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    • Stock Recommendation | ASIAN GRANITO INDIA LTD – SELL – Target Price : 150

      Publish date: FEBRUARY 15, 2019

      Company’s results came lower than our estimates due to increase in interest and depreciation charges. Volumes have started recovering and realizations, though stood flat YoY, have started improving on sequential basis. Gas prices have also come down so benefit should start getting reflected in few quarters. Acceptability of price hikes is likely to be watched out closely going forward owing to political uncertainty and lack of compliance towards e-way bill implementation.

      Asian Granito revenue for Q3FY19 was in line with our estimates and it was largely led by sharp jump in outsourced tile volume by 16.1% YoY and associate tile volumes by 17.4% YoY while own manufactured tiles have witnessed a lower growth in overall volumes. Overall volumes were up by 12% YoY. Operating margins declined sharply on yearly basis to 8% due to higher gas prices and higher proportion of outsourced tiles. Net profit performance stood lower than our expectations and was impacted by fall in margins and higher interest and depreciation charges.


      Stock is currently trading at valuations of 18x and 13.2x on FY19 and FY20 estimates respectively. We maintain our estmates but revise our valuation multiples downwards to factor in concerns related to search proceedings at its premises. We thus arrive at a revised price target of Rs 150 based on 13x FY20 estimated earnings (Rs 185 earlier based on 16x FY20 estimates). We recommend SELL rating on the stock.




      Asian Granito revenue for Q3FY19 was in line with our estimates and it was largely led by sharp jump in outsourced tile volume by 16.1% YoY and associate tile volumes by 17.4% YoY while own manufactured tiles have witnessed a lower growth in overall volumes. Overall volumes were up by 12% YoY. Volume was driven on account of good demand from government projects and large corporate clients. Company expects volume growth momentum to be maintained going forward.

      Though average realizations are largely flat YoY at Rs 311 per sq m but sequentially realizations have improved by 2.5% led by price hikes taken by the company during past few quarters. There is still pressure being felt on the realization on account of higher revenue share from project business in Q3FY19.



      Company has mentioned that demand for quartz has remained quite strong and quartz realization also remained strong in domestic and exports market. Company has also commissioned 3rd line of Camrolla Quartz which will stabilize production by March 2019. This has also resulted in sharp increase in quartz revenues during the quarter on account of consolidation of Camrolla quartz on YoY basis. Company expects the revenue contribution from Camrolla quartz to be around Rs 400 mn in FY19 and expects it to increase to Rs 1.5 bn by FY20.

      There is currently no update on the anti-dumping duty decision by Gulf Cooperation Council against imports of ceramics and porcelain products of Indian, Chinese and Spanish origin to the GCC. We believe that imposition of anti-dumping duty, if implemented, would be negative for the sector and even for AGL.

      We maintain our estimates and expect revenues to grow at a CAGR of 3.2% between FY18-20.


      Operating margins declined sharply on yearly basis to 8% due to higher gas prices and higher proportion of outsourced tiles. Net profit performance stood lower than our expectations and was impacted by fall in margins and higher interest and depreciation charges.

      Gas price continue to remain high for the quarter compared to same period last year thereby impacting profitability. Average price of gas for the quarter remains higher by 10% on QoQ basis and around 37% YoY basis to Rs 37 per scm as compared to Rs 27 per scm during Q3FY18. However, now gas prices have started correcting and it has reduced to Rs 38 per scm from the peak of Rs 41 per scm in Q3FY19.

      During Q3FY19, company also approved the raising of funds by way of issue of 20,00,000 convertible warrants to Santario Ceramics Private Limited and Oxento Ceramics Private Limited at a price of Rs. 245/- per Convertible Warrant. But due to negative developments related to search proceedings by Directorate of revenue intelligence at its office premises and arrest of promoter on the pretext of alleged undervaluation In respect of import of Crystallized Glass Panels from China during the years 2017 and 2018, Santario and Oxento ceramics withdrew its consent to subscribe to the warrants issue aggregating Rs 490 mn each. AGL has indicated that to fund the requirements, the promoters may infuse capital or raise their stake as and when the need arises.

      Though company has paid an amount of Rs 35 mn towards differential customs duty under protest (equivalent to almost 14%/10% of the estimated profits of FY19/20 respectively) but these developments put a question mark on the corporate governance standards of the company. We view this development to be negative for Asian Granito and would restrict re-rating of valuation multiples even when industry environmental is showing signs of demand recovery and peaking out of costs.

      Also, AGL had announced a lot of marketing initiatives and measures during Q1FY19 under newly appointed Sales and Marketing head who has also quit the company within few months itself. So it is difficult to ascertain sustainability of these measures.


      Stock is currently trading at valuations of 18x and 13.2x on FY19 and FY20 estimates respectively. We maintain our estimates but revise our valuation multiples downwards to factor in concerns related to search proceedings at its premises. We thus arrive at a revised price target of Rs 150 based on 13x FY20 estimated earnings (Rs 185 earlier based on 16x FY20 estimates). We recommend SELL rating on the stock.


      Asian Granito India Limited (AGL) was established in 2000 by Mr. Kamlesh Patel and Mr. Mukesh Patel. AGL is one of the top three Indian Ceramic Companies engaged in the business of manufacturing, and trading of Ceramic Wall, Floor, Vitrified Tiles, Marble & Quartz Headquartered in Gujarat. AGL has 8 manufacturing facilities in Gujarat. AGL has production of 1,02,900 sqm per day including outsourcing. Pan India marketing & distribution network of more than 6000 dealers and sub-dealers and over 231+ showrooms with global footprint with exports to over 55+ countries.


      BUY - We expect the stock to deliver more than 12% returns over the next 12 months
      ADD - We expect the stock to deliver 5% - 12% returns over the next 12 months
      REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
      SELL - We expect the stock to deliver negative returns over the next 12 months
      NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
      SUBSCRIBE - We advise investor to subscribe to the IPO.
      RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
      NA - Not Available or Not Applicable. The information is not available for display or is not applicable
      NM - Not Meaningful. The information is not meaningful and is therefore excluded.
      NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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