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INVEST AT CUT-OFF - NITCO TILES

March, 06

 

A result of a domestic boom in the construction industry is likely to drive earnings growth for Nitco Tiles.

To the initial public offer of Nitco Tiles, Investors with a penchant for risk can subscribe . Substantial expansion of its ceramic floor tiles capacity, sharp increase in the company's sales of vitrified tiles and imminent surge in demand for building materials as a result of a domestic boom in the construction industry is likely to drive earnings growth for Nitco Tiles.

The company's valuations are likely to be on a par with bigger players such as Kajaria Ceramics , after the increased capacities are in place . In the Rs 140-168 price band, the stock would quote at a multiple of 10 times its expected FY-07 per share earnings on an expanded equity base.

Nitco Tiles makes ceramic floor tiles, vitrified tiles and mosaic tiles. It is also into the business of processing and selling marbles. The company plans to deploy the proceeds of the issue to expand the capacity of its existing ceramic floor tiles, acquire or set up a wall tile manufacturing unit and install windmills to reduce power costs.

Volumes to drive revenue

At close to full capacity , Nitco Tiles is currently operating its ceramic floor tiles and witnessed flat sales from this segment for the past two years. The proposed additional capacity of 60 per cent will increase the total installed annual capacity to 6.3 million square metres and is likely to drive revenues from FY-07.

Current buoyancy in demand for ceramic tiles and the geographically-diversified marketing network of the company are likely to ensure sale of the increased volumes.

The current market share of the company among the organised players stands at 10 per cent. The increased volumes will enable it command a larger share of the domestic market pie in future.

The vitrified tiles business, outsourced from China, has seen a sales growth of close to 30 per cent annualised over the last three years. Vitrified tiles bear resemblance to natural granite but are priced at a lower range, thus offering a substitute at a lower price.

Nitco Tiles is likely to experience sustained revenue growth in this space , With exclusive purchasing rights from the Chinese contractor up to 2009.

Nitco Tiles also imports marbles and processes the same at its units located in India.

A recent change in the import of marble policy envisages that import of marble will be allowed only through existing marble processing units. Earlier, direct import by select groups such as hotels and temples were allowed.

This is likely to benefit organised players, such as Nitco tiles, since the new rule leaves room for fewer players in the business.

Improvement in margins likely

At 16 per cent, the operating profit margins (OPMs) of Nitco Tiles are lower than bigger players such as Murudeshwar, Kajaria Ceramics. The relatively low OPMs can be primarily attributed to fuel and power costs.

The following cost improvements planned by the company are, however, likely to place it at par with industry majors:

  • Nitco Tiles' fuel costs remained high with the use of LPG , While bigger players in the industry have switched to low-cost liquefied natural gas (LNG).
  • The company has, however, now entered into an agreement with GAIL for laying pipelines for the supply of LNG. This is likely to ease fuel costs by FY-08.
  • Installation of six windmills by FY-07 is likely to set-off a majority of the power cost through power purchase agreement entered into with the Maharashtra Government. Tax incentives are also likely to hasten the payback period of the windmill project.

Risks

  • Nitco Tiles generates about 35 per cent of the turnover from vitrified tiles imported from China, which now enjoys exemption from anti-dumping duties. Any change in the policy may affect profitability.
  • The company is yet to decide on its strategy to acquire or manufacture ceramic wall tiles.
  • Delay in the gestation period of setting up this facility may obscure revenue visibility. We have, therefore, not factored in revenues, if any, from this segment.
  • Any downturn in the construction sector is bound to dampen revenues for the tile industry as it is derives a chunk of the business from the realty space.
  • Investors averse to the above risks can consider setting a moderate target return for the stock and exit if the target is met shortly after listing.

Offer details
The company plans to raise Rupees 140-160 Crore through the offer. The initial public offer is open from February 22-27.

 
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