Asian Granito India

Promoted by Kamleshbhai Patel, Mukeshbhai Pate and Vinodbhai Patel, Asian Granito India manufactures vitrified tiles. The company currently has an installed capacity of 14,000 square meters(sq mt) per day and is second largest domestic producer of vitrified tiles controlling 10.57% of the installed capacity to produce domestic vitrified tiles. Asian Granito’s subsidiary, Asian Tiles, manufactures ceramic floor tiles. It has a capacity of 7,000 sq mt per day.

To modernise and expand its existing vitrified plant and set up a wall tile unit, Asian Granito is coming out with an initial public offering (IPO). For the proposed wall-tile plant and for future expansion requirement, the company has purchased 167,565 sq mt of agricultural land (at total cost of Rs 1.07 crore), of which 99,780 sq mt have been acquired from promoters. The average cost of acquisition of land from outsiders works out to Rs 35 per sq mt, while from promoters Rs 83 per sq mt, higher by 141%.

Strengths

• 2,000 sq mt per day of vitrified-tile capacity is likely to come on stream from October 2007.This will increase the vitrified-tile capacity to 16,000 sq mt per day. Production of vitrified tiles will be 4.51 million sq mt in the year ending March 2007 (FY 2007) and projected to be 5.2 million sq mt in FY 2008.

• The wall-tile unit is likely to come on stream in January 2008. Production is projected to be 0.68 million sq mt in FY 2008, 2.89 million sq mt in FY 2009 and 3.06 million sq mt in FY 2010. Realisation of wall tiles is currently about Rs 183 per sq mt.

• From 1 July 2007, China has reduced the export subsidy for producer of vitrified tiles to 3%, from 8% earlier. This is likely to improve competitiveness of domestic vitrified manufacturers compared with importers of vitrified tiles who have received antidumping exemption: Nitco and Kajaria. Imports of vitrified tiles have increased from Rs 11.66 crore in FY 2004 to Rs 66.95 crore in FY 2006.

Weaknesses

• Entering into the less attractive wall-tile segment. The realisation in wall tile is less than vitrified tiles on account of presence of many large unorganised players. Also the market size of wall tiles is much smaller than vitrified tiles.

• Over the past few years, realisation in tiles has not shown any significant improvement.

• About 50% of the revenue is from institutional clients compared with 70% earlier. Increase in proportion of retail sale is likely to increase marketing cost and reduce average realisation as institutional clients generally buy high-end products.

Valuation

Consolidated FY 2007 EPS on post-issue equity workout to Rs 10.9. At the offer price band of Rs 85 – Rs 102, the P/E range works out to 7.8-9.3, respectively. Even after the 58% rise in price in the last nine trading session, Murudesh Ceramic (larger player compared with Asian Granito) is trading at 8.9 times its FY 2007 earning. TTM P/E of the ceramics tiles industry is 9.23.

Asian Granito — IPO: Invest at cut-off

Investors can subscribe to the initial public offer of Asian Granito India, a maker of vitrified tiles. Invest with a two-year perspective to gain from earnings growth arising out of increased capacities.
Strong financials, a track record of quickly ramping up capacities, and presence in the fast growing vitrified tile business are the positives. The offer price of Rs 85-102 also appears attractive with a price earnings multiple of 5-6 times the company’s earnings for 2008-09, when all its planned capacities are likely to be fully operational.
The company’s market cap (at the offer price) is about Rs 200 crore; the small market cap may subject the stock to high volatility.Business
Asian Granito manufactures a range of vitrified tiles at different price levels. Vitrified tile offers an ideal substitute for high-cost marble and granite. It is also superior to ceramic tiles in that it is less porous and therefore absorbs less water. The company has a fully-owned subsidiary — Asian Tiles —which makes ceramic tiles, relatively low-end.
Asian Granito plans to raise Rs 60-70 crore through this IPO that will expand its share capital by 40 per cent. The proceeds are to be used to increase its vitrified tile capacity by 2,000 sq.m per day to 16,000 sq. m. per day, to be operational by October 2007.
The company also plans to set up a new capacity for wall tile manufacturing using imported Italian machinery. This unit is expected to go on stream by January 2008.Positives
Asian Granito enjoys 10.5 per cent of the organised vitrified tile capacity, according to the Indian Council of Ceramic Tiles and Sanitaryware. This share appears healthy, given that the vitrified tile market is fast growing and new players are entering the market, apart from Chinese imports.
The company’s range of products and its ability to offer tiles of various sizes are likely to provide it with a competitive edge in a market where the pricing pressure is likely to continue. The planned entry into the wall tiles segment also appears well-timed as there are not too many established players in this space.
This may provide the company an early mover advantage and derive superior realisation for a few years.
The company’s operating profit margins at about 24 per cent, though superior to a number of other tile companies, is less than leading players such as Murudeshwar Ceramics.
Superior realisation by the latter, as a result of better brand recognition and market share, appears to be the reason.
A smaller player such as Asian Granito may continue to face pressure on the realisation front; higher volumes in vitrified tiles post-expansion and possible superior realisation from wall tiles may provide some support to operating profit margins.
The company has enjoyed superior return on equity at over 30 per cent over the past three years. While the current equity expansion may dent this return in the short term, ramp-up in capacities is likely to get the returns back on track.
On the cost angle, the company’s facility is close to raw materials; it has moved to LNG (instead of LPG) over the past one year, thus reducing its power and fuel costs. Cost efficiency would also be key to buttressing margins.
Asian Granito appears to enjoy a pan-India presence as can be seen from the well-diversified geographical distribution of its revenues.
Increased competition from unorganised players and slump in real-estate leading to poor capacity utilisation are major risks for this tile maker.