Rs.1.73 b profit forecast for Royal Ceramics for FY12

Wednesday, 10 August 2011 01:21 - - {{hitsCtrl.values.hits}}

John Keells Stock Brokers (JKSB) is forecasting a Rs. 1.73 billion net profit for Royal Ceramics in the current 2011/12 financial year in comparison to Rs. 1.4 billion last year.

“We maintain our FY12 EPS estimate of Rs.15.68 per share and feel that the stock which is still trading at a forward earnings multiple of 9.5x FY12 earnings can sustain higher multiples,” JKSB said in an earnings update on Royal Ceramics following the release of FY 12 first quarter results last week. Here are excerpts.

Lower GP margins were compensated for by tight cost controls in RCL’s first quarter; with earnings flat mostly due to the reduction in comparative other operating income. The company also made some significant investments during the quarter.

Stripping out other operating income from EBIT shows an improvement of 29.0% in this quarter. However GP margins (as measured against net revenues) fell to 43.32% from 44.79% last year. Distribution and Admin expenses were essentially flat when looked at cumulatively.

Finance expenses rose marginally by 7.0%. Net debt increased sharply both YoY and QoQ by 168.7% and 46.9% respectively to reach Rs.1.37 billion for this period.

The segmental breakdown showed tiles having revenue growth of 11.6%. GP and net margins for the segment showed some erosion, with net margins for tiles declining from 36.9% last year to 31.7%. Sanitaryware revenue increased by 60.6% to Rs.163 m with earnings of Rs.18.7 m. The new paints acquisition had revenues of Rs.31.1 m for the quarter with earnings of Rs.1 m.

The company spent Rs.500 m in FY11 to expand their Horana plant which makes ceramic tiles. Production was boosted from 7,500 square metres a day to between 10,500 and 11,000 square metres per day. Porcelain tiles are made in Eheliyagoda which has a capacity of 4,000 square metres per day. RCL’s distribution network currently includes 41 showrooms and a network of 320 direct and sub-dealers. The company plans to open 10 new showrooms and add 25 more dealers this year.

RCL acquired 20.03% stake of Lewis Brown & Company Limited at a cost of Rs.621.2 m on 16 June 2011. Lewis Brown is the holding company of the 160 year old Delmege Forsyth which is involved in retail distribution, travel and insurance broking and reportedly made Rs.250 m in earnings last year. RCL also acquired Ever Paint and Chemical Industries (which retails paint under the brand name

“Colorbrite”) in April 2011 at a cost of Rs.70.35 m

We maintain our FY12 EPS estimate of Rs.15.68 per share and feel that the stock which is still trading at a forward earnings multiple of 9.5x FY12 earnings can sustain higher multiples.