La Opala RG Initiating Coverage Research Report By Nirmal Bang

Leader Creates the Market And Rules It

La Opala RG (LORL) ventured into the opalware segment in late 1980s, while its competitors entered this space only a few quarters ago. Just by sheer experience, we can be reasonably sure that LORL has a far better understanding of product manufacturing, channel-partners’ demands and consumers’ expectations.

In fact, we view the entry of new players as a positive signal for the industry and its future growth prospects. LORL is on the path to increase its total capacity by 71% to 36,000tpa by FY21E. All new capacity addition will be in the premium ‘Diva’ brand which should help improve margins. Economies of scale should also play its part.

With the buoyant and favourable consumer sentiment, we expect LORL to increase its revenues and EBITDA at 13.2% and 14.2% CAGR over FY18-FY21E. Our growth rate estimate is lower than Bloomberg consensus estimate and presents our base case scenario. LORL’s stock is already down 40% from its recent highs and offers a good entry point for medium/long-term investors. We initiate coverage on LORL with a Buy rating and a target price of Rs299, up 35% from the CMP.

LA OPALA RG LTD – FUND ACTION
UTI MUTUAL FUND Buys 15.50 lk shares @ Rs 225
DSP BLACKROCK MUTUAL FUND buys 22.71 lk shares @ Rs 225
STEADVIEW CAPITAL MAURITIUS sells 34.98 lk shares @ Rs 225
LTR FOCUS FUND sells 6 lk shares @ Rs 225
ABG CAPITAL sells 8.19 lk shares @ Rs 225

— SONAM MEHTA (@sonamcnbcawaaz) October 19, 2018

15% volume CAGR expected during FY18-FY21E:

In FY18, LORL achieved total production of 16,000tpa with an installed capacity of 21,000tpa (80% capacity utilisation). The recent 4,000tpa capacity additionin FY19 and further planned expansion should support 15% volume growth over FY18-FY21E. Over the same time, we expect the company to also improve its pricing which was down nearly 8%-10% because of Goods and Services Tax or GST benefit pass-through to consumers.

In total, we expect the company to increase revenues at 18% CAGR over FY19-FY21E. Following the change in accounting, FY19 reported revenues are not directly comparable with FY18. Also, because of GST benefit pass-through, product prices have already declined close to 10% YoY.

Front-runner to benefit from market shift:

Indian middle-class has traditionally relied on stainless steel tableware for daily use while ‘preserving’ the more expensive ceramic, melamine or glassware for ‘special occasions’ or for guests. This trend is now changing with rising income and as a result the size of the opportunity is huge.

According to LORL’s FY18 annual report and its management, currently India’s tableware market stands at close to Rs100bn. Of this, opalware accounts for close to 5%, while steel, bone china and melamine account for 60%, 31% and 9%, respectively. Thus, the shift from steel to opalware presents a huge opportunity for LORL which holds the No.1 position in the market with 48% revenue share and 43% installed capacity share.

Taking into account the ongoing capacity expansion at LORL (both Cello and Borosil have done expansion recently, but no new plans), it should hold over 52% installed capacity in the opalware industry in India by FY21E. Cello, with 18,250tpa capacity, holds 32% and Borosil (Larah Brand) with 14,600tpa holds 25% installed capacity share currently.

Other players like Corelle, RAK and Luminarc import the product. The recent entry of Cello and Borosil will give some competition to LORL, but will also help in expanding the market and create awareness for opalware products.