High sales growth, new investments make Royal Ceramics shine greater

Based on impressive third quarter results Lanka Orix Research has come up with an update on Royal Ceramics Lanka Ltd. Here are excerpts.

Race between the Top Line and the Bottom Line
The 3QFY07/08 was a tremendous success for RCL with the profit for the nine months summing to SLRs. 363.14 million with a YOY growth of 42%. The improved bottom line performance was mainly due to business expansion giving a boost to the top line. RCL made a net turnover of SLRs. 2.5 billion with a YOY growth of 36%. RCL recorded the highest ever monthly turnover level in the history of the Company in December 2007 with a turnover of SLRs. 460 million that resulted in a net profit of approximately SLRs. 100 million. The Management claims that the performance of the final quarter of the FY07/08 will follow a similar pattern to that of the third quarter and as such the year end results of RCL is expected to be much favourable.

The improved sales performance was mainly a result of RCL’s recent addition to its distribution channel in terms of the dealer network. The primary sales points to date were the own showroom network which the company decided to diversify into a dedicated external dealer network. The objective of having an external dedicated dealer network was to reach untapped markets to which it is unprofitable for RCL to move on its own. The dealer network which now stands at 80 in number has blended with the rest of the marketing strategy to enable RCL to attain the dominant position in the ceramic tile industry. In addition, the own showroom network had performed beyond expectations in brining turnover.

The finance cost component still remains a concern with the burden increasing 94% YOY to 3QFY07/08 to SLRs 254.8 million. The higher interest rates coupled with the Company’s need to pump capital to expansions are likely to ensure that the heavy burden will remain for the next few quarters. However, the impact of the finance cost to the bottom line had been less due to the support from the overall business growth and administrative and production cost efficiency the Company had managed to improve. There had been considerable productivity gains in their production plants in Horana and Homagama that had resulted in higher efficacy in terms of lower cost of production. RCL’s gross profit ratio had improved to 43% for the three quarters in the financial year 2007/08 when compared to a ratio of 40% for the financial year 2006/07. Further, the Company had managed to maintain a very tight control over administration expenses.

Looking forward
Organic growth had been a key aspect in the growth strategy of RCL and the Company expects to expand further internally. The concentrated marketing effort is to be continued by strengthening showroom network with four more on the way to make it a family of 50.

The Bathware venture of RCL, with a SLRs. 1.2 billion worth of investment, commenced trial production at the factory in Panagoda. The high quality standards and superior designs along with the well established brand name are expected to act as marketing catalysts for this new initiative. The product is expected to hit the markets by July 2008. With the help of the existing diversified sales network, returns from Rocell Bathware is expected nourish the bottom line further.

Further expansions to the existing production lines are in order along with a proposed new plant in the 33-acre land in Kiriwattuduwa. This BOI approved project is expected to be commission by 2010 with the demand for the expanded output to materialise from local as well as overseas markets.

RCL is continuing its efforts for overseas expansions with India and Australia being the most closely monitored. The management is highly enthusiastic to establish a strong export market with plans to have own retail outlets by 2010 especially in India. In the meantime, other forms of entry strategies are being explored.

Financial outlook
The net profit of RCL is expected to grow at a rate of 50% to SLRs. 494 million for the financial year 2007/08 with the expectation that the final quarter will be similar to that of the third quarter of the financial year. The turnover is expected to be SLRs. 3.5 billion for the financial year 2007/08 and is expected to grow at 35% YOY.

The forward PE ratio for RCL at a price of SLRs. 43 is 4.82 times which is relatively low considering the historically high PE ratio that the counter had sustained over the past years. The fundamental layout of RCL too seems to be strong with continuous market expansion opportunities both locally and internationally. In addition, the financial discipline of the company had been commendable for a firm with a capital structure geared over 28%. Although with a heavy finance cost burden RCL had managed to improve the financial performance. We believe that RCL has the potential to increase the shareholders’ wealth in the long term.