Saral Gyan Hidden Gem - Sept 2014

UNEXPLORED MULTIBAGGER SMALL CAP STOCKS

EQUITY RESEARCH REPORT

ASIAN GRANITO INDIA LTD.

BSE CODE: 532888 NSE CODE: ASIANTILES

Industry: Ceramics / Granite CMP: Rs. 98.35 (29/09/2014)

Market Cap: 2230 (INR in Millions) Target Price: Rs. 200.00 Date: September 29, 2014 Time Period: 12 – 24 months

Saral Gyan Capital Services

www.saralgyan.in

An Independent Equity Research Firm

http://www.saralgyan.in/

HIDDEN GEMS – SEPTEMBER 2014

- 2 - SARAL GYAN CAPITAL SERVICES

TABLE OF CONTENT

S.No Content Page No.

1. Company Background 03

2. Recent Developments 06

3. Financial Performance 08

4. Peer Group Comparison 10

5. Key Concerns / Risks 10

6. Future Outlook 11

7. Investment Rationale 13

8. Saral Gyan Recommendation 14

9. Disclaimer 16



1. Company Background

Asian Granito India Limited (AGL) was incorporated in 2002 as a manufacturer of ceramic tiles, by Mr Mr. Kamlesh Patel and Mr. Mukesh Patel. Since then the company has extended production capacities as well as the product range. AGL is engaged in the business of manufacturing, outsourcing and trading of ceramic wall

and floor tiles. The two manufacturing facilities are located at Idar and Himmatnagar in Gujarat. The company has also acquired 49% stake in Amazon Ceramics Limited located in Himmatnagar, Gujarat. Apart from this, the promoter group has also acquired stake in Gujarat based 3 tile manufacturing units resulting in an aggregate capacity of ~36.00 million sqm per annum. The company markets its tiles under the established brand names like ‘AGL’, ‘Bonzer7’, ‘Bellissimo’ etc. AGL has an extensive marketing and distribution network which comprises of over 3000 dealers and sub-dealers covering each and every state of the country. Company has also open more than 60 + exclusive showrooms under ‘AGL tiles world exclusives’ for showcasing its product range. AGL currently enjoys healthy footprints in around 47 countries. The company has produced 13 crore square meter of space décor under their leadership. AGL has eight states of art ultra-modern plants manufacturing world class Tiles, Marble & Quartz in Gujarat. Company’s facilities are ISO 9001:2008 and ISO 14001:2004 certified and are fully equipped with latest technologies to give contemporary touch to its products.

In FY14, AGL reported an operating income of Rs 759.14 crore and PAT of Rs. 14.15 crore as against an operating income of Rs.707.49 crore and profit after tax of Rs 17.11 crore during FY13. In Q1 FY15, company reported an operating income of Rs. 176.24 crore and profit after tax of Rs 3.35 crore



Products

Ceramic wall, ceramic floor and vitrified tiles Digital polished glazed vitrified tiles and digital wall tiles Marble and quartz

Business Segment: Tiles Tiles segment contributed 82% (Rs. 703 crores) of total revenues in 2013-14. The Company added 300 dealers and sub-dealers during the year (total 2,800). The Company’s total tile production capacity stood at 81,000 square meters per day including outsourcing at the close of 2013-14. Asian Granito has raised its production volume eight times during last 11 years and nearly 97 per cent of revenues were derived from within India.

Company has also widened its international footprint over the years. Company now exports to 47 countries, possibly the largest number of countries exported to by any Indian tile company. The Company has also commissioned an international retail outlet in Johannesburg, possibly one the first such instances ever undertaken by an Indian tile brand, which we hope to replicate in Italy and China. The Company entered into a joint venture with Panaria which will provide technical know-how to enhance product quality and

access to global markets through its proprietary distribution network while Asian Granito will continue providing world-class products around a competitive price-value proposition. Company introduced Carrara white tile claimed to be as the world’s whitest unglazed vitrified tiles in larger format. Carrara White echoes its superiority over traditional marble flooring in terms of whiteness and superior aesthetics & truly stands apart as the world’s whitest tile that is easy to install as compared to the marble flooring. The Company’s acquired ISO 9001:2008 and ISO 14001:2004 certifications for its state-of the-art manufacturing facilities, reflecting procedural consistency. The Company’s CE certification and status as an IGBC member, vindicates its excellence in the realms of export and environmental sustainability



Business Segment: Marbles and Quartz

Marbles and quartz segment contributed 15% of total revenues in 2013-14. Asian Granito accounts for a sizeable share of 45 per cent of India’s engineered stone market. The Company offers slabs in the 3,025x1,225 square millimeters segment, which enjoys a lot of popularity as it addresses large sized requirements. The Company’s products were marketed to real estate, infrastructure, hospitality, education and health sectors. Company’s marble and Quartz segment achieved gross revenue of Rs. 126 crores in FY 2013-14 compared to Rs. 96 crores in 2012-13.

The Company offered a variety of more than 1,200 designs to broaden the element of choice for the consumers. The Company has more than 60 dedicated marketing executives looking into this division, the largest in India. The Company’s products are available in more than 20 locations across the length of the country.

During last financial year, average realizations grew by 10 per cent to Rs. 150 per square feet. The company reported a value growth of 25 per cent corresponding to a volume growth of 5-10 per cent. The business is expected to do better due to government stability and increased infrastructural spending. The Company plans to increase segmental revenues to Rs. 250 crore by 2017.



2. Recent Development

Outcome of Company’s Board Meeting – 30th August 2014

Board of Directors of the Company at its meeting held on August 30, 2014, has framed a Committee of Directors to analyze the matter on allotment of warrants by way of Preferential Issue and after due study, the Committee will suggest the ways and means and various options in next four - five weeks.

Asian Granito India Ltd opens 50th ‘AGL Tiles World Exclusive’ showroom in Aurangabad – 18th April 2014

Asian Granito India Ltd (AGL), one of India’s top five ceramic tile manufacturers, has opened its 50th ‘AGL Tiles World Exclusive’ showroom in Aurangabad, Maharashtra. The company’s sixth exclusive showroom in the state of Maharashtra, the Aurangabad showroom will feature never-seen-before collections of a wide range of wall and floor tiles of superior quality and unparalleled variety under a single roof.

The company has launched its AGL Tiles World Exclusive’ showroom in partnership with M/s Swastik Tiles based at Aurangabad, Maharashtra

With an aim of giving shape to company’s dream project of having a strong retail presence pan-India, Asian Granito India Ltd. has successfully already opened 49 exclusive showrooms in cities like Mumbai, Delhi, Jaipur, Bangalore, Chennai, Ahmedabad, Nagpur, Amravati, Gonda (Uttar

Pradesh), Udaipur, Nasik and Jalandhar till now. With the opening of this showroom in Aurangabad, the number of AGL tiles world exclusives has gone up to 50 outlets.

Company plans to ramp up its retail business by opening 100 new exclusive AGL Tiles World stores. Company is confident to double the existing number of ‘AGL Tiles World Exclusive’ stores all over India in this financial year.



Asian Granito acquires shares of AGL Industries – 03rd March 2014

Asian Granito India has acquired 100% shares of AGL Industries to become its wholly owned subsidiary. AGL Industries, a company incorporated under Companies, Act 1956 having its registered office at D-702, Seventh Floor, Ganesh Meriden, Opp. High Court, S G Highway, Ahmedabad, Gujarat and is currently engaged in business of agriculture products.

Asian Granito takes contract manufacturing route to capacity expansion – 7th Mar’13

Tile maker Asian Granito Ltd has chosen the contract manufacturing route to add capacity as the demand for ceramic tiles is expected to firm up in the ensuing fiscal after recording muted growth this year.

The Ahmedabad-based firm is tying up with some 15 contract manufacturers to add capacity of about 25,000 sq mt each day in the next six months. It currently operates six manufacturing units of its own with a combined output of 81,000 sq mt a day in and around Ahmedabad.

“We are investing about Rs. 300 crore to put in place a network of contract manufacturers, including on modernizing their facilities. We are funding this expansion through our own accruals,” A.P. Manojkumar Vice-President (Sales and Marketing) told.

Asian Granito is the amongst the top seven or eight companies in the organised tile manufacturing sector after H. R. Johnson, Kajaria, Nitco and Somani. The domestic tile market is estimated at Rs.18,000 crore; it registered lower growth of 11 per cent this year as against 14-15 per cent in the previous fiscal.

The company will consider setting up its seventh manufacturing unit in the South, either in Andhra Pradesh or Karnataka, depending on the availability of gas. Tamil Nadu is company’s biggest market, followed by Kerala and Andhra Pradesh. If company get adequate gas supply, company may consider setting up a 9,000 sq mt a day unit at a cost of about Rs. 70 crore.



3. Financial Performance Asian Granito India net profit rises 31.37% in the June 2014 quarter Net profit of Asian Granito India rose 31.4% to Rs 33.5 million in the quarter ended June 2014 as against Rs 25.5 million during the previous quarter ended June 2013. Sales rose 12.2% to Rs 1762.4 million in the quarter ended June 2014 as against Rs 1571.4 million during the previous quarter ended June 2013. Asian Granito India net profit rises 62.53% in the March 2014 quarter Net profit of Asian Granito India rose 62.53% to Rs 59.0 million in the quarter ended March 2014 as against Rs 36.3 million during the previous quarter ended March 2013. Sales rose 22.1% to Rs 2523.4 million in the quarter ended March 2014 as against Rs 2066 million during the previous quarter ended March 2013. For the full year, net profit declined 17.4% to Rs 141.4 million in the year ended March 2014 as against Rs 171.1 million during the previous year ended March 2013. Sales rose 7.3% to Rs 7591.4 million in the year ended March 2014 as against Rs 7081.2 million during the previous year ended March 2013

1 2 3 4 5 6

Net Sales 2065.99 1571.43 1880.86 1615.68 2523.43 1762.39

Net Profit 36.25 25.49 28.81 28.09 59.03 33.48

2065.99

1571.43

1880.86

1615.68

2523.43

1762.39

36.25 25.49 28.81 28.09 59.03 33.48

0

500

1000

1500

2000

2500

3000

Rs in

Mil

lio

ns

Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14

Last 6 Quarters Net Sales & Profit



Current & Expected Earnings Quarterly Ended Profit & Loss Account

Expected Earnings for 2nd and 3rd Qtr FY 2014-15: Company has shown a turnaround performance in last 2 quarters and we believe it will continue to deliver robust bottom line compared to last year with better sales realization of its value added products. Asian Granito Ltd has taken no. of new initiatives to increase the proportion of value-added tiles in its product mix from 25.00 percent in 2013-14 to a projected 30 per cent in two years with a corresponding increase in average realisations and profitability.

Particulars (Rs in Millions)

Sep 2013

Dec 2013

Mar 2014

Jun 2014

Sep 2014 E

Dec 2014 E

Audited / UnAudited UA UA UA UA UA UA

Net Sales 1880.86 1615.68 2523.43 1762.39 1995.78 1927.69

Total Expenditure 1748.08 1469.78 2314.92 1592.76 1822.26 1734.35

PBIDT (Excl OI) 132.78 145.9 208.51 169.63 173.52 193.34

Other Income 2.67 3.62 5.82 3.04 2.95 4.45

Operating Profit 135.45 149.52 214.33 172.67 176.47 197.79

Interest 34.15 48.68 68.2 60.81 61.34 64.76

Exceptional Items 0 0 0 0 0 0

PBDT 101.3 100.84 146.13 111.86 115.13 133.03

Depreciation 58.53 60.19 38.95 64.04 65.11 66.21

Profit Before Tax 42.77 40.65 107.18 47.82 50.02 66.82

Tax 13.96 12.56 48.15 14.34 14.91 19.95

Provisions & contingencies 0 0 0 0 0 0

Profit After Tax 28.81 28.09 59.03 33.48 35.11 46.87

Extraordinary Items 0 0 0 0 0 0

Prior Period Expenses 0 0 0 0 0 0

Other Adjustments 0 0 0 0 0 0

Net Profit 28.81 28.09 59.03 33.48 35.11 46.87

Equity Capital 221.61 225.83 225.83 225.83 225.83 225.83

Face Value (IN RS) 10 10 10 10 10 10

Reserves

Calculated EPS 1.3 1.24 2.61 1.48 1.56 2.08

Calculated EPS (Annualised) 5.2 4.98 10.46 5.93 6.22 8.30

No of Public Share Holdings 13701690 14109933 14109933 14109933 NA NA

% of Public Share Holding 61.83 62.48 62.48 62.48 NA NA



4. Peer Group Comparison

PEER GROUP Asian Granito

India Kajaria

Ceramics Somany Ceramics Nitco

CMP 98.35 633.45 294.40 23.70

52 W H/L 121.90/22.00 690.05/214.10 359.00/75.20 27.50/10.88

Market Cap 2340.68 47878.42 11435.92 1296.37

Results (in Million) Jun-14 Jun-14 Jun-14 Jun-14

Sales 1762.39 5119.40 3310.20 1972.34

PAT 33.48 363.40 80.70 -568.98

Equity 225.83 151.20 77.70 546.99

EPS 6.62 17.08 7.80 0.00

P/E 15.00 37.09 37.77 -40.14

5. Key Concerns / Risks Rising competition: Lured by the demographic profile and improving prospects of housing and construction sector, many foreign companies are entering India with a view to leverage the opportunity. RAK Cermics, leading global player in ceramic tile sector, is expanding and is growing at 50% over the last two years. Monalisa Tiles, the third largest tile manufacturer in the world, is venturing into India with an initial investment of USD 25 mn and plans to open 15 stores in FY15. Thus, rising competition is not likely to allow significant improvement in profitability going forward. Rising power and fuel cost – hindrance to accelerate expansion: Power and fuel is the key cost for manufacturing tiles accounting for more than 12% of total sales of the companies. Rising issues on availability of gas and increasing unit power cost is leading to higher cost for the domestic companies. Companies are shifting their focus on improving their revenue mix towards value added products to mitigate this risk.

No major entry barriers in business: Tiles business have no major entry barriers. Product quality and designs also does not provide much resistance to competition. Hence branding is the only unique selling point for the companies to improve their recall in the minds of consumers. With rising disposable income, consumers increasingly prefer branded products. We believe that company has shifted its focus to offer value added products by increasing product mix & advertising spends to build strong brands and increasing brand awareness and offerings by opening retail outlets across country.



6. Future Outlook Indian tiles sector, despite being the third largest tiles market, is growing at the fastest pace amongst top five markets in the world. The growth of Indian tile sector of 14% CAGR over CY08-CY14 is more than 2x world average CAGR of 6.9% over the same period. Per capita consumption of tiles in India is lowest among the top five countries, providing immense potential for growth. The key catalysts for rising consumption of tiles are second largest and young population (median age of 25.5 years in 2010), rising disposable income and increasing urbanization. Consumerism is likely to fuel the demand for ceramic products, which are discretionary in nature. Tier-2 and Tier-3 cities are likely to lead the demand growth and urban / metro cities will add with replacement demand. As per Cushman and Wakefield, the total housing demand is likely to be 88.78 mn units by 2017 owing to urbanization and increasing population. It expects 2015 to be the inflection year for commercial real estate sector, as demand is likely to surpass supply due to expected improvement in economy. It estimates Hotel inventory to increase by over 65% by 2017 and approximately 22 mn sq ft of new mall supply to be added to the top eight cities by 2015. India holds 3rd position in the world consumption of ceramic tiles. Despite this, it is among the fastest growing tiles market with consumption CAGR of 14% over CY08-CY12 against world average CAGR of 6.9% over the same period, as per Ceramics Wolrd Review. Indian consumption of tiles reached 681 million square meters (msm) in CY12 against 403 msm in CY08. As per the industry, global ceramic tiles is likely to reach 18,154.1 msm by CY18, signifying a CAGR of 8.9% over CY12-CY18.



Increasing construction activity in China and India are likely to drive the growth of global ceramic tiles sector. If we assume that the Indian ceramic tiles sector will continue its 14% CAGR till CY18, the Indian ceramic tiles sector is likely to reach 1495.9 msm, 2.2x its current size. Tiles being a volume play, expansion are inevitable. To leverage the current opportunity and tackle with surplus capacity situation, most companies are going slow on organic expansion plans and are eyeing to partner with unorganized sector which constitutes ~50% of the total sector. For organized players, the cost of capacity expansion is reduced and the already available capacity enables immediate revenue generation lowering the payback period. For unorganized players, there is a ready market for their production as organized players are recognized by their brands. India has been increasing its market share in total consumption over the last few years. Its market share in world consumption increased from 4.8% in CY08 to 6.2% in CY09. This is the largest gain in share after China which grew its share by 515 bps over the same period, considering the top four countries. Despite increase in market share, the per capita consumption of tiles is lowest for India at 0.54 sq mtr against China’s 3.07 sq mtr, Brazil’s 4 sq mtr and Iran’s 4.84 sq mtr. This shows that the potential for growth in Indian tile sector is exponential, which increases its attractiveness in global landscape. In our opinion, the market share of Indian ceramic sector is likely to reach 8.2% in CY18.



7. Investment Rationale i) Company is shifting the manufacture of low-value tiles to its outsourcing and joint venture partners while selecting to allocate its captive capacities towards the manufacture of value-added tiles. This progressive value-addition (larger format, thicker vitrified tiles, double-charged, nano finish and increase in digital machines from one to seven to a projected ten in 2014-15) is expected to reflect in rising average realizations, quicker offtake and increased profitability in the near future. ii) Apart from manufacture of value added tiles; the Company will market these in a correspondingly uplifting environment. The Company expects to generate at least Rs. 250 crore revenues by increasing the number of exclusive shops through which these tiles can be marketed, from 50 to 80 in 2014-15. iii) Up-gradation of credit rating by ICRA A-/A2+ will also help the Company to negotiate debtor with banks and to introduce new financial products in the market. Going forward, the Company’s focus on value-addition is expected to strengthen liquidity. iv) The Company increased its product capacity (direct and outsourced) on the one hand; during the last financial year, it also embarked on a number of initiatives to introduce value added products (digital, textured and larger products) – from 12 per cent of its product mix in 2013-14 to a projected 30 per cent during 2014-15. v) Company’s management aims to achieve revenue of Rs. 1000 by this financial year with significant improvement in operating margins. Company extended its average realisations range from a peak Rs. 340 (2012-13) per square metre to Rs. 360 (2013-14) per square metre and expect to take this growth to Rs. 375 (2014-15) per square meter in the current financial year which will help company to improve its profit margins. Moreover, company is focusing more on brand building since last few years. Company estimates 2.5% of sales spend for brand building in 2014-15 compared to 2% in 2013-14 and 1.5% in 2012-13. vi) Currently, the market cap of Asian Granito is 223 crores against annual revenue of Rs. 854 crores in FY 13-14. Company trades at trailing PE of 15 with market cap to sales ratio of 0.3. However, peer group companies like Kajaria Ceramics, Somany are trading at trailing PE in the range of 35 – 40 with market cap to sales ratio above 1. Higher valuations of peer companies are mainly because of strong bottom line with better operating and profit margins and low debt on books. During last couple of years, Asian Granito profit margins were declined due to high debt on books and lower operating margins which seems to the key reason for stock trading at lower valuations. However, we expect that company bottom line will improve significantly in near future considering new initiatives taken by the company during last 12 months and help stock price to get re-rated in terms of valuations.



8. Saral Gyan Recommendation

If you look at financial performance of the company during last 5 years, it shows a poor performance which will not encourage investors to invest in such a company. Company EBITDA and PAT margins shows a declining trend from FY 09-10 to FY 13-14, poor performance in terms of important ratios like ROA and ROE and increase in debt to equity ratio. Moreover, promoter’s shareholding is low at 37.52% which further raises doubt on management interest in the company.

Important Ratios Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014

Margin Ratios

Core EBITDA Margin(%) 10.92 10.70 9.46 8.75 7.51

EBIT Margin(%) 8.19 7.32 6.72 6.33 5.16

Pre Tax Margin(%) 5.98 4.86 3.83 3.18 2.67

PAT Margin (%) 4.41 3.70 2.56 2.14 1.68

Performance Ratios

ROA(%) 4.82 4.57 3.66 2.88 2.12

ROE(%) 9.88 9.46 7.79 6.82 5.21

ROCE(%) 11.20 11.24 11.79 10.65 8.22

Financial Stability Ratios

Total Debt/Equity(x) 0.68 0.65 0.81 0.96 0.93

However, if we look at recent initiatives taken by the management like opening of

exclusive showrooms for strengthening retail business, shifting focus towards value-added products for increasing average sales realization & profitability, planning higher expense allocation towards brand building, outsourcing and joint venture partnership to increase capacity of value-added tiles, we believe Asian Granito will be a turnaround story going forward.

Low promoters shareholding and high debt on books is a concern for us. However,

we consider Asian Granito as our contrarian bet considering change in business approach by the management and favourable economy for companies in construction sector. Company has performed well in terms of top line and bottom line growth during last 2 quarters. Considering no. of initiatives taken by the management, we believe operating margins will continue to improve during next 4 to 6 quarters.

Peer group companies like Kajaria and Somany are better placed in terms of profit

margins but with trailing PE above 35, valuations seems to be on higher side. We believe company like Asian Granito is reasonably valued at trailing PE of 15 and will be the direct beneficiary in case of increase in profit margins. With market cap to sales ratio at 0.3, increase in profitability can re-rate the stock in terms of valuations going forward.



The advent of low-cost affordable housing, emphasis on providing total sanitation for every household by 2019 and the planned introduction of metro rail networks in Lucknow, Nagpur and Ahmedabad are expected to spur tile offtake. Moreover and the allocation of Rs. 7,060 crore towards the development of 100 ‘smart cities’ and the intended establishment of seven ‘industrial cities’ as per Union Budget 2014-15 indicates strong demand for construction material including tiles. Being one of the largest manufacturers of tiles in India, AGL will be the direct beneficiary.

As per our estimates, Asian Granito Ltd (AGL) can deliver bottom line of 227 million for full financial year 2015 – 16, annualized EPS of Rs. 10.05 with forward P/E ratio of 9.8X for FY 2015-16, which makes stock an attractive bet at current market price for long term investors.

On equity of Rs. 225.83 million, the estimated annualized EPS for FY 15-16 works out to Rs. 10.05 and the Book Value per share is Rs. 125.62. At current market price of Rs. 98.35, stock price to book value is 0.78.

Considering good future prospects and reasonable valuations of the company compared to peers, Saral Gyan team recommends “Buy” on Asian Granito India Ltd at price of Rs. 98.35 for target of Rs. 200 over a period of 12 to 24 months. Buying Strategy:

60% at current market price of 98.35 40% at price range of 80-88 (in case of correction in stock price in near term)

Portfolio Allocation: 4% of your equity portfolio.



9. Disclaimer Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company. © SARAL GYAN CAPITAL SERVICES

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

The information contained herein is from publicly available data or other sources believed to be

reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Saral Gyan Capital Services (www.saralgyan.in) or any of its affiliates shall not be in any

way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is

not intended to be and must not alone be taken as the basis for an investment decision.

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Saral Gyan Hidden Gem - Sept 2014