Look behind the shine
Sourcing from China is not a sustainable USP
Nitco Tiles provides flooring solutions. Its range of tiles is at various price points. The company’s products include mosaic tiles, ceramic floor tiles, vitrified tiles, paving tiles and imported marbles. It currently has an installed capacity of 0.8 million sq meters of mosaic tiles and 4.03 million sq meters of ceramic tiles.
Even while other manufacturers of vitrified tiles were fighting to block imports from China, Nitco went ahead and tied up for sourcing 15 lakh sq meters of vitrified tiles from a Chinese manufacturer. In fact, this is the main USP of the company. Imports of vitrified tiles from China attract a preferential import rate of 6.45%, without anti-dumping duty. As a result, Nitco derives an EBIDTA margin of 18% compared to 13% for tiles manufactured by the company in India.
Nitco has a distribution network of 550 direct dealers and about 5,000 outlets across India for retail sales. Its ratio of institutional to retail sales is 1:1.
The proceeds from the current issue are to be utilised to (a) expand the existing ceramic floor tiles capacity by 2.28 million sq. meters. to 6.31 million sq. meters by June 2006, (b) acquire/ set up a wall-tile capacity of 1.75 million sq. meters by April 2007, (c) install six wind mills to be completed by March 2006. The assessed funds requirement is Rs 95 crore, but the company is raising Rs 140 to Rs 168 crore.
Strengths
Increased thrust on housing and retailing augurs well for the tiles sector.
Weaknesses
- The sector is dominated by the unorganised sector due to the easy availability of raw materials and low capex.
- Nitco Tiles’s sourcing advantage is not a sustainable advantage and other players are likely to catch up in some way or the other. Or the government may plug the loophole, which is helping the company avoid the anti-dumping duty.
- With additional capacities planned by industry players, prices of tiles are expected to decline. Increased imports from China are directly or indirectly affecting prices.
- Nitco Tiles is not as strong as competitors in the retail segment.
- There was a negative cash flow from operating activities in FY 2005 on increased inventory due to the build-up of imported tiles from China.
Valuation
Unlike other players, Nitco Tiles’s manufacturing sales is very small. Traded (mainly sourced form China) sales accounted for 65% of total sales in the first-half of FY 2006.
In FY 2005, manufactured sales fell 3% to Rs 97.22 crore and traded sales shot up 63% to Rs 105.13 crore. These traded sales are driving the company’s financials.
With a price band of Rs 140 – 168, Nitco Tiles’s PE on FY 2005 EPS ( post-issue equity) works out to 41.4 – 49.7 times and 16.7 – 20.1 times H1 FY 2006 annualised earning on the post-issue equity.. Comparable players like Kajaria Ceramics trade at a TTM PE of 11: Murudeshwar gets a multiple of 8.