Exxaro Tiles IPO: Review

Exxaro Tiles IPO opens for subscription on 4th August. The company is looking to raise Rs 161 crore through the public issue. Here are the details:

Exxaro Tiles IPO Date: 4th August - 6th August 2021

Exxaro Tiles IPO Price band: Rs 118 - 120 per share

Issue Size: Rs 161.09 crore (Fresh equity shares worth Rs 134.23 crore and offer for sale by promoters and shareholders worth Rs 26.86 crore.)

Reservation: QIB 25%, Retail - 40%, NII 35%.

Employee Reservation: NA

Bid lot: 125 shares, and in multiples of 125 shares

Issue Objective

The money raised from the IPO will be used:

• To meet working capital requirements.

• To make Pre-payment/repayment of secured borrowing availed by the company.

• To general corporate purposes.

About Exxaro Tiles

• Exxaro Tiles was incorporated in 2008 and is engaged in the manufacturing and marketing activities of vitrified tiles.
• They manufacture Double Charge Vitrified Tiles, Glazed Vitrified Tiles made from ceramic materials i.e feldspar, clay, and quartz.
• Exxaro Tiles has a product portfolio of 1000+ different designs of tiles of 6 sizes. The well-established products are Galaxy Series, Topaz Series, and High Gloss Series.
• The company supplies products to large infrastructure projects like residential, educational, commercial, hotels, government, builders, religious institutions, etc. They also export tiles to countries like the USA, Bosnia, Poland, and others.
• Exxaro Tiles has two state-of-the-art manufacturing facilities in Talod and Padra with an installed production capacity of 1,32,00,000 sq m per annum.

Exxaro Products

They have two product categories -

Double Charge Vitrified Tiles - These are tiles that are fed through a press that prints the pattern with a double layer of pigment 3 to 4 mm thicker than other types of tiles. It is suitable for heavy traffic commercial projects, and the process in it does not permit complex patterns but results in a long-wearing tile surface.

Glazed Vitrified Tiles - These are flat slabs manufactured with ceramic materials such as clay, feldspar, and quartz. They are fired at high temperatures to ensure low water absorption and high strength. These are coated with glaze materials prior to the firing process.

Listed Peers

• The listed peers include Kajaria Ceramics Limited, Asian Granito India Limited, Somany Ceramics Limited, Orient Bell Limited, and Murudeshwar Ceramics Limited.
• The revenue of Exxaro Tiles is much lower than the listed peers (as most of them have a long history of operations). The list is led by Kajaria Tiles with revenue of Rs 2,832 crore (FY20), Exxaro Tiles had Rs 241 crore revenue in the same period.
• The EPS of 4.5 is much lower than leaders Kajaria and Asian Granito, who have Basic EPS of 16.06 and 14.02, respectively.

Financials

*The debt to equity ratio for FY21 is 9 months ending December 2020. 

• The  Company derives 85% revenues from retail sales channels and balance 15% comes from the institutional / projects segment. Exports are around 14% of the revenue and could scale up to 20% in the coming years. The revenue from the exports has grown at a CAGR of 150.87% between FY18 and FY20.
• The company lost Rs 40-50 crore in revenue in 2020-21 due to the Covid-19-led lockdown. But it expects profitability to improve due to a reduction in interest cost and working capital augmentation in the ongoing fiscal ending March 2022.
• The company’s total borrowing stood at Rs 182.27 crore as of March 2021, of which Rs 104.8 crore was working capital facilities. 
• Exxaro Tiles expects its revenue to touch close to Rs 400 crore in FY22 as operations normalise, and profit at Rs 40 crore,

Dividend Policy: ETL has not declared any dividend for the last five fiscals. It will follow a prudent dividend policy post IPO based on its earnings and future prospects.

USPs

Manufacturing facilities - The company has state of the art manufacturing facilities with a strong focus on quality and design. The facilities are multi-purpose and are designed to allow a level of flexibility, enabling them to manufacture various sizes of our products.

Trusted dealer network - The company has over 2000 registered dealers and has a presence in 27 states. They have maintained long-term relationships with most of their dealers, and hence they have a history of high customer retention.

1000+ designs - The company has a diversified product portfolio and consists of 1000+ designs. The designs are categorized into various series and available over six sizes.

Experienced management - The company has experienced management with significant expertise in the ceramic industry.

Growth Potential

Strengthening of brand value - The company will make consistent efforts to strengthen the brand value and visibility by undertaking various marketing initiatives.

Expansion of dealer network - The company intends to expand their dealer network in Tier-2 and Tier-3 cities. Also, the company aims to increase its presence based on its product portfolio.

Increase sales - The company plans to increase sales by enhancing manufacturing capacities and procuring materials on an outsourced basis. The company is in the process of obtaining certain lands at Morbi and is making advance payments to this end.

Use of technology - The company plans to increase the operating efficiencies through technology enhancements and by setting in-house gas stations. It will help them effectively manage and expand operations, maintain strict operational and fiscal controls and continue to enhance customer service levels.

Key Risks:

Raw material supply - The company faces volatility in the supply and pricing of raw materials, stores, and spares. For raw material, there is no long-term agreement. Hence, an increase in the price of raw materials may have an adverse effect on the business and financial condition of the company.

Power and Fuel - The company is exposed to fluctuations in the prices of power & fuel, and an inability to pass on increased costs may adversely affect profitability. Also, if there is a shortage or non-availability of power, fuel, and water facilities, it will impact the financial condition of the company.

Extensive Working capital - The company requires a significant amount of working capital for continued growth. If the company is not able to get the required working capital, it can affect the operation of the company.

Formalities:There have been some instances of non-filing/ delays /incorrect filings in the past with certain statutory authorities. If the authorities impose monetary penalties on the company or take certain punitive actions against them in relation to the same, their business, financial condition and results of operations could be adversely affected.

Loans:Company’s Promoters, directors and members of the Promoter Group have provided personal guarantees to certain loan facilities availed by the company, which if revoked may require alternative guarantees, repayment of amounts due or termination of the facilities, which in turn may adversely impact the cash flow, business and result of operations.

Exxaro Tiles IPO: INDmoney recommendation

Exxaro Tiles has posted a tepid growth in topline over the last two years. Better margins in the previous year have helped the company to post a robust 34% rise in profit in FY21. The previous year has been especially challenging for the tiles industry. Exxaro lost around Rs 50 crore in revenue in 2020-21 due to the Covid-19-led lockdown. Going forward, the company expects its profitability to improve due to reduction in interest costs and augmentation of working capital. The company has guided for net profit of about Rs 40 crore in FY22 (from 15 crore this year). 

At the higher end of the price band, Exxaro Tiles IPO is priced at a P/E of around ~35 times FY21 earnings (post-issue). This is lower compared to its listed peers Kajaria Ceramics (53 times), and Somany Ceramics (57 times). Given their superior financial profile, the peers are trading at higher valuations. 

It is to be noted that Exxaro Tiles would be listed in the T2T segment. Hence, there could be a 5% circuit, restricting large moves post-listing. 

Given factors such as tepid growth in revenues, lower margins and return ratios as compared to larger peers, higher competition and pricey valuations, we remain ‘Neutral’ on the prospects of the issue. Given its small issue size, Exxaro Tiles could still see good demand. Hence, investors seeking listing gains should ‘Subscribe with caution,’ given that the company is likely to be in the T2T segment.