Sezal Glass, Triveni Glass, FGP Ltd, Jai Mata Glass and globally compared with Industrial Glass & Mirror Inc of USA, Bassett Furniture Inds of Virginia, Beazer Homes Usa Inc of USA, Cavco Industries Inc of USA.

Investment Rationale:

La Opala RG Limited is the largest glassware manufacturer in India. The Company is engaged in manufacturing and marketing of opal glass tableware and crystal-ware products within and outside India. In 1999, Radha Glass and La Opala got merged and become La Opala RG Limited. The company mainly manufactures glass and glass products of all types and exports its 85 % of crystal ware around the world. La Opala RG Ltd has a network of 125 distributors with 10,000 dealers across country and the number is increasing at the rate of 15 per cent annually. Company also exports 10 % of its opal ware production to 20 countries. La Opala has a grand 70 years of experience & has a strong presence in the national glass industry in India. La Opala products are widely distributed in all major towns of the country through a network of distributors and sales representatives covering all states of India. There are about 10,000 retail touch points through which the products of La Opala are sold. La Opala deals in Opal-ware and Crystal-ware products and has a strong product portfolio that spans over 100 products. La Opala is one of the established brands in the country. The company has brands that cater to all the sections of the society. For example, ‘Diva’ is the high end brand of the company and contributes around 40 % to the company’s turnover. Apart from ‘Diva’, the company has brands like ‘Crystal’ which caters to the upper segment and ‘La Opala’ which is targeted towards the mass market. Till the early eighties, kitchenware in the average Indian home would constitute primarily copper, aluminium and stainless steel utensils; cutleries in the form of tea-cups, saucers and spoons; cookware of aluminium; plastic bottles to store spices, sugar, salt and edible oil. The only sophisticated gadgetry was perhaps the pressure cooker. Gradual changes were seen with stainless steel utensils replacing copper and aluminium. Then microwave made a grand entry in a number of kitchens in mid-90s, and then, the newer kinds of utensils and storage vessels started forming a vital part of the Indian kitchen. Indian kitchens and kitchenware are now evolving from being purely functional to convenient and fashion driven. This gradual shift in lifestyle brought changes in the cooking and eating habits of the Indian consumer. Convenience has now become an important factor for selecting kitchenware and now there is more emphasis on aesthetics, novelty and style. Kitchen utensils like pots and frying pans, woks, saucepans, pressure cookers and glass items such as heat resistant casseroles and vitro-ceramic pans also form part of the products found in the cookware sub-segment. A third group of items such as plates, bowls, serving dishes, dinner sets, serving ware placemats and coasters form the tableware and crockery market sub-segment. Then there are cutlery items like cutting tools and instruments, knives forks and spoons, etc. and glassware items like tumblers, stemware, bottles, and jugs. Global Sources classifies Indian houseware suppliers into four categories- household supplies, kitchenware, pet supplies and tableware. Kitchenware, in turn, is segmented further into bake-ware & cookware, kitchen accessories and kitchen storage. The market can be classified in several ways with ceramic, china and porcelain, metal-ware, plastic-ware and wood-ware being the major sub-segments. As is evident, there is a considerable overlap between these different product sub segments. The cookware segment dominates the Indian house-ware market and with significant growth in rural incomes there is an inspiring shift in lifestyles from traditional bone china crockery to modern alternatives. This is expected to plug the extensive crockery-ware which is under-penetrated with a 24 % share in India’s total dinner set market. India is possibly the largest relatively under-explored tableware market in the world. There is a visible transition from conventional crockery to modern equivalents on the one hand and the use of unbranded to branded products on the other. The use of opal glassware products has gone a transition, from special occasions in the past to everyday use today. The opal glassware product is considered more durable compared to its bone china equivalent. The opal glassware product is completely hygienic and vegan, an advantage over its bone china competition that contains animal matter. There has been a steady growth in urbanisation and nuclear families, catalysing tableware consumption. The entry of international brands is helping widen the opal glassware market and enhance category visibility. In India, more than 90 % of sales in this segment happen through traditional channels but now modern retail methods & direct sales method are gaining popularity and also online retailers are fastly increasing their market share. Kitchenware market in India is still very much driven by purely functional requirements and there is a huge scope for market expansion. It is a very niche market today and features mostly imported brands. The future trends are likely to remain focussed around products and retail formats. In terms of product range, non-stick cookware, healthy eating, wider range of cutlery and storage containers are some of the areas where we should see interesting developments in the near future. On the health concerns, there is an increasing growth seen in utensils that can be used to cook food without the use of oil and the fact that for effective storage of different food items, a special set of containers is required is again a trend, which is just being explored in India. La Opala is prepared for the next phase of growth by brown field expansion at its Sitargunj unit with an additional capacity of 8000 MTPA and has started operations in November 2015. This will increase the capacity from 8000 MTPA to 16,000 MTPA creating enough room to scale the mid premium brand ‘Diva’, rapidly in the years to come. In FY14, the company modernised its Madhupur plant and successfully replaced fuel fire furnace by electric arc furnace thereby improving operating efficiency. In the anticipation of increasing capacity, the company has been steadily investing in the distribution channels over the years and currently its retail points stand at about 11,500-12,500. The company funded this expansion plan by offering private placement to the tune of Rs. 55.3 Cr in FY15 avoiding the possible leverage on the balance sheet and hence without increasing any related interest outflow. To widen its product portfolio, the company introduced a new range of borosilicate cookware products in FY15 sourced from the Europe, diversifying the products offered. The management is committed to focus on the brand creation by continuous investing in the advertisement spends leading to the increased brand visibility among the potential consumers. La Opala’s revenue tripled in six year from Rs. 75 Cr in FY10 to Rs. 223.3 Cr in FY15, witnessing a 24 % CAGR growth. The company is mulling to launch new brands and will increase its ad spends which will help company to make its presence across the market. LA OPALA RG is looking at product extension and plans to sell products like water glasses, juice glasses, and Wine glasses and also bake and serve products. It will outsource the manufacture of these products and leverage on brand equity of La Opala apart from its distribution reach. This will significantly improve revenue and RoCE of LaOpala. Currently, the company caters to four different price segments - La Opala catering to the economic segment, Diva Classic, Diva Ivory and Diva Designer Collection catering to basic, medium and premium segments, respectively. Diva Classic enjoys a 35 % premium to La Opala, Diva Ivory enjoys around 15 % premium to Diva Classic and Diva Designer Collection enjoys a premium of 15 % to Diva Ivory. The current ad spends stands at about Rs. 35 Cr. It also got benefited by government’s imposition of anti-dumping duty in 2011 on cheap Chinese crockery imports. Increased capacity, new product launches and increase in the disposable income would propel the growth of LA Opala Rg and has greater prospects ahead.

Outlook and Valuation:

La Opala RG Ltd (La Opala) promoted by Mr. Sushil Jhunjhunwala and Mr. Ajit Jhunjhunwala, is engaged in manufacturing of Opalware and Crystalware products. La Opala started manufacturing Crystalware in March 1999, sourcing the exclusive right to use the technical know-how, information, data for the manufacture and sale of Crystalware in India and abroad from Doosan Glass of South Korea, a leading manufacturer of Crystalware globally. Headquartered in Kolkata, La Opala has manufacturing units in Madhupur (Jharkhand) and Sitarganj (Uttarakhand). La Opala RG Ltd has market share of 24 % in crystalware products. It offers opal glass tableware products such as plates, bowls, dinner sets, cup-saucer sets, coffee mugs, coffee cups, tea sets, soup sets, pudding and dessert sets as well as crystal-ware products comprising barware, vases, bowls and stemware under various brand names like Diva, La Opala and Soliatre Crystal. The company has also introduced the heat-resistant borosilicate range of cookware during the last fiscal year. It has two manufacturing facilities located at Madhupur, Jharkhand and Sitargunj, Uttarakhand with a combined capacity of 13,000 MTPA and has installed additional 8,000 MTPA capacity at its Sitargunj unit increasing the total capacity to 21,000 MTPA. The company is consciously building the brand and has celebrity endorsements from actor Bipasha Basu and fashion designer Manish Malhotra. Company have launched Opalware Cup-Saucer range and its commercial production has started at its Sitarganj plant from November 2015. The product was launched on 1 February 2016 under Diva brand. It is 25 % to 30 % more expensive than La Opala brand and the product has already been placed on important counters. The management believes that it won’t cannibalise La Opala brand as it has different price points. La Opala RG Ltd has launched a new category of ‘cook-n-serve’ product. The product is imported from Europe. The company has kick-started marketing campaign for the product. The gross margin of the product will be on the higher side as no overhead costs are involved. The product will be marketed under La Opala brand. La Opala RG Ltd has increased the number of distributors from 150 a few quarters ago to 170 currently. Headcount also increased because of the rise in Capacity, thereby driving up employee costs. Currently, combined capacity utilisation of its Sitarganj and Madhupur plants is 85 %. The new facility will be operating at full capacity and therefore there will be a rise in inventory level, which will be absorbed once traction occurs in Cup-saucer segment. As a major portion of the expansion is complete and there is no major expansion plan for FY17, the management believes that there will be only routine maintenance capex. It is also looking for inorganic growth via acquisition, if anything good comes by. Currently, exports account for 14 % to 15 % of sales, mainly because domestic volume has picked up significantly. The Middle East, Asia, Africa and Latin America are key areas where LORL is looking to export its new launched cup–saucer range. Export margins are 5 % to 10 % lower compared to domestic business. Modern retail currently accounts for 12 % to 13 % of sales. The Contribution of e-commerce is not significant currently. As per the management, Chinese products are priced 10 % to 15 % cheaper, domestic Indian products are priced 25 % cheaper while European products are priced 15 % to 20 % higher than LORL products. As per the management, Tier 2 and 3 cities are growing at a faster pace than metros and are good potential markets in Future. On financial side, during the period between FY11-15, the company sales witnessed a growth of 23 % CAGR, while in the same period its EBITDA grew at 33 % CAGR. This performance was due to two reasons, the company’s sales growth which was mainly from the volume growth of 14 % CAGR with the modern manufacturing facilities and increased realisation per unit at 9 % CAGR reflecting the pricing power enjoyed by the company. While on the expense side raw material witnessed a growth of 14 %, power cost grew at 11 % mainly on account of installation of cost efficient modern electric arc furnace at Sitargunj unit. Company will continue with the robust performance as the company have ramped up its capacity at Sitargunj helping the company to scale in terms of volumes of brand ‘Diva’ and also it enjoys certain pricing power in the market. Replacement of fuel furnace by electric arc furnace at madhupur plant in FY14 helped the company to better control the power cost, hence expanded its operating margins and will continue for coming years also. During Q3FY16, La Opala reported net sales of Rs. 80.48 Cr registering growth of 27 % y-o-y basis and 28 % growth q-o-q basis, its sales grew by 21 % during 9MFY16. Diva brand contributed 70 % to the total revenues during the quarter, followed by La Opala at 20 % and Solitaire at 10 %. EBIDTA Margins have improved significantly to 36 % during the quarter vis-à-vis 32.9 % in corresponding quarter last year and PAT margins have improved from 22 % to 25.1 % during the same period. Improvement in margins is on account of better product mix, reduction in raw material & fuel cost and better operating leverage. The Company enjoyed EBIDTA margin of 33.8 % during 9MFY16. The company is well positioned itself to gain the benefits from increased urbanisation, rising disposable income, improving lifestyles and home ownership. Rising urbanisation will significantly expand the market for the company’s products and also with rising disposable income leading to the higher discretionary spending would translate into increased spending on tableware products, hence benefiting the company. Improving lifestyle would induce people from traditional tableware such as stainless steel and melamine towards branded and premium products such as opalware and crystalware. These augers well for the company. At the current market price of Rs. 577.90, the stock is trading at a PE of 50.69 x FY16E and 38.52 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 11.40 in FY16E and Rs. 15.00 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	223.33	270.78	344.17	428.17
NET PROFIT (₹ Cr)	41.74	63.05	83.15	108.17
EPS (₹)	7.50	11.40	15.00	19.50
PE (x)	81.20	53.80	40.80	31.30
P/BV (x)	18.30	14.30	11.00	8.40
EV/EBITDA (x)	51.50	36.60	27.50	21.60
ROE (%)	22.50	26.50	27.00	26.90
ROCE (%)	28.80	33.30	34.20	34.30

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