Company Analysis - Orient Bell

About Company / Industry

Orient Bell is a 110 cr company in business of manufacturing and selling Ceramic, Vitrified, Ultra vitrified and Decorative tiles. In 2010 Orient Ceramics acquired Bell Ceramics and later merged it with itself. With this acquisition Orient’s production capacity increased to about 30 million square meter per annum with manufacturing facilities are located at Sikandrabad (UP), Dora (Gujarat) and Hoskote (Karnataka).

Company sells their products through dealers and retailers. Company is having a marketing network with about 2500 dealers, 9000 Retailers and 30 Stock points. Region wise contribution of sales is close to 41% from North India, 33% from South, 17 % from East and 9 % from West.

Company is selling its products under three different brands – Orient, Orient International and Bell. Out of these orient International is selling premium imported tiles from Italy, Spain, etc. Company owns a design studio in Castellon, Spain and design head is from Spain, based out in Sikundrabad / Head Office.

At the time of acquisition, Bell was making losses. Current management has turned it around and made profitable.

Indian Ceramics organized tiles market is around Rs.8000 Cr and Orient’s main competitors are Kajaria,. Somany Ceramics, Nitco (loss making unit and now under CDR), HR Johnson, etc. Orient is one of the largest player in this industry with a market share close to 12 -15 %.

Industry is cyclic in nature and characterized by high fuel cost, high competition and high working capital requirement.

Financials

Company has turnover of around 550 cr and market cap of 110 cr. Company has been able to grow at ~20% in last 5 years on the back of recent acquisition and capacity addition. Profit of around 2.2 cr in 2008 has increased to ~12 cr in FY 2012. They were able to maintain operating margins in the range of 12-15% in past, which has gone down to ~9% since acquisition of Bell.

Financials of Company has been very dynamic in recent years. In 2008-09 they tighten up the working capital and reduced debts. Due to acquisition of Bell and debt acquired with Bell – their debt level has gone up to more than 190 cr from earlier approx 100 cr, Inventory shoot up, receivable gone up, but overall impact on working capital is not huge compared to all these increases.

In case Company is able to manage the working capital and able to improve the operations efficiency - cash from operations should be enough for them to reduce the debt in next 2-3 years.

Some of the other options with management to re-pay the debt:

• By selling real estate at Kakinada, which was acquired for new plant and after takeover of Bell they do not have plan to develop that location in near future. 
• By issuing fresh equity. 

Positive

• Efficient management - Their recent acquisition of loss making Bell Ceramics turned it around within one and a half year proves their capabilities.
• They have excess land in existing plants to increase capacity and with current 65%-70% utilization of installed capacity, they do not need major capex in near future, while maintaining a growth of 15-20%.
• They have good dealer network on all India basis. Their design studio in Spain is taking care of good design and adding some innovations like ‘germ free’, high strength, etc.
• They are also carrying out trials to use the local clay for manufacturing to avoid transportation cost. I am not too sure if this will work out well – but it shows their good intention to run the operations as effecient as possible.
• Fuel cost consists about 35% of the production cost of Tiles manufacturing. On commissioning of Ratnagiri-Bangalore Gas pipeline in 2013, their Hoskote (Karnataka) plant should be able to get gas from GAIL. This will enable them to save fuel cost.
• Company is an uninterrupted dividend payer for past many years.
• 50 cr worth of accumulated tax losses in Bell will provide some tax comfort and help in paying debt.
• Promoters were buying shares from open market and their current share holding is around 75%.

Negative / Risks

• High debt (D/E>1)
• Cyclic nature of industry and depend on the infrastructure / housing
• Promoters investing in retail – no clear info on investment amount and going aggressive may result in loosing / blocking cash in below average returns.

Management

• Salary is being on higher side. Total salary for both father & son duo is around 10% of profit as per regulations. This is a bit negative. 2 times in 3 years, owner salary increased limit (10% of profit) – both year salary increased from previous years
• Resources allocation seems to be reasonably good
• Details in AR seem to be fine.
• Related party transactions – there are some transactions between Company and promoter companies, but nothing seems to be abnormal.
• Not sure why they have taken foreign currency loan of 14 cr and same time not sure why they purchased a Hong Kong based marketing company.

Valuation

Company is available at PE of 7.3 (TTM basis) and 0.6x book value.

Sales basis:

Comparing with Kajaria Ceramics: Kajaria is valued around 1.4 x turn over, while Orient Bell with a turnover close to Rs. 550 Cr is currently valued around 0.2 x turnover - market cap of Rs.125 Cr. This is 7 times difference in valuation on the basis of turnover multiple. This difference is mainly due to high debt of Orient Bell, brand value / lead position of Kajaria, risk associated with loss making acquisition and past performance record of Orient Bell. I expect this valuation gap to reduce a bit as Orient Bell start paying down debt and operations at ex-Bell unit stabilizes. Wide network of dealers is a moat for them and they should be able to utilize this to their advantage. 50 cr of accumulated tax losses are going to provide relief in taxes in future. Even if marker value Orient Bell to around half of current turnover in future, Company value should be more than double now. OR considering current market valuation (0.2x turnover) and with management target of 1500  cr turnover in next few years, Company should trade close to 300 cr or more than double from now.

DCF / Other method based:

With various valuation methods, considering lower range of past performance, Company should be valued at around 190-220 cr.

My 2 cents

Company seems to be under valued for investment with fair bit of risk attached to it. Company may continue to report quiet results for next few quarters before showing improvement.

What could be triggers to unlock the value of Company?

• Reduction in debt
• Growth in turn over and improvement in margin. This will indicate that operational efficiencies at Ex- Bell plant has been improved. 

Disclosures: I hold a small position to track the stock. Please note that this is not a recommendation to buy or sell. Please do your own check before investment.