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La Opala’s Q3FY24 print was weaker; revenue/EBITDA declined by 15.2%/11.8%, though PAT grew 27.5%. Management alluded weak revenues to, (1) necessary changes made in front end distribution saw sales disruption, (2) high base due to non-recurring institutional order of Rs100mn in Q3FY23, (3) weak consumer spends cut discretionary demand, and (4) rising competitive intensity. Lower input prices and operating leverage influenced gross margin rising to 78.9% (+120bp); yet despite lower employee and other expenses by 8.6%/26.5% EBITDA margins settled at 37.9% (+146bp) YoY. With higher other income (+38.2%) and cut in interest expenses (-8.3%) PAT grew by 27.5% to Rs442mn. Management cited current capacity utilization ~60% expecting demand revival in Q4. Though we are positive on La Opala’s growth story, considering weaker than expected 9MFY24 performance we cut earnings and retain Buy with a revised TP of Rs491 (34x Sept’25E EPS).

Weak consumer spends, and distribution changes hurt Q3 revenues

After witnessing strong demand in domestic market over past two years, Q3FY24 revenues declined by 15.2% at Rs1.1bn. Management alluded weak revenues to, (1) necessary changes made in front end distribution saw sales disruption, (2) high base due to non-recurring institutional order of Rs100mn in Q3FY23, (3) weak consumer spends cut discretionary demand, and (4) rising competitive intensity. In term of channel mix retail contributed ~75% followed by Modern Trade at 20% and balance from e-commerce. That said, with distribution changes made in Q3, La Opala expects further retail expansion from current 20k base backed by enhanced capacity (36K tn). Management said demand in Q4 to come back driven by urban and tier 2/3 towns, while with exports (~15% sales) remain muted. Management aspires to deliver double digit revenue growth in FY24 with steady EBITDA margins at 9MFY24 levels. 

De-bottlenecking, focus on premium products saw margin improvement

With lower input prices and operating leverage gross margin increased to 78.9% (+120bp). However, despite lower employee and other expenses by 8.6%/26.5% EBITDA declined to Rs406mn (-11.8%) resulting EBITDA margins at 37.9% (+146bp) YoY. With higher other income (+38.2%) and cut in interest expenses (-8.3%) PAT grew by 27.5% to Rs442mn. Management cited current capacity utilization ~60% expecting further de-bottlenecking to add capacity. Apart from this, with greenfield unit in Sitarganj for borosilicate glass is expected to shore up revenues in our view. Further we note the company is currently experimenting outsourced products under La Opala brand under Cook-Serve-Store category. The product range under this category includes – bakeware, storage bowls, tiffin boxes and serving bowls. We believe as consumer traction improves, the company may plan further capacity expansion.

Valuation and key risks

We reckon La Opala’s growth is driven by, significant capacity addition, venturing into new product categories, capturing favorable consumer demand lifting revenue momentum. However current demand is pressured by lower discretionary spend and rising competitive intensity which may wane off in Q1FY25E. With leaner balance sheet remains and strong cash flows we are sanguine on La Opala’s growth story. Considering weaker than expected 9MFY24 performance we cut earnings for FY24E/FY25E by 3.1%/13.8% and retain Buy with a revised TP of Rs491 (34x Sept’25E EPS). Risks: prolonged weakness in discretionary spends and rising competitive intensity in India. 

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