Published on 9/12/2019 10:32:32 AM | Source: ICICI Direct

Update On Pokarna Ltd by ICICI Direct

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USDOC significantly increases preliminary CVD…

On November 14, 2019, the USDOC increased preliminary CVD on Pokarna from 4.32% to 83.79% after a US based stone manufacturer-Cambria Company submitted comments alleging significant ministerial errors in CVD determination. With Pokarna deriving almost entire revenues from the US market and quartz contributing ~68% to its overall FY19 revenues (worth | 462.2 crore), the amended preliminary CVD rate could have a material adverse impact on Pokarna’s financials, going ahead. The management hopes the amendment will be reversed in final determination.


Preliminary CVD on Pokarna increased from 4.32% to 83.79%…

On October 11, 2019, the United States Department of Commerce (USDOC), published its preliminary affirmative countervailing duty (CVD) determination on certain quartz surface products from India. According to this, it levied 4.32% preliminary CVD on Pokarna. However, on October 16, 2019, a US based stone manufacturer-Cambria Company LLC submitted comments alleging significant ministerial errors in CVD determination with respect to Pokarna. After analysing the comments, the USDOC amended the preliminary determination to reflect the correction of ministerial errors made in calculation of CVD rate earlier. Accordingly, the preliminary CVD for Pokarna has been increased from 4.32% to 83.79% (link).


…which may adversely impact Pokarna’s financials

In FY19, Pokarna’s revenues grew 40.8% YoY to | 462.2 crore with ~98% revenues derived from the US market (revenues grew 26.4% YoY to | 243.1 crore with 82.6% revenue contribution from quartz division in H1FY20). Furthermore, quartz being a key focus area for Pokarna, contribution of this business to overall revenues increased to 68% in FY19 from 54% in FY18. With the USDOC increasing preliminary CVD rate to 83.79% for Pokarna, it would significantly impact the company’s price competitiveness and, hence, sales in the US market, which could adversely hamper its financials, going ahead. Secondly, Pokarna is currently expanding quartz manufacturing capacity by 130% (to 7.8 LSM) in Hyderabad at a capex of | 330 crore (| 250 crore debt and | 80 crore internal accruals), of which it had already incurred one-third capex as of FY19. While this plant was earlier expected to be operational by Q4FY20E, the developments from USDOC could delay the operationalisation of the new plant.


Valuation & Outlook

At the CMP, the stock is trading at an attractive valuation of ~3.5x FY19 EPS. While the valuation appears to be cheap, Pokarna’s earnings are heavily dependent on quartz business performance. The USDOC’s increasing preliminary CVD rates on Pokarna from 4.32% to 83.79% could materially impact its financial performance. Pokarna’s management is in disagreement with the development and hopes for the amendment to be reversed in the final determinations. However, till final determinations are in place, we change the recommendation on the stock to UNDER REVIEW.


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