MEGA JACKPOT::::::::::::::: ARO GRANITE LIMITED " Benificiery Of Housing + Real Estate Boom "

Aro Granites

Benificiery Of  Housing + Real Estate Boom

(NSE CODE:  AROGRANITE, BSE Code: 513729) (CMP: Rs.78)

Company Description

Aro Granite is based at Hosur in Tamil Nadu, promoted by Mr. Sunil Arora for processing polished/ flamed granite tiles and slabs. The company also exports its products to North America, South America, Europe and Far East markets.

 

ARO Granite Industries started operations as a 100% Export Oriented Unit in 1991 for processing Polished / Flamed/modular Granite Tiles & Slabs. It is engaged in manufacturing of modular granite tiles and granite random slabs. It is a star export house; exporting to around 30 countries like North and South America, Europe (UK, Germany, the Netherlands, Italy), Africa, Greece, Portugal , Iran and the Far East. Their plants are strategically located and therefore, it gets direct access to quarries in South India, which are known for the finest and widest range of appealing granites. The company has installed the most sophisticated and environment-friendly granite processing machinery imported from Italy.

 

Positives Triggers

§  Diversified market globally, US being only 20% of the overall portfolio, which protects them from uncertainties in one market, supplying to almost 50 countries. Top 10 distributors contribute to only 17% of the sales, which makes the trade less risky.

§  Last year, Aro’s 11000 sq meters warehouse became operational which is a game changer according to the management. It has enabled them to display their products in a much better way and gives them a chance to stock granite and compete with the market. Before their customers used to spend almost 3 to 4 weeks to book 15 to 20 containers, but now with the warehouse adding value to its product, the same customers are able to book 15 to 20 containers in a day thereby improving the efficiency of their sales.

§  Aro granite set itself in a different league as it sells the most expensive granite in the industry, it’s mainly because of their costing’s and their high end customers do not mind spending.

§  Indian market is also having huge demand of Tiles and Granites because of push towards housing for all by 2022 and also Smart Cities are being built.

§  ARO Granite saw capacity utilization – 85% , Tile capacity utilization – 60%.

§  Topline growth can come due to Cut to Size & entry into new markets. The company can easily do more than 300 crores  turnover from existing capacity.

§  The company had to shift their entire model from produce on order to Stock & sell. The new warehouse can stock ENTIRE finished goods. Now clients can fly from abroad, stay in banglore for 2-3 days, finalize the order after seeing the material & availability. Due to warehouse, now sales cycle will be faster.

§  Since entire finished goods inventory can be stored in the warehouse, lot of free space available in the factory. Now there are 80 blocks in the que instead of 100 blocks for processing. Also, 12 gangsaw machines can do 90 sowing, instead of 75 due to free space. Due to these efficiency measures, peak capacity has gone up by 20%.

§  No capex for next 2 years.

§  No cross-currency risk, as their billing is in USD & Euro.

§  Sales Breakup

Competition From Domestic Un-organized Players

Being tax compliant there were not able to compete with the domestic competitors who tend to evade taxes & deal in ‘kaccha’. Local players selling price is equal to aro‘s acquisition price. Aro pays 22% duty, local guys pay nothing. Aro does everything in white, there is no cash transaction at all. “We pay highest taxes & our procurement cost is the highest. But then our selling price is higher than everyone.

” With GST coming in and government focusing on cashless trade there will be a time where ARO granite will be able to capture domestic market. Since they are the best in terms of quality, management is confident of being in a position to grab domestic market share.

 

Management View On Quartz & Porcelain

§  It is a very simple technology. You only require Quartz, which is available round the world. Then it requires pigment and epoxies. In the end, it is not big rocket science, anybody can make it.

§  The company did some preliminary study on Quartz project & ruled it out. The problem is China, the usual mass production which they do. In the next five years, as per their study, the production will be not 5x, may be 10x more than what they are doing today. So they are going to capture the whole market and it will be very difficult for us in India to compete with the chinese.

§  There are two technologies, one is Breton and other is the Chinese. The Breton plant costs almost 300 crores and the Chinese costs hardly 50 crores. But there is not much difference in the selling price, hardly 10%.

§  In the last one year the median prices have gone down from $60 a square meter to $40 a square meter. ( As on august / sept 2016 )

§  Porcelain slabs are in similar sizes to Quartz and the thickness they process is between 3 mm and 12 mm.

§  The advantage is that they are copying lot of marble products like the Popular Calcutta, etc. Marble is not acid resistant / stain resistant / scratch resistant and the same problem is with Quartz. Quartz is also not stain resistant, acid resistant or fire resistant. When you take Porcelain on the other hand, it overcomes all of these things. So it is definitely a superior product compared to quartz. The price range of Porcelain is much higher, currently it is almost double the price of Quartz but it is still cheaper than the higher range high-end marble.

§  As per management view- Natural Stone market will always be there. Artificial stone, which is essentially a man made ‘fake’ product, will not remain popular for so long.

Triggers For Granite Industry

§  Opening of mines which have been closed in many parts of the country especially TN and Karnataka.

§  Correction in drastic price differences created by currencies especially due to Brazilian currency devaluation. Brazilian granite has a currency advantage at this point of time & Indian players are not able to match their pricing. Any improvement in Brazilian economy is a good news for indian players too.

 

 

 

Our View

§  Margins may have bottomed out in last few years. Before 2007, the company consistently delivered 20%+ ROE & ROCE. Company got attacked from all sides over the last 10 years. US housing bust + underutilized capex + brazil currency devaluation + competition from engineered stones + quaries closing down in TN, Whatever could go wrong, has gone wrong for them.

§  Now demand growth is picking up from all sides Domestically and Internationally, US President TRUMP and Indian Prime Minister MODI both have the vision to make the infrastructure as their top priority.

Why To Buy

The Company has been very consistent with dividends and has also been rewarding shareholder with regular bonuses and is available at extremely compelling valuations of less than 9.45 times trailing PE whereas industry PE is 26.66. The company would keep bettering on the growth moving forward and would be a clear beneficiary of word economy picking up and smart cities project, Housing for all could be the icing on cake. The company would become debt free this year. With a lot of its raw materials being imported and most of the products exported, the company is naturally hedged against currency fluctuations. A point to note is that No other company in this sector has this level of natural hedge. It’s great because it saves finance costs. The company’s almost doubling its sales every four years and should better this moving forward. The company that’s consistently growing for last 10 yrs, regularly rewarding shareholders with bonus shares and dividends and is in one of the hottest sectors of the moment cannot keep on trading at these kinds of ridiculous valuations. The management quality is impeccable here. This is one stock that has not just survived but thrived in harsh business environment and with improving business environment, the company can graduate to a new level altogether.

Super Compelling Valuations

 With the current market cap of just 119cr whereas Enterprise value is 553 cr, Debt to equity is very low just 0.75, Book Value is 111.95, Price/ Book- 0.63, EPS of FY17 - Rs 8. This is a wonderful cash bargain. On top of it its being trading at a dirt cheap PE of just 9.45. Even doubling from these levels the stock would still be just 19 PE. Given that its peers are trading at anything between 20-80 PE and given the strong demand of its products, strong earning consistency and visibility the stock, backed by an ethical management should get strongly re-rated in near future.

 

 

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