18/02/2008

Murudeshwar Ceramics Ltd

Initiating with a BUY 12 M Price Target: Rs. 102

We are initiating coverage on Murudeshwar Ceramics (MCL) with a 12-month

RESEARCH HEAD price target of Rs. 102.
M.R Lalitha

Assisted by Investment Highlights

Aarthi S
Hari Prasad B
Jayamurugan P
Consistent growth in performance: Murudeshwar ceramics has shown a
5-year CAGR of net sales of 24% and 5 year CAGR of net profit of 59%.
Industry: Ceramics
Price Data
Lower input cost to increase the margin: The company’s Karaikal unit
Current Price (Rs) 82.15 operates on natural gas for which it had tied up with GAIL for supply of
52 wk range (Rs) 156-75 natural gas and enjoys lower fuel cost. The costs at this unit are less
Price Movement Chart compared to the company’s other unit at Hubli. This would bring down
the operating cost and improve the margin going forward.
500 200
• Expansion plan to drive volume: The company is adding 4,000 sq. mtrs.
400 from 21,000 sq. mtrs. per day of capacity in vitrified tiles. PBIT margin in
Volume in Thousand

150
vitrified tile is 30% where as ceramic tile fetch only 15%. The expansion
Price in Rs

300
in vitrified tile would drive volume and increase overall margin.
100
200 • Construction industry growth creates demand for ceramic product:
50 The construction industry is likely to grow at 8% CAGR for next couple of
100
years on back of boom in housing sector due to increasing income level
0 0
and attractive home loans, retail, IT & BPO sectors. This would create
Jan-07 Apr-07 Aug-07 Nov-07 demand and drive volume for MCL’s product.

Stock Performance
1 M 3 M 6M
Absolute % (26) (31) (32) Financial Snapshot
Stock Data (Rs Cr)
Mkt Cap (Rs Cr) 143.84 Particulars FY05 FY06 FY07
Last traded qty (NSE) 40016 Net Sales 167.42 191.12 235.40
No. of shares o/s(Cr) 1.751
Adj PAT 16.43 23.83 29.73
Free float (%) 51.91
Share holding pattern chart Adj PAT Margin (%) 9.81% 12.47% 12.63%
Shareholding Pattern as on Dec 07 Adj EPS (Rs.) 9.38 13.61 16.98
13.62
P/E 8.76 6.04 4.84
20.83 48.08
Mcap/Sales 0.86 0.75 0.61

1.21
16.25
Valuation
Promoter Private corp Institutions
Public NRI
We expect a stronger topline and bottomline growth on the back of improved
demand growth for ceramic products. At the CMP of Rs. 82.15, Murudeshwar
Key Indicators
Ceramic is trading at 4.70x its TTM earnings. Compared to the industry average
Adj. EPS (9M annualized)(Rs) 17.92
PE of 15.57x, the stock is highly under valued. We recommend a BUY on the
BV per share (Rs) 157.32
stock with a 12M-price target of Rs.102.
PAT Margin (9M annualized)(%) 13.51

Code
NSE MURUDCERA
BSE 515037
Reuters MURD.BO
Bloomberg
honey
MCER IN
 Industry Outlook

Due to boom in housing sector, retail, IT & BPO sectors, the ceramic tiles
sector has been clocking a robust growth of 12-15% consistently over the
last few years and India ranks in the top 5 countries in the world
manufacturing ceramic tiles.

The ceramic tiles sector investments in the last five years are approx. Rs
2,000 crores. The industry also enjoys the unique distinction of being
highly indigenous with an abundance of raw materials, technical skills,
and infrastructure facilities despite being fairly capital intensive.

The Indian Industry has developed an export market and presently in

MCL’s Net Sales volume, it constitutes less than half a percent of the global market. But
this reality could change as Indian exports are rising at the rate of 15%
Net Sales per annum. The top-end of the global export market is presently
250
dominated by Italy (40.8%) and Spain (26.4%).
200

150
Rs. Cr.

100 Company Profile

50
Murudeshwar Ceramics Limited, established in 1983, manufactures and sells tile
- and slab products in India. The company offers vitrified tiles, ceramic tiles, and
FY05 FY06 FY07 granite slabs, as well as undertakes earth works.

It markets its products through distributors, show rooms, depots, and a network
MCL’s Product Mix for Q1FY08 of dealers, as well as operates its own showrooms. The company has two
manufacturing units, one unit in Hubli, karnataka and other unit in karaikal,
Product Mix - Q1FY08 Pondicherry.
5% 7%
The company has pan-India presence and markets its product under the brand
11%
name “Naveen” which comprise Naveen Dimontile for vitrified tiles, Naveen
Ceramic for ceramic tile and Naveen Granites for granites.

77%
The company’s installed capacity is 2.7 and 3 million sq.mtrs pa for vitrified tile
and ceramic tile respectively in Hubli unit and 3.3 million sq.mtrs pa for vitrified
Virtified Tiles Ceramic Tiles Granite Earthwork
tile in karaikal unit.

MCL has been accredited with the ISO 9001:2000 certification from TUV -
Zertifizierungsgemeinschaft e.v. (Germany).
MCL’s geographic break up of sales for
Q1FY08
Geographic break up of sales

16%

14%

70%

South West North and East

Investment Rationale

On cost considerations the company stopped production of Ceramic tiles

in August 2003. But later, on demand, Ceramic tiles manufacturing was
once again started with an initial capacity of 12,000-sq.mtrs.per day at
Hubli unit. The new unit became operational from Jan 2006.Thus
manufacturing of ceramic tile would give support for vitrified tile and
give additional revenue to the company.

The flame for artistic floors creates demand for Vitrified tile. Moreover
the Forums, Mall culture and big commercial complexes have enlarged
the market for tiles Industry. Cheaper and consumer friendly bank loans
have encouraged all sections of the society to spend more on
construction (flooring). The change in culture would create demand and
make the company to utilize full capacity, which in turn reduces the
operating cost.

The company has cost advantage over other players as it procures all its
raw materials with in radius of 500 Kms from the plant and 80% of the
raw material required by the company is met from its own quarry. This
makes the company to price its products competitively and capture the
market easily.

Peer comparison

Name of the M Cap* Price* Face Value Net Sales PAT Mcap/ EPS P/E
Company (Rs Cr) (Rs) (Rs) TTM (Rs Cr) TTM (Rs Cr) Sales (Rs)
Murudeswar Ceramics 143.84 82.15 10.00 238.47 30.58 0.60 17.46 4.70
Asian Granito 136.15 64.65 10.00 187.95 26.12 0.72 12.40 5.21
Kajaria Ceramics 177.99 24.20 2.00 475.46 4.91 0.37 0.67 36.25
Nitco Tiles 815.21 253.80 10.00 581.69 50.63 1.40 15.76 16.10
*As on18/02/08
Figures are for TTM
Source: Capital Line

Investment Concern

Anti-dumping duty imposed by the Government of India only provided a
temporary reprieve as the tile market has many other entries for the
imported tiles.

Rising competition from the unorganized market are likely to bring the
company's operating profit margins under pressure.

The company’s stock performance depends on the market conditions.
Any volatility in the stock market would affect the share price of the
company.
Financial Statements

Income Statement*
(Rs Cr)
Particulars FY05 FY06 FY07 9 M FY08
Sales 167.42 191.12 235.40 174.28
yoy growth % 14.16% 23.17%
Total Expenses 118.93 130.98 161.42 115.51
Gross profit 48.49 60.14 73.98 58.77
Other income 0.33 0.73 0.97 1.39
Depreciation 16.58 18.24 22.06 16.84
PBIT 31.91 41.90 51.92 41.93
Interest 13.00 14.58 16.29 16.62
PBT 19.24 28.05 36.60 26.70
Tax 2.81 4.22 6.87 3.16
PAT before Minority interest 16.43 23.83 29.73 23.54
Minority interest - - - -
Reported PAT 16.43 23.83 29.73 23.54
Extraordinary items - - - -
Adjusted PAT 16.43 23.83 29.73 23.54
yoy growth % 45.04% 24.76%

Ratio Analysis
Profitability Ratios
Gross profit margin 28.96% 31.47% 31.43% 33.72%
EBIT/sales 19.06% 21.92% 22.06% 24.06%
Other Inc/Sales 0.20% 0.38% 0.41% 0.80%
Adj PAT Margin 9.81% 12.47% 12.63% 13.51%
Tax Rate 14.60% 15.04% 18.77% 11.84%
Valuation Ratios
Adj EPS 9.38 13.61 16.98 17.92
Book Value per share 92.10 106.16 139.39 157.32
Mcap/Sales 0.86 0.75 0.61 0.62
P/E 8.76 6.04 4.84 4.58
Price/BV 0.89 0.77 0.59 0.52
* Sources: Company Reports
 Balance Sheet*
(Rs Cr)
Particulars FY05 FY06 FY07
SOURCES OF FUNDS
Share Capital 31.01 46.02 17.51
Equity 15.01 15.01 17.51
Preference 16.00 31.01 -
Reserves and Surplus 146.25 170.88 226.57
Minority Interest - - -
Secured Loans 119.13 135.63 142.30
Unsecured Loans 13.54 55.00 56.87

TOTAL LIABILITIES 309.93 407.53 443.25

APPLICATION OF FUNDS
Gross Block 349.31 425.29 469.23
Less: Accumulated Depreciation 112.68 129.00 144.28
Net Block 236.63 296.29 324.95
Capital Work in Progress 18.59 19.32 7.43
Investments 3.00 3.00 3.01
Current Assets, Loans and Advances
Inventories 50.95 68.90 92.47
Sundry Debtors 20.79 32.93 46.18
Loans and Advances 13.38 21.30 18.26
Cash and Bank Balances 7.78 13.12 7.28
Total Current Assets 92.90 136.25 164.19
Current Liabilities
Sundry Creditors 16.80 26.44 32.75
Other liabilities - - -
Provisions 5.90 6.77 8.69
Total Current Liabilities 26.84 38.08 49.04
Miscs Expe (not written off) 0.09 0.34 0.25
Deffered Tax Asset - - -
Deffered Tax Liability 14.44 9.59 7.54
Net Deferred tax (14.44) (9.59) (7.54)

TOTAL ASSETS 309.93 407.53 443.25

* Sources: Company Reports

While all efforts have been made to ensure the veracity of information and analysis provided herein, neither the organization, nor any of its
directors or employees are responsible for any errors inadvertent or otherwise, and for any investment or divestment decision taken based on
its recommendations. Our company or an associate company or firm, their employees may hold positions and / or transact in the instruments
mentioned herein.
APOLLO SINDHOORI CAPITAL INVESTMENTS LTD, NO.55, GREAMS ROAD, CHENNAI -600 006