Adding To The Status Symbol

There is a radical change in the attitude of consumer behaviour in India, riding on the back of higher disposable income, changing lifestyle, urbanisation of semi-urban and rural communities, more push towards aesthetics, increasing consumer awareness, and innovative promotional campaigns. Nowadays Indian consumers are also much more optimistic and increasingly willing to spend on branded products. With the changing pattern of consumer behaviour and consumer spending, companies in India are also tweaking their strategies to retain their loyal consumer base, while attracting the emerging young consumers. La Opala is one such company which has truly captured the mind of Indian consumers in glass tableware category, which we feel is niche retail space.

La Opala offers opal glass tableware products such as plates, bowls, dinner sets, cup-saucer sets, coffee mugs, coffee cups, tea sets, soup sets, pudding, and dessert sets as well as crystal ware products comprising barware, vases, bowls, and stemware under various brand names like Diva, La Opala and Soliatre Crystal. La Opala introduced opal glass tableware in 1988, under the La Opala brand and extended its brands to La Opala, Diva, and Solitaire Crystal. It successfully exported to more than 40 countries, including the US, UK, Singapore, South Korea, Australia, New Zealand and Spain as well as the Middle East, Africa, Latin America and the ASEAN region.

With rapid urbanization, the business has grown by leaps and bounds and being a market leader La Opala has grabbed the opportunity with both hands. Investors were quick to reckon the same and no wonder the stock has been witnessing a smart upward movement. Now as the scrip has captured the attention of investors, we provide here a detailed analysis of the company. We also had a discussion with Ajit Jhunjhunwala, Joint MD, La Opala RG to understand the business in a better way.

SUSTAINING THE FIRST MOVER ADVANTAGE

La Opala became the first Indian company to bring opal ware to India in 1988, and has changed the perception of kitchen tableware by redefining the product design, features and aesthetics. The Indian opal ware industry is currently around Rs.  350 crore of the approximately Rs.  1000 crore Indian glass tableware industry. Being the first entrant, La Opala took an early mover advantage and consolidated its leadership position in the opal ware segment with over 45 per cent market share. If we talk about competition, Corelle is the second-largest player in the opal ware market with sales of around Rs.  60 crore, followed by RAK and Luminarc, among others.

La Opala enjoys a strong position on the back of its brands La Opala and Diva which have a strong recall among consumers. The company’s turnover has surged from a mere Rs.  78 crore in FY10 to Rs.  178 crore in FY14, implying a CAGR of 23 per cent. We expect La Opala to maintain its market leadership and register around 25 per cent YoY growth in the opal ware market over the next 3-4 years.

BRAND BUILDING AND STRONG DISTRIBUTION NETWORK

Over the last five years, La Opala has continued to invest aggressively in brand building and product awareness with cumulative of Rs.  51.30 crore or 8 per cent of average annual sales. Higher spending on marketing, promotion and branding enable the company to compete against international players and has helped it to become a leading crockery brand in India. Going forward, the company would maintain the advertising spend at around 10 per cent of sales in advertising and brand building over the next few years. We feel the strategy has paid off well in the past and would be successful going ahead also. Another factor driving the company’s growth has been its wide distribution network of 135 distributors leading to around 10,000 retail points across more than 500 towns’ pan-India.

The management is increasing the distribution network by 15-20 distributors every year. Compared to its competitors, La Opala is far ahead not only in terms of the number of distributors but also in terms of the towns covered, thus giving the company an edge. We feel it would be difficult for a new entrant to create such a network in the near term. The products are also supplied directly through leading retailers such as Pantaloons, Big Bazaar, Hypercity, Spencers, Reliance Lifestyle, etc. Sales through modern retail chains constitute 20 per cent of its revenue.

DOUBLING THE CAPACITY OF DIVA

As a part of its strategy, La Opala continues to focus on its premium Diva brand and has streamlined operations at its Uttaranchal plant for better capacity utilisation. To take advantage of the robustness in the premium category, it has further doubled its capacity from 8000 MT to 16000 MT with a capex of Rs.  60 crore funded through internal accrual and also, the company is raising Rs.  55 crore by issuing around 5 lakh equity (4.53 per cent stake) shares at price of Rs.  1100/share on preferential basis to WestBridge Crossover Fund. The additional capacity will come into operation by Q1FY16. As per the management, the additional capacity will generate revenue of Rs.  150-170 crore at full capacity utilisation. In FY14, capacity utilisation at its Jharkhand plant was 95 per cent while it was 80-85 per cent at plant in Uttaranchal. After four years of successful brand building for the Diva range of products, the company incurred capex of around Rs.  23 crore for capacity expansion from 4000 MT to 8000 MT in FY13.

IMPROVING THE PRODUCT MIX

Over the last three years, the Diva brand’s revenue share has increased from around 30 per cent in FY12 to 60 per cent in FY14 due to capacity expansion solely in the premium product category. During the same period, La Opala’s brand revenue share became the reverse of its Diva brand. Therefore, over the last four years, the company has posted resilient margin performance with EBITDA margins soaring from 16.43 per cent in FY10 to 28.53 per cent in FY14. Savings in the cost of power is another factor to have led to an improvement in the EBITDA margin through conversion of both the plants from oil-based furnace to electric furnace. Over the next few years, the company is likely to increase the proportion of Diva to 75-80 per cent of the total sales by FY17. This will help to increase the company’s EBITDA margins by around 150 bps.

BENEFITS OF ANTI-DUMPING DUTY

La Opala smartly grabbed the opportunity available through anti-dumping duty on cheap imports of opal glassware from China and UAE for a period of five years from December 2011. The duty is in the range of 41.6-110.17 per cent of the landed cost of consignments from China while UAE imported opal glassware attracts duty at 36.73 per cent of the cost. La Opala will enjoy this advantage for the next two years. If at all the government lift s the antidumping duty, the company is all set to face competition from branded as well as unbranded products. This is due to the fact that consumers are now more willing to spend on branded and quality products. The advantage that La Opala has is its affordable pricing along with high product quality and good dealer commission.

STRONG FREE CASH FLOWS DESPITE HIGH CAPEX

Over the past four years La Opala has continued to deliver strong free cash flows on the back of marginal capex as most of the expansion has been brownfield. Th e rise in net cash flows from an operation to generate sufficient funds to grow the business and to de-leverage the balancesheet. The company has further doubled its capacity from 8000 MT to 16000 MT with capex of Rs.  60 crore which will be recovered in three years.

VALUATION

Going ahead, we believe that the company’s strong brand, wide distribution network, strategy to introduce new products and designs, capacity expansion and increased demand will lead to strong growth in topline and as well as bottomline. Th e proof of the pudding lies in its cash generation ability alongside scalability of the brand with a de-leveraging of the balance-sheet. Our key readings on La Opala are as follows: (1) Earnings are expected to grow at 25 per cent CAGR over FY14-16, (2) Strong free cash flows generation despite high capex, (3) Robust profitability in business with EBITDA margins around 30 per cent and net margins of more than 16 per cent (4) High profitability combined with robust ROCE at around 35 per cent, and (5) Doubling the capacity on premium products. A relative comparison with multiple businesses indicates that La Opala is numero uno in key parameters of profitability, cash flow generation, return ratios and payout. Therefore, we feel the scrip has good steam left in it and would hence like to recommend to our readers to buy the counter with the expectation of 35 per cent spiral from its current market price in the next one year.