South side story

PENNY WISE

As new properties mushroom across the country, it is not surprising to see tile manufacturers like Murudeshwar Ceramics doing well.

To say that tile companies are witnessing robust demand thanks to the boom in construction space is a no-brainer. The credit for the upswing in the tile market should also be attributed to the change in aesthetic tastes of house owners and corporates.

Builders are coming up with sprawling residential complexes, corporates are spending on plush offices and classy malls are springing up everywhere, so tile makers are surely having a good time.

Anticipating that the construction boom is far from peaking out, Murudeshwar Ceramics is making a smart comeback in the ceramic tile segment and strengthening its position in the vitrified tiles market.

Though investors are yet to take a fancy to the scrip, analysts feel that an increasing brand presence should help the company to command better valuations that it deserves.

Growth sector

The Rs 190-crore Murudeshwar Ceramics is a leading player in the value-added vitrified tile market and has garnered a 30 per cent market share under its brand 'Naveen Diamontile'.

The Karnataka-based tile maker derives 70 per cent of its revenues from the fast growing market in South India, thanks to its dominant presence and strong distribution network in this fastest growing vitrified tile market in India.

With combined production capacity of 21,000 square metre per day (sqmpd) at its two plants, one in Karnataka and Pondicherry each, the company is well equipped to cater to the speedily rising demand.

Though Murudeshwar is also present in the ceramic tiles and granite business; vitrified tiles, contributing 94 per cent to the turnover, is the primary revenue driver.

Over the past five years, the Rs 5,000 crore Indian tiles market is growing at an annualised rate of around 20 per cent. The upturn in construction and real estate space is bolstering the demand for tiles and organised tile players, which account for 55 per cent of the market, are speeding up their capacity expansions.

The vitrified tiles market is poised to grow at an annualised rate of 30 per cent backed by robust demand from corporates and mall owners who prefer these durable and low maintenance tiles. But ceramic tiles have an edge over vitrified tiles when it comes to looks as the former offer a wide variety of textures and colours.

Demand for ceramic tiles comes from showrooms and households where aethetics count and with people spending more on interiors, demand is likely to be robust. Also, vitrified tiles are typically more expensive than ceramic tiles.

Comeback in ceramics

Around 2003, Murudeshwar Ceramics moved out of the ceramic tiles business as rising fuel costs were eating into profits and price wars with unorganised players, including cheap Chinese imports, made the business unviable.

However realising the tremendous potential in the ceramic tiles market, the company is making a comeback with 24,000 sqmpd plant in Hubli, with a dry grinding production which will reduce power cost. With the ceramic plant becoming fully operational this month, the company expects to capture a substantial market share and volume growth to provide a fillip to overall revenues.

"We expect revenues to catapult to Rs 302 crore in FY07. The sales mix will move in favour of ceramic tiles that are likely to chip in around 25 per cent revenues, while vitrified and granite segments will contribute about 72 per cent and 3 per cent respectively," says N M Hegde, vice president-finance, Murudeshwar Ceramics.

A cost-efficient player

Murudeshwar Ceramics commands the highest operating profit margins in the industry due to its strong presence in the lucrative value-added vitrified tiles market coupled with low raw material and fuel costs.

Thanks to the high proportion of vitrified tiles sales, the company enjoys a stunning 31 per cent operating margin whereas in case of comparable peers margins stand at around 15 to 20 per cent.

The company sources raw materials like China clay and feldspar from its captive mine located in at a short distance from its production plants. About 90 per cent of raw materials for ceramic segment and 50 per cent for the vitrified tiles segment are sourced from its in-house quarry.

Moreover, Murudeshwar sources natural gas from GAIL at its Pondicherry plant. The gas is used instead of LPG and reduces the fuel cost to one-third. Its new ceramic tiles plant in Hubli uses the dry grinding process which leads to lower power and fuel consumption.

"Having our own quarry does reduce input and transportation costs, but saving on fuel cost helps us pocket much higher margins," adds Hegde.

This year, Murudeshwar Ceramics will see a substantial decline in operating margins due to an increase in sales of low-margin ceramic tiles.

However, the margins would still be better than other major players. "Our operating margins will move down to 22 per cent but rising volumes from increased capacities would partly offset the dip in margins," says Hegde.

Financials

Over the years, Murudeshwar Ceramics has been showing consistent growth and good margins. In FY06, its revenues increased by 14 per cent on a y-o-y basis to Rs 191 crore while operating and net profit increased by 24 per cent and 45 per cent respectively. Both operating and net profit margins witnessed expansion of more than 250 basis points.

In the June 2006 quarter, net sales increased by 8.6 per cent y-o-y to Rs 46.9 crore. Operating and net profit increased by 23 per cent and 41.5 per cent respectively. Operating profit margin increased by more than 400 operating basis points due to increased sales in vitrified tiles.
 

AHEAD ON MARGINS
FY06 (Rs crore)	Murudeshwar Ceramics	Nitco  Tiles	Kajaria  Ceramics
Net sales	191.12	275.26	330.85
Operating profit	60.14	42.98	67.73
OPM	31.47	15.61	20.47
Net profit	23.82	20.02	28.17
NPM	12.46	7.27	8.51
CMP	104.15	203.45	58.90
P/E	6.56	22.63	15.39

Valuations

At the current market price of Rs 104.15, the stock trades at 6.56 times its FY06 earnings, while the valuation of peers like Nitco Tiles and Kajaria Ceramics stands at 22.6 times and 15.4 times.

The scrip trades at 5.6 and 4.8 times its estimated FY07 and FY08 earnings respectively. Going by the comparative valuations with peers, the stock is capable of delivering a substantial upside.

Though a few leading broking houses recommend the stock with price targets in the range of Rs 165-200, market players have not taken keen interest in the scrip.

Analysts attribute a lack of brand awareness among consumers as the reason for its cheap valuations. Murudeshwar Ceramics needs to work towards advertising and enhancing its brand to capture investor attention.