Stock Pick from Construction Materials Sector
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HERE IS WHY
- Attractive Valuation
- Business to grow ahead of the industry
- Better future prospects on improvement in the US economy
India is the second-largest exporter of raw granite after China and ahead of Brazil and South Africa. India ranked fifth in the export of processed (value-added) finished product. Keeping in view the increasing demand in both the domestic and international markets for new varieties, we have been finding such hidden gems for our readers. Aro Granite Industries (Aro) is one such scrip that has great potential to create wealth for its shareholders.
Aro Granite Industries is a 100 per cent export oriented unit (EOU) and is engaged in the processing of granite tiles and slabs. It has two processing facilities at Hosur and Krishnagiri in Tamil Nadu with an aggregate installed capacity of 5.4 lakh square metres per annum for granite tiles and 5.9 lakh square metres per annum for granite slabs. Aro mainly exports its products to USA, Europe, Africa and other Asian countries. For FY14, there was a 33 per cent increase in sales to North America; 314 per cent increase in sales to Libya; and 50 per cent increase in Germany along with double the sales in Poland, Italy and Japan.
The US economy grew in the spring at the fastest pace in the last one year along with higher consumer spending and better housing sales data. We expect that the US economy will maintain its momentum despite a world of worries. As such, Aro will grab the opportunity in the US’ market. Aro’s revenues have grown at a CAGR of 18.7 per cent from Rs 150.23 crore in FY11 to Rs 251.34 crore in FY14. The growth was largely driven by realisation (11 per cent CAGR FY11-14) with the volume lead growth being moderate (7.8 per cent CAGR FY11-14).
However in FY14, Aro’s revenue has grown by 34 per cent; this was largely driven by 22 per cent volume growth with the realisation lead of 12 per cent growth. At the same time, its EBITDA margin increased by 234 bps to 16.7 per cent in FY14 from 14.4 per cent in FY11. Even its bottomline grew at 30.5 per cent CAGR from 9.49 crore in FY14 to 21.09 crore in FY11 with posted net profit margin of 8.5 per cent in FY14. At the market cap of Rs 114 crore, the company is generating revenue of Rs 251.34 crore and profits of Rs 21.09 crore based on FY14 figures.
On the valuation front, Aro is trading at a TTM PE ratio of 4.75 and on the basis of price to book, it trades at 0.78x. It deserved at least 10x PE, supported by revival in the domestic housing and infrastructure sector as well as from the overseas’ emerging markets and improvement in the US’ economy. Its strong broad-based topline as well as bottomline growth drives double-digit EPS, even issuing 1:2 bonus shares in FY14. Aro is consistently dividend paying and grew ahead of the industry. It is therefore expected to perform well in the future too. Hence, we recommend our readers to take an exposure in the stock with an investment horizon of one year.