Royal Ceramics Lanka (RCL) - A likely Rs 500+ stock

Background

RCL is country's main manufacturer and dealer of Porcelain Ceramic Tiles. RCL's business portfolio includes tiles & associated items, sanitary ware, aluminium, plantations, packaging & mining. Also RCL's associate companies have exposure on finance sector.

Revenue mix

64% of the 2019/20 revenue came from tiles and associated products while 13% of the revenue came from packaging. 10% of the revenue came from  aluminium while the rest has come from sanitary ware, plantations & others. In 2019/20 the company has significantly improved on export revenue as well as added innovative new designs. The same strategies coupled with direct sales to large scale projects is said to boost future revenue as well and to cushion out any impact on future revenue by the removal/reduction of imported products by the Government.

Financial Performance

RCL's consolidated revenues were growing at a compound rate of 6% from 2015/16 to 2019/20 but profits have declined by a compounded rate of 3.1%. This could be attributed to higher operating costs as well as finance cost due to high interest rates. However 2020/21 will be a completely different year with both negatives as well as positives. Covid-19 lockdown has impacted Q1 performance but the subsequent two quarters have been very positive due to multiple factors of reduction in imports, pick-up of export sales as well as reduction in finance costs due to lower interest rates. 

Ratio Analysis

RCL's ROE was on a declining trend from 20.1% in 2015/16 to 10.3% in 2019/20. PE ratio was also declined from 3.8x to 2.4x in 2019/20 due to lackluster demand for RCL stock in the market. PBV too declined from 0.8x to 0.2x in 2019/20 reflecting the opposite move of RCL stock price and NAV. 

2020/21 F results

Given the strong performance during first nine months I expect RCL to record a consolidated revenue of Rs 43.5Bn in 2020/21 FY with a Rs 5.1Bn profit attributable for shareholders. This translates to a EPS of 46, NAV of 259. RCL now has announced a total dividend of Rs 14 with the latest 2nd interim dividend announced. At the current market price of Rs 333.50 RCL stock is now trading at a PE of 7.3x and a PBV of 1.3x showing clearly the higher investor appetite on the stock due to strong profits. These are the highest valuation parameters seen on RCL during the last five year period.

2021/22 F results

After taking into consideration of company strategy of driving more of export sales and introducing new products together with increasing production capacities to suit local markets I expect the possible negative impacts from easing off of the current import restrictions on tile products to be successfully managed similar to the management of covid impact.  Accordingly I expect RCL to post a consolidated revenue of Rs 50Bn with a profit attributable to equity shareholders of Rs 5.9Bn with a EPS of 52.8.

Valuation in comparison to capital goods sector valuation parameters.

Capital goods sector valuation parameters as of 12th February were as follows.

PBV - 1.18x, PE 26.3x and DY - 1.79%. Applying the same parameters to RCL's 2020/21 F and 2021/22 F numbers RCL can be valued as below.

PBV - Rs 305 based on 2021F and Rs 349 based on 2022F

PE - Rs 1,208 based on 2021F and Rs 1,389 based on 2022F

DY - Rs 782 based on 2021F and Rs 899 based on 2022F

Based on dividend discount model ( market return 15%, Risk free rate 5%, beta value 1,79 & dividend growth of 15%) I value RCL stock @ Rs 204 based on 2020/21 data and @ Rs 234 based on 2021/22 data.

On average, RCL can be valued at Rs 469 ( after discounting of 25% for market inefficiencies and other factors) based on FY 2020/21 data and at Rs 538 (fter discounting of 25% for market inefficiencies and other factors) based on FY 2021/22 data. This means there is a gap of 41% and 61% exists for short term and long term investors.

Comments

  1. SL BeatFebruary 13, 2021 at 11:25 PM

    Is it practical to apply sector PE of 26.3 for this counter.I see some errors in CSE sector identification.

    ReplyDelete
    Replies
    1. SL Equity Guide BLOGFebruary 14, 2021 at 1:07 AM

      I also felt that however we need to go with published data. CSE uses latest 4Q earnings and current prices to calculate sector PEs. Sometimes we use forward earnings to evaluate stock prices therefore there is a gap.

      Delete

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