La Opala: In a sweet spot; Buy for 20% upside potential

SKP Research | Nov. 5, 2009, midnight

Investment Rationale


Topline to grow at a CAGR of ~24% over FY15-18E


- During Q3FY16, La Opala reported net sales of Rs 804.8 mn, registering growth of ~27% y-o-y basis and ~28% growth q-o-q basis, mainly on account of increasing demand from the growing mass affluent with higher disposable income, change in lifestyles, increasing rural incomes and nuclear families. The Company 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%.


- With full new capacity in place, Diva is expected to grow at robust CAGR of ~30% during FY15-18E, resulting into overall topline CAGR growth of ~24%.


Margins expected to stabilize:


- 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.


- With improving product mix i.e. high margin Diva contributing ~75% to the topline by FY18E, and better operating leverage, we expect EBIDTAM & PATM to stabilize at ~36% and ~25% respectively by FY18E.


Incremental capacity of brand ‘Diva’ got commissioned


- To meet the growing demand for premium tableware due to increased surplus for life style consumption in the hands of an aspiring mass affluent, La Opala has doubled capacity of Diva, at Sitargunj, from the current 8,000 MTPA to 16,000 MTPA.


- The additional capacity got commissioned recently on November 16, 2015 and has a potential to generate revenues of about Rs 1.5-1.6 bn at full capacity utilization.


Valuation:


- The expected recovery in the economy coupled with strong brand equity and distribution network, changing consumer preferences towards good quality and branded lifestyle products, increasing disposable income and nuclear families, augers well for the company.


- We have valued the stock on the basis of EV/EBIDTA - of 26x of FY18E EBIDTA and recommend ‘BUY’ on the stock with a target price of Rs 734 (20%) in 18 months.

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