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Strong growth path to continue

La Opala clocked sales of Rs820m (+155% YoY), EBITDA of Rs327mn (+243% YoY) and PBT of Rs276mn (+139%). Sales and EBITDA grew at CAGR of 12/10% while PAT remained flat over 1QFY20-23. Gross margins and EBITDA margins stood at 92% and 40% respectively. GM usually stands at elevated level in 1Q as company manufactures higher white plate inventory for the upcoming festive season. As a result change in inventories is usually negative leading to higher GM. Capacity utilization at both the plants stood at 95+%. The new unit has started to contribute to sales from July’22. We maintain our bullish stance on the business and Buy rating on the stock with revised TP of Rs442, valuing at 35x FY24E eps.

Healthy demand with multiple growth drivers

Strong demand in domestic market continued in 1QY23 with April and May sales at record high vs. April and May of past years. Strong consumer sentiments kept the demand healthy. Demand remained healthy equally across urban and tier II/III towns. In export markets realization remained strong except few markets such as Sri Lanka. Export market contribution stood at 16-17% of total sales for FY22. Channel wise mom and pop outlets continue to contribute most with ~80% sales coming it while Modern Trade (MT) contribution stood at 10-15%. Rest 5-7% contribution came from e-commerce channel. We anticipate sales CAGR of 22% over the next two years.

Strong capacity expansion in pipeline

La Opala’s Greenfield plant in Sitarganj, Uttarakhand with 11,000tn of capacity has commenced and has started to contribute to total sales from July’22. Based on the current demand scenario management sounded confident that this capacity will get absorbed in two years and will contribute ~Rs1.8bn to the sales. Apart from this, the company’s Greenfield unit in Sitarganj for Borosilicate glass is expected to commence in less than two years. Total capex is ~Rs700mn and peak sales would be Rs1.1bn from this unit. We estimate all these capacities combined can clock sales of Rs6.5bn by FY25/FY26.

Sequential improvement in performance expected

The first quarter of the year usually contributes least to the annual sales and contribution usually stands at 18-20%. Sales trajectory is expected to improve meaningfully in subsequent quarters as the festive season approach. Onam, Durga Pujo and Diwali are the key festivals which drive the demand for opalware on upward trajectory. Management sounded confident of crossing Rs4bn of sales in FY23 based on the current demand trend. We expect EBITDA margins to settle in range of 38-39% in FY23/24.

Valuation and key risks

We continue to remain bullish on the La Opala’s secular growth story. Significant capacity addition, venturing into new product category, favorable consumer demand is expected to provide the growth impetus to the company over next three years. Balance sheet continues to remain debt with liquid investment and cash of Rs3.6bn at end of FY22. We maintain our Buy rating with revised target price of Rs442 valuing at 35x FY24 EPS. Our target multiple is 10% premium to average of 5-yr PE (FY17-22).

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