EQUITY RESEARCH: La Opala RG Ltd.

Summary

La Opala RG Ltd is an primarily India based pure-play tableware agency. The Company operates as a manufacturer and marketer of life style products inside the tableware segment. The Company is engaged within the manufacture and advertising of opal glass tableware and approximately 24% lead crystalware products. The Company's glassware portfolio includes plates, bowls, dinner sets, cup-saucer sets, espresso mugs, espresso cups, tea sets, soup units, pudding and dessert sets, and crystal ware merchandise contain barware, vases, bowls, stemware and heat-resistant borosilicate cookware. The Company's manufacturers comprises La Opala, Diva and Solitare. Diva (tableware) and Solitare (crystal ware) deal with client needs. The Company exports products to 40 nations. It has centres positioned at Sitarganj, Uttarakhand, which manufactures opalware and Madhupur, Jharkhand, which manufactures crystal ware and opal ware. Its production operations are located in India.

La Opala RG Ltd.

ABOUT

• The Jhunjhunwala family is behind the 1987 incorporation of La Opala RG Ltd (La Opala). It is one of the top manufacturers of glass and opal tableware in India. For the glassware and opal ware segments, the company has production facilities in Madhupur, Jharkhand, and Sitarganj, Uttarakhand. Both facilities use equipment from the leading manufacturers in the world and European technology, which results in higher asset utilization, quicker investment returns, and quicker processes. The business is a market leader in India for tableware, and its goods are popular in the US, UK, France, Turkey, the Middle East, and other Southeast Asian nations.
• Product Portfolio: The product portfolio of the company includes Opal glassware which includes Plates, Bowls, Dinner sets, Cup-saucer Sets, Coffee mugs, Coffee cups, Tea sets, Soup sets, Pudding, Dessert sets, etc, and Crystalware which includes Barware, Vases, Bowls, Stemware, etc.
• Brands: The flagship brand of the company is LA Opala and other brands that the company offers are Diva, Solitaire Crystal, and Cook Serve Store. The company’s total capacity across its two plants (Sitarganj and Madhupur) was 36,000 MTPA, The capacity expanded at Sitarganj (Uttarakhand) from 4000 MTPA in FY08 to 31,000 MTPA; the Madhupur (Jharkhand) capacity was 5,000 MTPA.
• Wide Distribution Network: The Company’s pan-India distribution network comprises more than 200 distributors and 20,000 retailers. The company’s domestic footprint covers more than 600 towns and an international presence in more than 30 countries.
• Alliances: The company collaborated with South Korea’s Hosan Glass for technical assistance to manufacture opal glassware in 1988. A range of 24% lead crystal glassware was introduced by La Opala in technical collaboration with South Korea’s Doosan Glass in 1996.
• Capex: The company is in the process of setting up an additional unit for manufacturing opal glass tableware with a capacity of 12,000 MTPA at Sitarganj, at an estimated cost of Rs.127 cr, also it has announced another Capex in November 2021 for setting up a borosilicate plant at Sitarganj with a proposed capacity of 25 MT per day, at an investment cost of Rs.70 cr.
• Focus: The company focuses significantly on research and development (R&D) and introduces new designs every year.

SHAREHOLDING PATTERN:

INVESTMENT RATIONALE

• Revamped distribution strategy

The company's retail reach stayed in the 10,000–12,000 area in the years up to FY22. The company's distribution reach increased dramatically in FY22, going from 12,000 shops in FY21 to 20,000 outlets.  The business continued to grow in FY23 as well.  The company hired a fresh group of managers from various industries who gave a new perspective on expanding its market position.  The business improved its distribution capabilities so that its products could reach more people and areas of the nation. Wider refers to the company's decision to advertise its products through resellers in areas where a direct dealer has not previously established business. 'Deeper' refers to a drill down from Tier 2 to Tier 3 and Tier 4 areas where rising disposable incomes are generating more demand for opalware.

The company's capacity to serve markets increased and it was able to reduce "loss of sale on account of product non-availability" thanks to the revised strategy. We are confident that La Opala will be able to market the increased production resulting from the increased capacity by virtue of spreading itself deeper.

• Entry into the borosilicate glass category

La Opala has made the decision to enter the borosilicate glass market in order to build a platform that might fuel the business's upcoming growth phase. This market is heavily reliant on imports. Even the market leader Borosil Ltd. is currently entirely dependent on imports. Lunchboxes, bakeware, and microwaveable items are all made of borosilicate glass, which falls under the Rs 500–600 Cr bracket. La Opala made the decision to enter this market with a 120 Cr total capital investment in its own manufacturing setup. The corporation is currently finalizing the location of the factory, and it will take 18 to 20 months before operations can begin. The plant might start operating toward the end of FY25. La Opala will continue to sell and distribute goods through its current opalware channel. To help establish markets, La Opala has already begun to sell products that were outsourced under the "Cook, Serve, Store" brand. The management believes that the margin profile of borosilicate should be comparable to that of opalware.

• Capacity addition to drive the growth

The promoters made the decision to establish an opal glassware manufacturing facility in 1987. The business put its first facility into operation in Madhupur, Jharkhand, with a 650-ton starting capacity. The business's second phase of growth began in 1995 when it decided to expand from opal glass to crystalware as a product category. The business produced 24% lead crystal glassware first in India. The product was identified as Solitaire. La Opala also distributed crystalware through its current opalware distribution networks.

The establishment of a 4,000-tonne Greenfield capacity in Sitarganj, Uttarakhand, with capex of Rs. 40 cr. in FY08 marked a turning point for the company. Modern European technology was used in the new plant in Sitarganj, which was entirely automated. We think that the management's choice to expand capacity in FY08 was crucial to the company's long-term growth and margin expansion. In FY08, total capacity increased from 5,000 tonnes per year to 9,000 tonnes. A premium line of opalware was introduced through this expansion.

Since then, La Opala has steadily increased its capacity to increase the size of the opalware market in India. The business has maintained its status as one of the biggest organized crockery businesses in India by proactively growing its capacity. Total capacity reached 24,000 tonnes per year by the end of FY18. The company finished an 11,000-tonne-per-year greenfield capacity addition in Sitarganj, next to its existing plant, in Q4 FY22, bringing the total capacity to 36,000 tonnes per year. By Q4FY24, the increased capacity might have been fully utilized.

KEY RISKS

• Higher competition

The company's profitability may suffer as a result of increased competition from branded (such as Borosil, Cello, etc.) and unbranded players. The market's availability of less expensive products could impact sales. Although the category's growth potential is still great, the company's growth rates have structurally been hampered by the small size of the sector and the increased amount of serious competitors. The economy is predicted to turn around shortly, and new capacity will soon start operating, so the corporation can speed up top- and bottom-line growth over the next two years.

• Removal of anti-dumping duty on opalware imports

The Indian government placed permanent antidumping taxes on imports of opal glassware from China and the United Arab Emirates in July 2017 for a five-year term. The revenue department has now placed a final anti-dumping charge on any opal glassware used in kitchens and offices in addition to tables after its expiration in August 2022.  charge in the instance of Chinese Opal Glassware was 30.64% of the imports' Cost, Insurance, and Freight (CIF) value. The anti-dumping duty that was imposed in the case of imports of Opal Glassware from the UAE was set at 4.38% of CIF value. If this is withdrawn or the time period expires without an extension, it may result in an increase in inexpensive Chinese imports, which could harm the company's ability to expand.

• Volatility in raw material price

The cost of raw materials, including quartz powder, sodium silicofluoride, borax, and soda ash, makes up a sizable portion of the overall cost of sales. Quartz powder, one of the main raw materials, comes from Rajasthan, while other ingredients like soda ash and boric acid are mainly bought locally. China, the US, and Turkey are used as sources of some raw materials. The company's profitability is still subject to changes in raw material prices because those prices are unstable and La Opala does not have any long-term procurement agreements for those materials. One-fourth of the cost of sales is made up of power costs. Therefore, any sudden spike in power prices could raise La Opala's costs.

FINANCIALS:

1Q24: Sales, EBITDA, and PAT for the company increased by 5%, 8%, and 43% year over year to Rs 86 Cr, Rs 35 Cr, and Rs 29 Cr, respectively. EBITDA margin was 40.9% as opposed to 39.8% in Q1FY23. Despite the fact that Q1 is often thin, this time the margins were better. The management anticipates a rise in demand beginning in September 2023 due to the holiday season. The company has increased prices by 4-5%, and this will start to show in Q2FY24. Additionally, starting in August 2023, one of the four furnaces will be out of commission for 50 days for maintenance. However, the management thinks that growth won't be affected because the company has enough inventory.

Since FY14, La Opala has become largely debt-free. The only borrowings recorded on company books were quick loans, which were mostly used for working capital. The company had minor long-term debt of Rs 13 Cr in March 2022, which had been reduced to Rs 8.3 Cr in FY23 after 8 years. Despite holding cash and equivalents worth more than Rs 350 crore, the corporation has increased the debt as a tactical maneuver (lower interest rate compared to treasuries and government incentives). Despite spending Rs 130 crore on expanding its opalware output, its balance sheet is still thin. Despite the additional outlay of Rs 120 Cr for the borosilicate facility, we anticipate the financial sheet to remain lean.

Valuation & Recommendation:

Given the magnitude of the opalware market in India, the enormous underserved population, the country's steady population increase, and the rising ambitions of the rapidly growing middle class, we think opalware will continue to be one of India's most sustainable consumption stories. La Opala is a market leader in the premium and mass product segments, which are primarily driven by aggressive branding and robust distribution. The business consistently maintains best-in-class margins of 35%+, the highest in the whole consumer discretionary sector. As a result, the balance sheet is robust and free of debt, and the return ratios are respectable. It has consistently used product releases in both the value-for-money and premium markets to capitalize on its strong brand recall. We anticipate the company will profit from its dominant position in the tableware and opalware markets, and we anticipate the advent of luxury products to de-risk its revenue stream. Visibility of growth over the medium term is provided by significant capacity expansion, foraying into a new product category (borosilicate glass), and good customer demand. We recommend a BUY recommendation with a target of Rs. 470.

Source:

STOCX

COMPANY WEBSITE

REFERENCE REPORTS