Royal Ceramic's (RCL) has reported net earnings of LKR382.5 mn (up 189%YoY ) in 1QFY11 whilst the top line grew by 58%YoY. This was mainly driven by strong home builders demand, improved sales mix in the sizes of tiles (Bigger tiles tend to have higher margins) and increase in demand from hotel refurbishment projects and apartment developments.
RCL, the market leader in floor tiles with circa 45% market share has two manufacturing plants for floor tiles in Horana & Ehaliyagoda and one for sanitary ware in Homagama. Currently the floor tile production lines operate closer to 100% capacity to produce circa 10,500-11,000 sqm/day whilst the bathware currently produces circa 12,000 pieces/month where the installed capacity is a near 20,000-24,000 pieces per month. In order to meet the excess demand the company is planning to increase the Horana plant's capacity by 3,500 sqm per day by Jan'2011.
With the economic conditions improving and demand from both home builders and hotels and apartment towers picking up considerably and with the interest rates on the downward trend we revise our projected FY11E earnings upwards by 12.9% to reach LKR1,579.4 mn (up by 63%YoY). On top of the demand picking up in the country, the expected reconstruction boom in the North and East from drumming up the overall economic growth, the construction industry is expected to witness a turnaround. RCL is one of the prime beneficiaries as a leading player in the Western province and a dominant player in the country. With the company's short term plans to increase capacity in the existing production facilities we revise up our FY12E forecast also by 31% to LKR2,068.3 mn (up 31% YoY).
Yearly & Quarterly Performance
Net revenue grew 58% YoY to LKR1,152.4 mn in 1QFY11. RCL's net turnover has grown 58% YoY to LKR1,152.4 mn during 1QFY11 on the back of increased demand from home builders, hotel and apartment building projects. During 1QFY11 the sales volume grew by near 50%YoY whilst there has been no increase sales price.
Gross profit has risen by 51% YoY to LKR516.2 mn in 1QFY11. RCL's cost of sales has increased by 64.3% YoY to LKR636.2 mn in 1QFY11 where the company has posted gross profit of LKR516.2 mn in 1QFY11 (up 51% YoY). The gross profit margin has dropped marginally to 44.8%.
EBIT has increased by 73% YoY to LKR255.2 mn in 1QFY11. The company's administrative expenditure has increased to LKR82.3 mn (up 28.4% YoY) in 1QFY11 whilst distribution expenses have risen by 37.2% YoY to LKR178.7 mn on the back of increased expenses on the sales network of 41 showrooms. Consequently, RCL has recorded an EBIT of LKR255.2 mn in 1QFY11 (up 73% YoY) whilst the EBIT
margin has grown to 22.1% during the quarter from 20.2% in 1QFY10.
Other income has risen 68.3%YoY to LKR182.9 mn in 1QFY11. RCL's other operating income has increased by 68.3%YoY to LKR182.9 mn during the quarter mainly owing to profit on sale of shares amounting to LKR164.7 mn.
Net profit has increased by 188.9% YoY to LKR382.5 mn in 1QFY11. RCL's finance cost has dipped by 55.2%YoY to LKR55.8 mn in 1QFY11 owing to circa 26%YoY reduction in borrowings totalling to LKR790.7 mn and low interest rates. Consequently, the net profit during 1QFY11 grew by 188.9%YoY to LKR382.5 mn.
Slow and steady growth in bath-ware. The new Bathware manufacturing plant that commenced commercial operations in FY09 (built at a cost of LKR1.2 bn) with an installed plant capacity of around 250,000 pieces per annum has contributed LKR101.5 mn in revenue during 1QFY11 vs LKR26.4 mn in 1QFY10. The sanitaryware has also reduced its losses to record a loss LKR5.8 mn vs a loss of LKR38.5 mn in the corresponding previous quarter. Further, we believe that with the management's efforts on entering into new contracts this manufacturing facility would breakeven in another 10 - 12 months whilst the company is also focusing on increasing exports of sanitaryware.
Further, the company plans to open around 4 to 5 new showrooms during this year mainly in the recently liberated North and East. Further, due to the increased demand the company is planning to increase the capacity of the Horana plant by circa 3,500 pieces by January 2010. Moreover, the company owns a 33 acres land in Kiriwaththuduwa (owned by its newly incorporated subsidiary, Rocell Ceramics Limited) and has an option to commission a brand new floor tile facility there if there is a need for further expansion.
Forecast net profit to grow by 63.8% YoY to LKR1,579.4 mn in FY11E. With the economic conditions improving and demand from both home builders and hotels and apartment towers picking up considerably and with the interest rates on the downward trend we revise our projected FY11E earnings upwards by 12.9% to reach LKR1,579.4 mn (up by 63%YoY). On top of the demand picking up in the country, the expected reconstruction boom in the North and East from drumming up the overall economic growth, the construction industry is expected to witness a turnaround. RCL is one of the prime beneficiaries as a leading player in the Western province and a dominant player in the country. With the company's short term plans to increase capacity in the existing production facilities (increase production by 3,500sqm at Horana by Jan'2011) we revise up our FY12E forecast also by 31% to LKR2,068.3 mn (up 31% YoY).
Share offers good value on 4.5X forecast FY12E earnings. Despite the share appreciating sharply since we initiated "BUY" recommendation on the counter, the share is still trading at steep discount to market and remains very attractive on just 5.9X FY11E net profit and 4.5X forecast FY12E net profit whilst trading at 1.4XPBV. Maintain - BUY
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