Multi Baggers

Orient Bell Ltd. (earlier called Orient Ceramics and Industries Ltd.), a pioneer in manufacturing ultra vitrified tiles in India was formed in 1977 as a public limited company. The company started its manufacturing facility in Sikandarabad in Uttar Pradesh. The company is accredited with ISO 9001:2000, ISO 14001 and ISO 18001 certifications for quality control management systems. The company manufactures Non-Vitrified, Vitrified, and Ultra Vitrified Tiles for walls, floors & facades. The company also imports and markets Vitrified Porcelain Tiles, Borders, Motifs and other value added accessories from various countries to complement its wide range of tiles. The company started manufacture of Vitrified Tiles in 2008.

Acquisition of Bell Ceramics Ltd.

The company acquired Bell Ceramics Ltd. in December 2010 and merged it into Orient Ceramics and subsequently the name of the company was changed to Orient Bell Ltd.. Bell Ceramics Ltd. was started in 1985 to manufacture ceramic glazed tiles and has two manufacturing plants - one near Vadodra in Gujarat and the other near Bangaluru, Karnataka. With the acquisition, Orient Bell today has manufacturing plants in North, West and South India and capabilities to cover the entire country through Sales & Distribution Network.

Post merger, the company has emerged as the only company to have manufacturing plants in North, West & South India. The plant in UP caters to sales in North & East India while the plants at Vadodara & Bangaluru cater to the Western and Southern markets respectively. This translates into excellent synergy for the combined business of Orient Bell.

Major Concerns

The major concern is the debt on the balance sheet of the company - post acquisition of Bell Ceramics. This we believe is the primary reason for the low Market Cap of Orient Bell. However, any restructuring of debt in terms of retiring debt out of Cash Flows or swapping debt through equity infusion at higher valuations may have an impact which could be hugely positive for the market cap of the company.

The other major concern is competition from cheaper imports from China - the anti dumping duty imposed by the Government of India however acts as a protection for domestic manufacturers. Any withdrawal of anti dumping duty will be negative for the domestic manufacturers.

Investment Rationale

Acquisition of Bell Ceramics - Whole Bigger than Sum of Parts

The company's acquisition of Bell Ceramics has been a good opportunity for the company enabling it to grow inorganically at a faster speed and we believe that the combined value of Orient Ceramics & Bell Ceramics is far in excess of the individual businesses due to excellent business synergies. The company had a manufacturing capacity of 14.5 million square meter before the acquisition of Bell Ceramic, which post merger of Bell Ceramics has become 29 million square meter. And a predominantly North based company has become a company with pan India presence.

Indian Tile Industry

The Indian tile industry is estimated to be 625 million sq. mtr. as of March 2012. The Industry size Rs 17000 crore, out of which National Brands control roughly 45-50% of industry. The industry has been growing at a CAGR of 15-16% per annum in last 4-5 years. Even though the industry grew at 15% in FY12, the company registered a Sales Growth of 86% primarily on the strength of acquisition of Bell Ceramics. Even if we exclude sales of Bell Ceramics, the Sales Growth was 36% - much higher than industry average. The company managed to increase its market share too.

Undervalued to the Peers

The stock of Orient Bell looks grossly undervalued compared to the peer group. If we compare the FY 12 numbers of Orient Bell with the Industry leader Kajaria Ceramics - Kajaria Ceramics has sales revenues roughly 2.4 times of Orient Bell ( roughly Rs.1300 crores as against Rs.550 crores achieved by Orient Bell); did PAT of roughly 6 times of Orient Bell (Rs.80 crores against Rs.13.50 crores for Orient Bell) but commands a Market Cap which is roughly 16 times of Orient Bell. (Market Cap of Kajaria is Rs.1300 crores as against Rs.82 crores for Orient Bell).

While Kajaria has a Market Cap which is equal to its Sales, Orient Bell's Market Cap is just 15% of its sales. Also Kajaria has a Price to Book Value of 3.75 as against just 0.75 for Orient Bell. Kajaria has an installed capacity which is roughly 50% higher than Orient Bell (Kajaria has capacity of 41 million square meters as against 29 million square meters for Orient Bell).

We do not deny the fact though that Kajaria has a leadership position in the sector, has a better Debt to Equity position compared to Orient Bell, does higher operating margins and has superior Return ratios - we believe the huge valuation gap is unjustified.

Other Factors

Promoters have been doing creeping acquisition of shares through market purchases and have increased their stake from 73.45% in June 12 qtr to 74.88% in Dec 12 qtr. They have thus reached close to the threshold of 75% allowed by SEBI. The company has been a regular dividend payer and has not skipped dividend in last 20 years. Moreover, the company has refrained from any Equity dilutions through fund raising exercises in the last 15 years.

Orient Bell's recent acquisition of Bell Ceramics, a loss making company, which is  almost similar in size of Orient Ceramics and its turnaround from loss making to a profitable entity in less than 2 years shows the business acumen of the promoters. However, the next challenge is higher capacity utilisation of Bell Ceramic's plants, and consequently scaling up the sales and distribution network to cater to the increased capacity utilisation.

Power & Fuel costs form a substantial portion of the total manufacturing cost of tiles - and any initiatives there would lead to long term benefits to the company. We believe that the implementation of Ratnagiri - Bangalore Gas Pipeline (expected to be completed in 2013) will lead to higher capacity utilisation and reduced fuel costs at the company's Bangaluru unit.

Orient Bell is now concentrating on value added premium segment where competition is less from small players and is also making efforts towards effectively utilising higher capacities, expanding its dealer and distributor network,  establishing exclusive Display Studios and filing patents for tiles with uniqueness & Innovativeness like Germ Free etc.

Our major concern is high debt which increased due to its acquisition of Bell Ceramics - we however believe that with higher utilisation of its production capacities, the company's Interest Cover ratio will improve. Also, the company had earlier acquired land assets for organic expansion - however with the acquisition of Bell Ceramics, the company may have the option to dispose off the assets and use it to repay part debt.

We believe that on the back of higher installed capacity and higher capacity utilisation, the company will maintain its growth in the future. However, the Game changer for the company could be retiring of substantial debt coupled with high growth which we believe is a high probability here. We believe that given focussed promoters with their sincere efforts and the company's undervaluation to the peer group - we believe at the current price of Rs.60, the stock is the best pick from the sector and may emerge as a dark horse in the next few years.

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