Verdict: Fragile, lacking Sheen

Rs. 161 cr IPO:

• 83% is fresh issue for debt repayment (Rs. 50 cr) and working cap (Rs. 45 cr)
• 17% OFS by an individual shareholder with 13.7% stake

IPO Date: Wed 4^th Aug to Fri 6^th Aug 2021

Price band: Rs. 118-120 per share

Mcap: Rs. 537 cr, implying 30% dilution

Allocation: 25:35:40 for QIB, HNI and retail respectively, against 50:15:35 otherwise

Listing: 17^th Aug 2021, in T2T segment (no intra-day), since issue size < 250 cr

Gujarat Based Vitrified Tile Maker

FY21 production was 0.92 sq mt, leading to 70% combined utilization across 2 plants, with 1.32 sq mt p.a. capacity. Production grew 46% since FY18’s 0.63 cr sq mt, but revenue growth was only 16%, from Rs. 220 cr in FY18 to Rs. 255 cr in FY21. Most of this growth was export-led, share of which, rose from 2% in FY18 to 14% in FY21’s revenue mix. Thus, domestic sales remained stagnant at Rs. 215-220 cr, despite booming housing demand. This also implies 20% drop in realization in past 3 years, against peer Kajaria maintaining prices, despite Chinese threat and highly competitive unorganized domestic market. 

Low Growth in Profitability

Between FY18 to FY21, revenue grew at a 3 year CAGR of only 5%, with EBITDA (excluding other income) growing at 6% CAGR to Rs. 47 cr. MAT credit utilization lead to an effective tax rate of only 11% in FY21, leading to Rs. 15 cr net profit and 6% net margin (over 4.2% average net margin between FY18-20). FY21 EPS stood at Rs. 4.54.

Company’s advertising spends have declined from Rs. 3.4 cr in FY18 to Rs. 0.3 cr or 0.1% of sales in FY21. While DE ratio of 1 will fall to 0.3 post IPO, credit rating BBB+ is not comforting either. Post IPO, promoter holding will slip to 42% from 56%.

Poor Working Capital Management 

On an annual topline of Rs. 255 cr, Rs. 90 cr is closing debtors and Rs. 104 cr inventory. Thus outstanding debtors at 4.25 months and 5 months of inventory, make business slow moving and fragile. Company is yet to recover Rs.3.7 cr from 64 debtors and is pursuing legal options. Exxaro’s working capital management is poor, not only in absolute terms, but also in relation to peers. Asian Granito, Orient Bell and Pokarna hold inventory of 2-3 months, with debtor days of ~2 months for Orient and Pokarna. 

Rich Valuation, even if Slow Growth and Poor Working Cap ignored

With m cap of Rs. 537 cr and enterprise value of Rs. 625 cr, shares are being offered at FY22E sales multiple of about 2x and PE multiple of close to 25x, which is quiet aggressive on peer comparison. Asian Granito, with Rs. 1,300 cr topline is ruling at m cap of Rs. 600 cr, with PE of 7x and sales multiple of 0.7x. Orient Bell, with Rs. 500 cr topline, is ruling at sales multiple of 1x and PE multiple of 24x, while Pokarna, with Rs. 300 cr topline and double digit net margins (18% in FY20), is ruling at PE of 24x.

Moreover, going by Q1FY22 results announced by peers Orient Bell, Prism Johnson, sales volumes for tile makers were severely impacted in June quarter, bringing down sequential profits sharply. Thus, financial stress due to second wave will reflect post FY21 financials.

Conclusion

Stagnant domestic sales, falling realization, poor working capital management and highly competitive industry structure make company’s fundamentals weak. The IPO is an avoid.

Grey Market Premium (GMP) of Exxaro Tiles: Grey Market Premium of Exxaro Tiles is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.