Orient Ceramics

The revival in demand for tiles with pick-up in real-estate activities, the company's growing retail presence and modest valuations are reasons for investing in the stock of Orient Ceramics and Industries.



Orient Ceramics is one of the leading players in the organised tile market in North and East India. The company's revenue has been growing at a compounded rate of 17 per cent annually over the last five years, against the industry's average of 15 per cent. In a largely unorganised market, Orient Ceramics may see its market share (currently at little over 3 per cent) go up over the next few years with its new high-end ceramic tile product — ‘Europa' — seeing strong response.

At the current market price of Rs 96, the stock trades at a price-earning multiple of 7 times, lower than its major competitor Kajaria Ceramics (12 times). Being a small-cap the stock is suitable only forinvestors with a high-risk profile willing to stay put for the medium term.

Growing business


Orient Ceramics makes and sells ceramic and vitrified tiles and has the capacity to produce 14.4 million square metres (msm) of tiles per annum compared with Kajaria Ceramics that produces 23.4 msm.

The uptick in realty projects, post the lull in 2008-09, the shift in consumer preference from mosaic to ceramic tiles and the rising replacement demand in the consumer market are driving sales for tile manufacturers.

Orient Ceramics' focus markets currently are the northern and eastern regions. The company has not yet fully explored the southern and western markets, which contribute to 60 per cent of tile sales in the country. To bridge this gap, Orient Ceramics is looking at putting up a manufacturing facility in a location that can serve both the western and southern markets. The company intends to spend Rs 100 crore on this; capex will be funded by a mix of debt and internal accruals. By 2011-12, the company expects to run a capacity of 19 msm.

Last December, the company launched two products Europa, a high-end ceramic tile variety, and Stiller, a wall highlighter. Thanks to the launches, the company's March-2010 quarter sales rose by a good 25 per cent (over last year). In the June-2010 quarter, sales was also up 11 per cent, Y-o-Y.

In FY-10, 12 per cent of the company's revenues came from projects business and the rest from retail sales. Orient Ceramics operates with close to 4,000 dealers across the country (inclusive of 900 exclusive dealers). This apart, the company also has stock depots in strategic locations for easy reach to the market. Towards increasing its retail presence, the company intends to add 100 more stores in the current year.

Improved margins

Almost 20 per cent of Orient Ceramics' total production cost is accounted by expenses on power and fuel. The company does not suffer major fluctuations in fuel cost, given its arrangement with GAIL to avail of gas at a price based on past five years' monthly average crude prices. Also, clay, the key input for manufacturing tiles, is sourced by the company from suppliers near its plant, thus saving on freight costs. At the PBIT level, the company's margin stood at 16 per cent in the June-2010 quarter, up from 9.5 per cent in FY-10, thanks to the product launches.

The company's net margin is around 9 per cent. As of end-March 2010, the company had an outstanding debt of Rs 63.81 crore, debt-to-equity was 1.03:1, and interest coverage ratio stood at four times. Recourse to additional debt for expansion, might lead to pressure on margins. The company's return on equity ratio was around 20 per cent (for FY-10), in-line with Kajaria Ceramics.

via BL