SRI LANKA EQUITY RESEARCH CAPITAL GOODS INTERIM RESULTS UPDATE

ROYAL CERAMICS LANKA

RCL.N: LKR37.80
RECOMMENDATION : BUY A sustained growth plan assured amidst continued import limitations whilst
FAIR VALUE : LKR46.0 planned capacity expansions to go live by 1H- FY23E…
RESULTS RELEASED : 8/10/2021 Equity holders’ profits of Royal Ceramics (RCL SL: LKR37.8) rose +1,000% YoY to LKR1.3
REPORT PUBLISHED : 8/16/2021 bn in 1QFY22 (amidst a lower base in 1Q’21 due to island wide lockdowns prevailed then),
mainly steered by increased topline (up ~95% YoY - backed by improved revenue from all
COMPANY OVERVIEW
main segments), expanded profitability margins, reduced net finance costs (-70% YoY) along
Royal Ceramics Lanka (RCL) dominates the local tile
with increased associate income from LFIN. However, on a QoQ basis, earnings slipped -54%
manufacturing industry with a collective market share of
QoQ. Furthermore, EBIT margins expanded to 21% in 1Q’22 (cf. 4% in 1Q’21). Conversely net
c.66% in floor tiles (RCL and TILE) held an average
finance costs dropped ~70% YoY to LKR155 mn in 1Q’22 amidst lower finance costs (down ~57%
capacity utilization of almost 100% by end FY21.
YoY) due to reduced lending rates and curtailed borrowings (-49% YoY to LKR12 bn).
Following the acquisition of Lanka Ceramic (CERA SL:
LKR155), RCL became the holding company of its direct
The prevailing import restrictions on low quality tiles, an initial ~10% capacity expansion
competitor Lanka Tiles (TILE SL: LKR58.9) in FY14.
across all tile plants and effective cost optimization strategies to steadfast RCL’s earnings
over FY22/23E.
VALUATIONS (4 Qtrly Trailing)
• Near-medium term demand sustainable: Given GoSL’s intension to develop local
Market Sector RCL SL
PE (x) 10.5x 11.9x 5.7x industries and soften the pressure on LKR, the prevailing import restrictions on floor
PBV (x) 1.4x 0.9x 1.4x tiles, Walltiles and Sanitary ware (as per the gazette issued on 11th Jun’21) would most
DY (%) 2.6% 2.2% 3.7%
likely aid RCL to maintain its optimal capacity utilization levels in FY22E.
Prices as at : 8/16/2021 • We hence expect RCL’s FY22E profits to grow ~14% YoY LKR7.0 bn (revise up by
6%) given the sustained elevated demand for tiles and improved earnings from
SHARE STATISTICS
Packaging, Sanitary ware and Aluminium segments.
Bloomberg Ticker RCL SL
Reuters Ticker RCL CM • Furthermore, reduced housing loan rates enhancing the local home builders’ market,
Market Cap. (LKR Bn) 42.1 effective cost controlling measures (group recorded a cost saving of +LKR700 mn in
(USD Mn) 210.0 FY21 through TPM and reduced total cycle time), lower cost of borrowings and lower
N - Issued Shares (mn) 1,107.9
corporate taxes should bode well for RCL to maintain its earnings trajectory in the
Free Float (%) 30.3
forecast period.
(LKR/USD =200.5) • Margin pressure likely to persist: Nevertheless, the rising global raw material prices
including LP Gas, Aluminium and paper amidst the depreciating LKR cf. USD could
SHARE MOVEMENT YTD 3M 12M
continue to suppress RCL GP margins in FY22E (GP margins dipped from ~41% in
N - High/ Low (LKR) 42.1/31.2 41.7/35.0 43.9/7.3
4Q’21 to 37% in 1Q’22).
RCL.N (%) 114.6 2.7 399.3
Avg. Daily T/O (LKR Mn) 173.9 136.5 123.2 • Moreover, the additional expenses associated with covid-19 related health & safety
ASPI (%) 19.1 12.9 55.3 protocols could further burden RCL’s profitability, escalating OPEX in FY22E.
• Expansions to be at existing premises whilst evaluating options for a Greenfield
Plant: Based on RCL’s management, all 4 tile factories comprise adequate space for
Prices as at : 8/16/2021
capacity additions (initial phase of ~10%) whilst the group expects the commencement
MAIN SHAREHOLDERS 6/30/2021 of expansions to fall by 2QFY23E and the total capax is yet to be finalized. Further to
Vallibel One Plc 55.96 that, group is also evaluating avenues on commencing a greenfield plant with latest
Employee's Provident Fund 13.79 technologies which could cut operational costs by ~20-25%, if materializes.
Seylan Bank Plc/Hotel International (Pvt) Ltd 1.12 • RCL is also expected to complete installation of solar panels at its factories in 2021E.
Amana Bank Plc/Mr.Mohamed Nayaz Deen 0.54
• FY23E earnings could rise to LKR8.3 bn (up +20% YoY): This is backed by RCL’s
Mrs S.N. Fernando 0.50
expectations to meet the incremental domestic demand via capacity enhancements and
Employees Trust Fund Board 0.49
higher yields backed by mass production from FY23E.
• Additionally, encouraging capacity utilization levels at the Mosaic tile plant which RCL
ASPI Vs PRICE CHART
commenced in 2020 will also aid to sustain RCL’s FY22/23E profits.
10000 45 • Moreover, RCL’s efforts to restructure its debt and its sound cash position of LKR3.7 bn
as of end 1Q’22 further remain positive.
40
9000 • On the other hand, in case the imports are relaxed, the importer margins might be
35 further tarnished given the expected LKR depreciation in the future.
8000 30 • Confectionary business may not be under RCL’s portfolio: Meanwhile as per RCL
Share Price (LKR)

management, the proposed biscuit and chocolate factory is expected to be located at

25
(ASPI)

7000 Kiriwaththuduwa and may not be a part of RCL.

20
Highly undervalued and derives a TR of ~27%. RCL currently trades at a TTM PER of 5.7x
6000 15 which derives a ~53% discount to the Capital goods sector. Further, RCL generates a ~21%
10 upside to its average 12-month TP of LKR46.0 (post a diversified discount of 10%) based on the
5000 SOTP (WACC of ~13%) and implied PER (PER of ~7.5x) valuations. Thus, the fwd dividend yield
5
of ~6% and the capital appreciation translates to a total return of ~27%. Hence maintain BUY.
4000 0
Sep-20

Jan-21

Apr-21

Jul-21
Nov-20

Mar-21
Aug-20

May-21
Oct-20

Feb-21

Jun-21
Dec-20

Key risks: (i) Possible relaxation of the import ban on tiles, (ii) a slowdown in construction
impacted by the pandemic, (iii) delays in capacity expansions, (iv) the rising global commodity
prices and (v) probable LKR depreciation could weigh on RCL GP margins and future profits.
CSEALL Index RCL

ANALYST : Shadini Silva

Prepared by : Softlogic Stockbrokers 1 P a g e

SRI LANKA EQUITY RESEARCH CAPITAL GOODS INTERIM RESULTS UPDATE

Tiles contributed ~67% to 1Q’22 group revenue

EARNINGS FORECAST
12%
Tiles YE 31 March FY18 FY19 FY20 FY21 FY22E FY23E
9% Net Profit (LKR mn) 2,880 2,632 2,586 6,135 6,970 8,353
Sanitaryware
YoY growth (%) -15% -9% -2% 137% 14% 20%
6% Plantations EPS (LKR) 2.6 2.4 2.3 5.5 6.3 7.5
6% Aluminium DPS (LKR) 0.7 0.4 0.4 1.4 1.9 2.3
67% BVPS (LKR) 18.3 20.8 22.7 27.4 31.8 37.1
Packaging EBITDA (LKR mn) 6,894 6,241 6,301 11,257 12,561 15,802
YoY growth (%) -5.8% -9.5% 1.0% 78.7% 11.6% 25.8%
EV/EBITDA (x) 7.1 7.8 7.8 4.4 3.9 3.1
Debt to Equity 74% 82% 83% 35% 34% 35%

Gross Profit up c.152% YoY in 1Q’22 Dividend Payout 27% 17% 17% 25% 30% 30%
ROE (%) 14% 11% 10% 20% 20% 20%
(LKR mn) (LKR mn) Investor Ratios (%)
15,000 7,500
PE (x) 14.5 15.9 16.2 6.8 6.0 5.0
12,500
PBV (x) 2.1 1.8 1.7 1.4 1.2 1.0
10,000 5,000
Dividend Yield (%) 1.9% 1.1% 1.1% 3.7% 5.0% 6.0%
7,500
5,000 2,500
2,500
- - SEGMENTAL PERFORMANCE – 1QFY22
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

1QFY22 1QFY21 1QFY22 1QFY21 1QFY22 Contribution

RCL
Revenue Revenue YoY % PAT PAT YoY % Revenue PAT
Revenue (LHS) Gross Profit (RHS) Tiles 7,137 3,333 114% 1,264 (204) 720% 67% 70%
Sanitaryware 635 357 78% 59 (39) 253% 6% 3%
Plantations 594 473 26% 2 (18) 112% 6% 0%
EBIT surged +800% YoY in 1Q’22 Aluminium 901 436 107% 27 (25) 210% 9% 2%
Packaging 1,318 833 58% 78 42 85% 12% 4%
Finance & Others 7.2 0.6 1100% 383 160 139% 0% 21%
(LKR mn) (LKR mn)
5,000 3,000
4,000 2,500 QUARTERLY SUMMARY
2,000
3,000
1,500 LKR mn (YE March) 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 YoY % Change QoQ % Change
2,000
1,000
Net Revenue 5,432 11,232 14,121 14,235 10,592 95% -26%
1,000 500 Cost of sales (3,882) (7,294) (8,626) (8,392) (6,682) 72% -20%
- - Gross Profit 1,550 3,938 5,495 5,844 3,911 152% -33%
Other Income 39 45 47 197 60 52% -70%
2QFY21
1QFY21

3QFY21

4QFY21

1QFY22

Distribution Expenses (780) (1,375) (1,737) (1,681) (1,276) 64% -24%

Administrative Expenses (298) (418) (543) (485) (500) 68% 3%
EBIT (LHS) Net Profit (RHS) Other operating expenses (277) (96) (50) (57) (18) -94% -69%
EBIT 235 2,095 3,211 3,817 2,177 828% -43%
Finance Costs (521) (436) (261) (191) (226) -57% 19%
All margins expanded in 1Q’22 Finance Income 9 14 14 46 71 701% 55%
PBT (278) 1,673 2,964 3,672 2,021 827% -45%
50% Share of Associate Company Profits 161 446 462 745 370 129% -50%
Net Profit Before Tax (117) 2,119 3,426 4,417 2,392 2148% -46%
Income Tax Expense 34 (455) (659) (229) (579) -1791% 153%
PAT (83) 1,664 2,768 4,188 1,813 2296% -57%
25%
Equity holders Profit 9 1,293 2,011 2,822 1,290 13835% -54%

0% OPEX (1,355) (1,888) (2,331) (2,223) (1,794) 32% -19%

Net Finance Cost (513) (422) (247) (145) (155) -70% 7%
2QFY21
1QFY21

3QFY21

4QFY21

1QFY22

Total Assets 64,582 62,837 63,140 66,140 67,374 4% 2%

Borrowings 20,790 16,678 11,287 10,688 11,952 -43% 12%
Equity 25,143 26,443 28,119 30,397 30,328 21% 0%
GP Margin EBIT Margin Cash and cash equivalents 797 919 2,598 4,925 3,722 367% -24%
Net Margin
GP Margin 29% 35% 39% 41% 37% 838 bps -413 bps
EBIT Margin 4% 19% 23% 27% 21% 1623 bps -626 bps
RCL currently trades at a ~71% discount to its NP Margin 0.2% 11.5% 14.2% 19.8% 12.2% 1201 bps -764 bps
regional peers Debt/Equity 83% 63% 40% 35% 39% -4328 bps 425 bps
Tax rate 29% 21% 19% 5% 24% -510 bps 1901 bps
Stock Country PER - TTM EV/EBITA Distribution/Revenue -14% -12% -12% -12% -12% 231 bps -24 bps
Royal Ceramics Lanka Plc Sri Lanka 5.7 5.5 Admin Expenses/Revenue -5% -4% -4% -3% -5% 77 bps -131 bps
Mulia Industrindo Tbk Pt Indonesia 9.5 7.1
Korea Cast Iron Pipe Indus South Korea 10.3 15.2
Taiwan Fu Hsing Industrial Taiwan 10.8 5.1
Tien Phong Plastic Jsc Vietnam 12.0 10.3 Sources: Company interim statements
Binh Minh Plastics Jsc Vietnam 12.1 5.3
Mj International Co Ltd Taiwan 14.6 11.3
Lion Chemtech Co Ltd South Korea 15.1 10.7
Chosun Refractories South Korea 15.9 14.6
Globe Union Industrial Corp Taiwan 16.2 14.8
Sunspring Metal Corp Taiwan 17.0 25.4
Stylam Industries Ltd India 17.5 26.0
Concepcion Industrial Corpor Philippines 18.4 6.2
Zhejiang Xidamen Textile D-A China 19.1 14.7
Hsil Ltd India 19.4 17.3
Shandong Longertck Technol-A China 20.6 19.5
Byucksan Corporation South Korea 29.4 26.1
Apollo Pipes Ltd India 39.3 29.9
Acrysil Ltd India 42.9 30.9
Jeongsan Aikang Co Ltd South Korea 47.2 15.5

Sources: SSB Research, Bloomberg

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SRI LANKA EQUITY RESEARCH CAPITAL GOODS INTERIM RESULTS UPDATE

FINANCIAL SUMMARY

Y/E 31st March (LKR mn) FY17 FY18 FY19 FY20 FY21 FY22E FY23E
Revenue 26,413 29,090 31,499 31,412 44,972 49,777 57,156
Gross Profit 10,863 10,933 10,296 10,425 16,803 18,150 22,557
EBIT 6,076 5,498 4,651 4,556 9,369 10,508 13,572
Share of Associate company's Profits 1,042 1,107 1,304 1,373 1,814 1,993 2,292
Net Profit Before Tax 6,167 5,373 4,085 3,679 9,860 11,555 14,469
Taxation (1,335) (1,501) (991) (803) (1,309) (2,311) (2,894)
Profit For The Year 4,637 3,851 3,083 2,866 8,540 9,233 11,565

Equity Holders Profit 3,375 2,880 2,632 2,586 6,135 6,970 8,353

Y/E 31st March (LKR mn) FY17 FY18 FY19 FY20 FY21 FY22E FY23E
ASSETS
Non Current Assets 29,864 33,873 36,622 41,655 43,835 47,000 50,568
Current Assets 14,935 17,681 21,552 23,490 22,305 27,956 35,446

Total Assets 44,799 53,158 61,200 65,145 66,140 74,956 86,014

Shareholdets Fund 17,631 19,688 22,084 25,135 30,397 35,276 41,123

Non Current Liabilities 8,610 8,530 9,233 10,985 9,651 8,768 9,977
Current Liabilities 10,095 13,438 16,887 19,616 14,511 17,473 19,248
Total Equity & Liabilities 44,799 53,158 61,200 65,145 66,140 74,956 86,014

Y/E 31st March FY17 FY18 FY19 FY20 FY21 FY22E FY23E
YoY Revenue growth 6% 10% 8% 0% 43% 11% 15%
YoY NP growth 15% -15% -9% -2% 137% 14% 20%
GP margin 41% 38% 33% 33% 37% 36% 39%
EBIT margin 23% 19% 15% 15% 21% 21% 24%
NP margin 13% 10% 8% 8% 14% 14% 15%
Debt/Equity 69% 74% 82% 83% 35% 34% 35%
Effective Tax rate -22% -28% -24% -22% -13% -20% -20%

Source : Company Reports/SSB Research

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SRI LANKA EQUITY RESEARCH CAPITAL GOODS INTERIM RESULTS UPDATE

CHANGES IN THE TOP 20 SHARE REGISTRY

# Shares as at 30
Top 20 Shareholders # Shares Changed %
June 2021

VALLIBEL ONE PLC 620,026,000 55.96

EMPLOYEE'S PROVIDENT FUND 152,779,980 13.79
SEYLAN BANK PLC/HOTEL INTERNATIONAL (PVT) LTD 12,360,290 450,000 1.12
AMANA BANK PLC/MR.MOHAMED NAYAZ DEEN 6,024,065 New Entrant to top 20 0.54
MRS S.N. FERNANDO 5,500,000 0.50
EMPLOYEES TRUST FUND BOARD 5,380,403 -617,997 0.49
AMAYA LEISURE PLC 5,216,000 0.47
SEYLAN BANK PLC/JANASHAKTHI CAPITAL LIMITED 5,194,160 0.47
SRI LANKA INSURANCE CORPORATION LTD-LIFE FUND 4,733,495 New Entrant to top 20 0.43
BANK OF CEYLON-NO2 A/C (BOC PTF) 4,694,100 0.42
MR K.A.S.R. NISSANKA 4,622,000 345,000 0.42
COMMERCIAL BANK OF CEYLON PLC/CAPITAL TRUST HOLDINGS LIMITED 4,442,465 1,958,535 0.40
MR D.L.B.C. PERERA & MRS I.V. KARIYAKARAWANA 3,192,420 0.29
COMMERCIAL BANK OF CEYLON PLC/G.S.N.PEIRIS 3,036,780 New Entrant to top 20 0.27
AIA INSURANCE LANKA LIMITED A/C NO.07 2,668,560 0.24
PEOPLE'S LEASING & FINANCE PLC/CAPITAL TRUST HOLDINGS LIMITED 2,560,248 76,318 0.23
MR A.M. WEERASINGHE 2,297,040 -750,000 0.21
MR K.C.C. PERERA 2,186,663 New Entrant to top 20 0.20
SEYLAN BANK PLC/PRIYANTHA PUSHPAKUMARA MADDUMAGE 2,132,500 -603,530 0.19
MR A.S. ASHRAF 2,075,000 New Entrant to top 20 0.19

Source : Company Quarterly Reports

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 SRI LANKA EQUITY RESEARCH CAPITAL GOODS INTERIM RESULTS UPDATE

Softlogic Research Guide to Investment Rating

BUY : Total return may exceed 15% over the next 12 months
Trading BUY : Total return may vary from 7.5% to 15% over the next 12 months
Neutral : Total return may fall within the range of +/- 7.5% over the next 12 months
Take Profit : Target price has been attained. Look to accumulate at lower levels
Sell : Total return may fall by more than 15% over the next 12 months

Equity Sales
Dihan Dedigama [email protected] +94 11 7277010 / +94 117277955, +94 777689933
Hussain Gani [email protected] +94 11 7277020 / +94 777992086
Prasanna Chandrasekera [email protected] +94 11 7277056
Eardley Kern [email protected] +94 11 7277053, +94 777348018
Andre Lowe [email protected] +94 11 7277052, +94 777230040
Dilip Fernando [email protected] +94 11 7277000, +94 77 3379730
Dinesh Rupasinghe [email protected] +94 11 7277059, +94 77 2072397
Tharindu Senadheera [email protected] + 94 11 7277000, +0773505094
Madushanka Rathnayaka [email protected] +94 34 7451000, +94 773566465
Gratian Nirmal [email protected] +94 774510000/+94 21 7451 000
Krishan Williams [email protected] +94 31 7451000, +94 773569827
Lakshan Rathnapala [email protected] +94 11 7277000, 077 8329698
Asitha Bandara [email protected] + 0718740019
Isuru Adamsz [email protected] + 074 1502884
Asendra Wijesiri [email protected] + 077 6470632, 077 3669108

Equity Research
Mahesh Udugampala
[email protected]
+94 11 7277030, +94 769 637 638

Shadini Silva Thuvarakan Senthilmani

[email protected] [email protected]
+94 11 7277032, + 94 773 627 792 +94 11 7277031, +94 77 5015637

Raynal Wickremeratne Nishanthi Hettiarachchi

[email protected] [email protected]
+94 11 7277034, +94 77 5268282 +94 11 7277033, +94 77 1078499

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