The Hindu Business Line : Murudeshwar Ceramics: Buy

Increase in demand for ceramic tiles, strong presence in the high premium vitrified tiles segment, and various cost efficiency measures adopted augur well for the company's earnings growth. At the current market price of Rs 100, the stock trades at six times its likely FY-07 earnings (on a diluted basis) and is at a discount to peers such as Kajaria Ceramics.

Cost efficiencies

Murudeshwar's operating profit margins (OPMs) at 32 per cent is far superior to competitors with OPMs of less than 20 per cent in 2005-06.

While the expansion in ceramic tiles business is likely to reduce margins, cost efficiency measures adopted by the company can offer some protection.

Murudeshwar's Karaikal plant enjoys lower fuel cost with natural gas supply. While the same is not yet available in its Hubli plant, it produces value-added products in non-standard sizes that typically fetch higher realisation to maintain the OPM.

It has recently gone in for superior technology called dry process that consumes lower power.

The above factors offer an edge over peers such as Nitco Tiles. It has its own quarry and processing unit of china clay — a key raw material, thus keeping manufacturing costs at bay.

Murudeshwar has a market share of about 30 per cent in the vitrified tile capacity. Vitrified tiles are priced between ceramic tiles and Italian marbles.

The tile is more scratch and break resistant and offers a substitute to natural granite and Italian marble at a lesser price. Murudeshwar has expanded capacity of this high-margin product.

While the proportion of vitrified tiles in the total revenue can decline as a result of heightened activity in the ceramic tile division, increased volumes in the latter segment is likely to sustain the bottom line.

Murudeshwar's institutional clients constitute 60 per cent of total sales. Increased activity in the retail and office space is likely to keep demand robust.

Risks

The domestic tile industry continues to be threatened by cheap imports of Chinese products.

Levy of anti-dumping duty has not provided the needed relief as the tiles are still being routed through countries such as Indonesia and Malaysia.

This can affect the price realisation and market share of organised players.

Competition from low-cost tiles from the unorganised market also remains a concern.

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