Nitco Tiles – A derived Real estate cum housing play.

When there was a gold rush in California all the diggers bought pick axes and shovels. While many gold mining enthusiasts did not make money the ones selling equipments and accessories made decent money.  Levi Strauss Jeans was one example.

This analogy may be repeated in the Indian real estate market while it is not certain that you would make money buying land and selling homes it is certain that you would need floor tiles, glass, electrical fittings etc. So companies manufacturing these items would surely make money.

Nitco tiles (CMP Rs 169) is India’s leading tile manufacturer  with a fully automated integrated Ceramic tile plant built in technical collaboration with world leaders 'Sacmi Impianti' of Italy. The marble division has a processing facility at Mumbai and the company also has a Cement terrazzo division. The company derives 50% of its business from new construction while the other 50% depends upon the renovation market. This ratio could get skewed in favor of the new construction as the spending on this sector grows at a faster pace over the next few years

The per capita consumption in India is as low as 0.15 sq.mtr as compared to China (2 sq. mtr), Europe (6 sq.mtr), Brazil (2.5 sq.mtr). India figures in the 11th position in the list of top consuming nations of tiles in the world. The ceramic tiles demand is projected to grow at over 20% for the next 3-4 years based on continuing thrust on housing and real estate, booming economy, rising disposable incomes of the middle class.

The existing plants at Nitco are running at 100% capacity utilization. To create volume growth the company set up a new plant at Alibaug in May this year. This increased the floor tile capacity by close to 56%. The annual capacity increase of 2.28 million sq. mtrs. shall significantly contribute to the bottom-line in FY 07.

The company has installed windmills to generate 7.50 MW of power, which it sells to the MSEB at a rate of Rs 3.5 per unit (to increase by 15 p each year). In return, the company purchases power from the state electricity board at a lower price. This is because the state government encourages clean sources of energy from windmills. In the first quarter revenues from the power generation was Rs 1.5 crore and the management expects to do at least Rs 5 crore fro the full year. 

NITCO is the highest importer of Marble at 12,816 tons. This accounts for 9.90% of total marble imports in the country. The company also launched a Wooden tiles collection this year.

For the past few years the company’s ceramic tiles division has been averaging growth at 40-50%. The marble business does not facilitate this kind of growth as it is quota-based. The growth here is at around 25%.

The company is planning to do an acquisition of a wall tile unit or put up a new unit and various options are presently being evaluated.

In the first quarter of FY07 net profit was up 114% at Rs 6.9 crore against Rs 3.22 crore for Q1FY06 even as its net sales jumped 42% on top of a robust volume growth. The management expects the trend to continue as revenues from its new projects have started to kick in from May this year. The return ratios are below 12% which should improve as the new facility starts to contribute and the IPO cash gets fully deployed.

The company also increased its realization per square meter in FY 06 as is evident from the table below. This indicates the company’s advent into higher margin items.

NITCO Real Estate: NITCO Tiles has recently entered into the Real Estate business, with the initial project being started at Andheri, Mumbai.

Exports: Nitco also focuses on markets abroad and exports about 20% of its Ceramic tiles production all over the world including Canada and the US

Recommendation: NITCO Tiles remains a twin play on the Indian housing/real estate market as well as on rising consumer incomes. At a PE of 8.45 times FY 07 the stock merits investment and investors should take positions and add on declines.

Source: Company feedback and media reports