The demand scenario appears to possess tailwinds such asimproving living standards, government emphasis on housing, rural penetrationetc. The company has also outsourcedsome manufacturing by licensing its brand name that has helped save costs and mayimprove competitiveness.
The company reported somewhat volatile operating performanceover the last five years – reporting about 50cr of operating profits onrevenues of about 200cr in the last twelve months. It’s debt load of 140cr (at 31stMarch 2011), although not comfortable, appeared to be manageable particularlyin relation to net current assets.
The business is exposed to changing consumer preferences andhigh competition – including the unorganised sector, which adversely impactsthe retail market that forms the largest tiles market segment.
The business model is characterised by heavy capitalinvestment – both in fixed assets and working capital – resulting in reducedfree cash flows. It may also increasefinancial and operational leverage, which translates directly to diminishedearnings at the slightest drop in revenues.
Increases in input costs – natural gas, power(unavailability of quality coal), etc., and transport costs – fuel (petrol)etc. adversely impacts profit margins. Governmentincreases in excise duties and delays in laying infrastructure such as naturalgas pipelines could also hamper profits. Retaining skilled personnel appears to be another challenge in thisindustry.
Management does intend to raise additional funds in the nearfuture, including via preferential allotments of warrants to promoters at INR17/share, ostensibly to repay debt. Overall,minority shareholders will have their stakes diluted from 45% to 32%. Minority shareholders ought to note thisdilution factor along with management’s attitude towards them beforeconsidering a commitment to the company’s equity.