Asian Granito Research Reports By Edelweiss & Religare + Investors Presentation

Research report by Edelweiss

Beneficiary of GST + Product mix driving profitability

Asian Granito India (AGL) is the fourth largest tiles manufacturer in India, with ~33MSM capacity and accounts for ~8% of the organised tiles market. AGL produces ceramic wall & floor tiles and digital, polished/glazed vitrified tiles. It is also engaged in marble and quartz manufacturing with an annual installed capacity of 1.3MSM. The company has a wide range of tiles portfolio offering 1,200 plus designs across the INR 30 to INR 165 per sq ft price range. A vibrant product range, aggressively expanding distribution network, sustained capacity expansion and potential benefits of shift of market share to organised players are expected to aid AGL outperform peers. We estimate AGL to clock revenue/PAT CAGR of ~19%/45.7% over FY17‐19E, respectively, with healthy RoCE of ~20%. Initiate coverage with ‘BUY’ and target price of INR 640.

Ample catalysts to spur outperformance

AGL’s is expected to clock revenue CAGR of ~19% over FY17-19E primarily driven by increase in tiles sales volume CAGR by 16.7%, improvement in utilization, introduction of new products and increase in distribution reach to 5,500 sales points. AGL is targeting INR 2,000 cr sales over FY17- 21E. GST implementation is expected to lead to market share gains for organised players as Morbi players: a) may convert into organised players as it will be difficult to bypass GST; b) may shift focus to export markets to replace anti-dumping duty hit China, thus helping organised players like AGL gain domestic market share; or c) could outsource their facilities to organised players.

Ample levers to spur operating margin

We estimate AGL’s operating margin to catapult 180bps over FY17-19E on account of: (a) increased contribution of VAPs; (b) higher B2C sales (from 35% to 50%); c) lower gas prices; d) sharpening focus on branding; and e) expansion of dealers’ network— planning to add another 90; targeting 1,200 dealers by FY19. Ergo, we estimate the company’s EBITDA margin to jump to 13.4% by FY19E.

Outlook and valuations: On strong turf; initiate with ‘BUY’

The key drivers that will spur AGL’s surge are: 1) rising capacity; 2) focused vertical for value-added products; 3) aggressive launch of new products; 4) expanding network; and 5) demand recovery. These, we believe, will boost the company’s profitability in coming years, which is likely to lead to re-rating of valuation multiple. We initiate coverage on the stock with ‘BUY’ recommendation and target price of INR 640 based on 25x FY19E earnings (12% discount to Kajaria’s target multiple). The stock is currently trading at 24x/16x FY18E and FY19E earnings, respectively.

Research report by Religare

Multiple growth levers

Established in 2000, Asian Granito India Ltd. (AGIL) is the fourth largest ceramic company in India with a global footprint across 53 countries. AGIL manufactures and markets interior & infrastructure products like vitrified wall & floor tiles, porcelain, natural marble composite and quartz. It has 8 state of the art manufacturing units spread across Gujarat and has 196 exclusive showrooms across lndia.

• Investment rationale

• Given India’s consumption potential, demand from retail is expected to remain robust in the next few years. Thus, the management is focused on increasing the number of its exclusive outlets from 196 currently to 500 by FY21E. It is targeting revenue mix of 50:50 (retail:institutional) in the next 3-4 years from (35:65) currently.

• GST implementation will help the organized players, including AGIL, to gain market share in the coming years. To encourage domestic manufacturers, the government has imposed an anti-dumping duty between USD 0.79 per sq mt and USD 1.87 per sq mt on all vitrified tiles imported from China in April 2017 for a period of five years (valid till 2022), which is expected to provide some relief to domestic tile players.

• The management is planning to increase its capacity utilization to 85% in the next 3-4 years from 65% in FY17, while selectively outsourcing the production of non-value added tiles. It is focusing on going through JVs and outsourcing model to expand its tiles capacity, which will help it to create an asset light business structure.

• The market for quartz stone in India is estimated at around Rs. 450 cr, which is growing at ~30% every year. Further, the export market for quartz stone is huge and it is targeting exports to US, Canada, EU and other Middle East Asian countries. The management is targeting to triple its quartz revenue in the next 2-3 years.

• The proportion of revenues from value added products is expected to increase from ~35% to ~60-65% over the next 3-4 years. AGIL also benefitted from falling natural gas prices in the last 3 years and favorable long term gas supply contracts with some of the major gas suppliers, which we expect to continue in the coming years as well.

Outlook & Valuation

AGIL is well placed to reap the benefits of the favorable outlook for the tile and quartz industry. The management has an ambitious target of reaching Rs. 2,000 cr revenue by FY21E from Rs. 1,066 cr in FY17. Factors like rising disposable income, lower per capita consumption of tiles in India, pick up in real estate sector; rapid urbanization and improvement in rural economy augur well for the tile industry. The company has been launching new and latest products to increase its offerings and providing value addition to its customers. We expect it’s operational and profit margins to improve on back of better product mix, focus on B2C sales, higher capacity utilization and asset light JV expansion plan. We expect revenue and PAT to increase at CAGR of 16.3% and 32% respectively over FY17-20E. We recommend a Buy on the stock with a target price of Rs. 642.

Investors’ presentation