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Tile manufacturers like Euro Ceramics are cashing in on the opportunity of the booming real estate market in India and rising aspiration levels of Indians due to higher disposable incomes.
The company is tapping the primary market to raise about Rs 83-99 crore from the public in the price band of Rs 150-180 a share.
Though the valuations based on annualised half yearly earnings of FY07 look a bit high as compared with its peers, the company has reported the fastest growth in last two years and also enjoys operating and net profit margins that are similar to its larger peers.
Increasing products
The company manufactures vitrified ceramic tiles and aluminium extrusions like tubes, frames for doors and windows, panels and strips under the "Euro" brand.
However, about 88 per cent of its sales in H1 FY07 came from tiles. Its products are mostly sold in the domestic market to institutional customers like corporates, hospitals and builders.
It is also the first domestic company to introduce calcarious tiles in India, which are higher end products and substitute for Italian marble.
With the current project, Euro is entering the sanitaryware segment by setting up a 11000 metric tonne per annum unit. While the sanitaryware project of Rs 77 crore will be funded through IPO proceeds, the calcarious tiles project of Rs 82 crore is financed through a term loan.
Competitive industry scenario
Almost all of Euro's products operate in a competitive market, with competitors like H&R Johnson and Murudeshwar Ceramics. In sanitaryware, Hindustan Sanitaryware and Cera are two large players.
Further, the tile industry is highly fragmented with low entry barriers, so the number of unorganised players is large. Also, there is a threat from Chinese imports though the products are of cheap quality.
But the company feels that unorganised players are comparatively lesser in its markets of vitrified tiles and in sanitaryware market.
Further, the market demand is so huge, that the company does not see any competitive pressure as it caters to the higher end of the market. The Indian tiles and sanitaryware market is estimated to be growing at 10-12 per and 15-17 per cent per annum respectively.
Strong growth in the past
Euro's sales and operating profit have more than doubled in the last two financial years, while its net profit has grown nine fold, though on a lower base.
If half yearly results for FY07 are annualised, then its net sales are expected to rise at 18 per cent and operating and net profit are expected to grow at 53 per cent and 21 per cent respectively, thus leading to improving margins. The company's 10 MW captive power plant partially helps it in controlling costs.
Valuation a tad higher
Its competitor Murudeshwar Ceramics trades at 6 times FY08 earnings. Even sanitaryware player Cera trades at about 10 times trailing earnings.
On the other hand, Euro is priced at 8.5-10 times its FY08 estimated earnings. Though Euro has slightly higher net profit margin than Murudeshwar, the issue looks expensive.
