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La Opala RG’s net profit has grown at an astounding CAGR of over 65% in the last five years, thanks to rising sales and increased efficiency

Rising from the ashes - La opala RG

Its products had always been aspirational for middle class India, but its financial health was anything but inspirational. Then came 2008. As was the case with most companies, the financial crisis wreaked havoc on La Opala RG and it managed to stay in the black only thanks to export incentives provided by the government. But the turnaround the company has seen since, has left many pundits dumbfounded and made its shares the darling of Dalal Street Shakti Shankar Patra | @TheDollarBiz Shakespeare once famously said, “Let me embrace thee, sour adversity, for wise men say it is the wisest course.” And Sushil Jhunjhunwala, Managing Director, La Opala RG Ltd., India’s top opal glass tableware manufacturer, seems to be on a mission to prove these words right. Some would say, he’s already done it. For, until 2009, La Opala was known more as a brand and less as a business. La Opala dinner sets had become synonymous with fine dining, at least for a large chunk of middle-class Indians. But very few knew that the company, whose products had become a symbol of quality and sophistication, was anything but that. For, in the eight years between FY2001 and FY2009, La Opala’s sales grew at a CAGR of just 7.87%, profits were in single-digit crore and even the most ardent of Dalal Street bulls had given up on it. As compared to this, in the five years between FY2009 and FY2014, La Opala’s sales have grown at a CAGR of 22.98%, EBITDA margin has improved by almost 12 percentage points, and net profit at an unprecedented CAGR of 68.5%. This has not gone unnoticed by the market as bulls have lapped up its shares with both hands, resulting in a stunning appreciation of, hold your breath, 6,291% (between January 1, 2009 and August 8, 2014). So, what caused this tectonic shift? What made it the cynosure of all eyes from being an also-ran? A case study Until FY2008, La Opala RG had just two brands to boast about. One, La Opala, its flagship brand, used to market opal glass tableware. And second, Solitaire, the high-end brand, used to market lead crystal glassware. In FY2009, a third brand was added to the portfolio – Diva – to market premium segment opal glass tableware. After launching Diva, La Opala RG ventured into an area, it had almost always shied away from – advertising. Roping in the sensuous Bipasha Basu as the brand ambassador for Diva, the company launched an advertising blitzkrieg across several general entertainment TV channels. This is reflected in the annual report of FY2009 as the company’s advertisement and sales promotion expense shot up by over three times (y-o-y). Since then, it’s advertisement and sales promotion expense, as a percentage of net sales, has headed in only one direction as the company has realised the power of advertising, particularly in the segment its products were in. While advertising and the global economic recovery did indeed help matters, they were in no way central to La Opala RG’s turnaround. Efficient efficiency Over the last five years, the kind of efficiency that La Opala RG has managed to bring to its operations is simply astounding. For example, while material cost and packaging material consumed was 27.07% of net sales in FY2009, it collapsed to 20.18% of net sales in FY2014 – that’s almost Rs.7 saved for every Rs.100 worth of sales. Similarly, when it comes to power and fuel cost, the kind of efficiency that the company shows now, is simply unbelievable. For, while power and fuel cost, as a percentage of net Sales, was 27.01% in FY2009, it has more than halved by FY2014 to just 13.2% – that’s another Rs.14 saved for every Rs.100 worth of sales. All this means that even while La Opala’s sales have grown almost three-fold in the five years between FY2009 and FY2014, its EBITDA has grown nine-fold in the same period. Back to roots In many ways, La Opala today has got almost everything that any corporation would dream about. It’s in a segment, which is assured of growth thanks to rising consumerism. Its operational efficiency is improving by the day. It doesn’t have any debt. And more importantly, it has shifted focus to the buoyant domestic market almost at the perfect time. Not that this domestic push has come at the expense of exports, it’s just that the domestic business is growing at a faster clip than exports. For example, in FY2009, 29.6% of La Opala’s net sales, i.e., Rs.19.34 crore out of Rs.65.26 crore came via exports. By FY2014, although its exports had almost doubled to Rs.34.24 crore, they represented just 18.7% of net sales. Anti-dumping boon But is the domestic business growing at a faster pace just a coincidence? And why has La Opala taken its foot off the pedal when it comes to exports, particularly since export incentives were the difference between it making money and dipping into the red in FY2009? The answer to this lies in Notification No. 103, issued by the CBEC on November 23, 2011. As per the notification, the Ministry of Finance levied anti-dumping duties ranging from 36.73% to as high as 110.17% on opal glassware imports from China and UAE. And since this will remain in effect till mid-2016, La Opala has at least two more years before any serious competition can show up. It’s not that it is unprepared for rising competition. In fact, with zero debt in the balance sheet, modernisation of the Madhupur unit almost complete and expansion work at the fully-automatic Sitargunj unit scheduled to complete next year, the company is up for any challenge. Where the mouth is There’s an unwritten rule in Wall Street – buy when insiders are buying, sell when insiders are selling. And a look at La Opala’s shareholding pattern reveals that promoters were always bullish about the future and were consistently ramping up their holding when it was not even on the radar of most investors. For example, as on March 31, 2001 the promoter group held just 53.42% of the outstanding shares of La Opala. This number had swelled to 64.32% by March 31, 2009 and had risen further to 68.15% by March 31, 2014. While the ramp-up in these last five years might not seem like a lot, it, without a doubt, shows the kind of confidence the promoters have in the business, even going forward. But that doesn’t mean there’s not a single cause for concern when it comes to La Opala. Firstly, scalability is always a question for the segment that the company is in. Secondly, if anti-dumping duty is not extended beyond 2016, one never knows what kind of supply can suddenly show up from China. And lastly, while a dip in the growth rate of exports can be ignored in the short run, things can hit a bit of a bump going forward if it’s due to something systemic. Despite these minor concerns, there is absolutely no doubt that La Opala has been a miraculous turnaround story. And, if one goes by the confidence that the promoters and the top management have in the company, there’s no reason why the next five years can’t be as magical.

Interview with Sushil Jhunjhunwala, MD, La Opala RG next page...

“The shift in focus back to the domestic market was strategic”- Sushil Jhunjhunwala, MD , La Opala RG

While the rebound in global equity markets since the 2009 lows has been astounding, not many companies can boast of their shares rallying by 6,000% in these five years! To figure out why investors did exactly that to the shares of La Opala RG, we caught up with the company’s MD, Sushil Jhunjhunwala. Neha Dewan | @TheDollarBiz TDB: As you have grown in size, your margins have continued to improve. Is it just a function of efficiency of scale or there’s something more to it? SJ: Much of it is from our experience of the industry as I myself have 48 years of experience in the glass industry. The strong brand value having high customer recall, also contributes notably to the topline. Apart from efficiency of scale, our state-of-the-art technology and high quality products have also helped in increasing the top and the bottom lines. TDB: China and Germany are, by far, the biggest exporters of kitchenware/tableware made of glass, ceramic or similar material. How are products of La Opala, being an Indian company, perceived in global markets? SJ: As we are only in tableware and not in kitchenware, we have no competition from Germany. The quality of our products is perceived as world class and is comparable with any of the other top tableware manufacturers in the world. Hence, our exports are increasing continuously, with almost 75% of the total production under the Solitaire brand being exported. TDB: The La Opala brand has always been something aspirational for the Indian middle class. What kind of response have your high-end brands got in the domestic market and abroad? SJ: Our high-end brand Solitaire, which is 24% Lead Crystal Glass, is getting very good response from both domestic, as well as international buyers. TDB: In FY2014, La Opala didn’t make or lose any money from forward contracts. Don’t you hedge raw material costs and receivables anymore? SJ: We partly hedge our receivables and the rest is naturally hedged against our imports. FY2014 forex losses are only on the book as we have secured our receivables through hedging. TDB: Since the term loan for the Sitargunj unit has been paid off and you have become a zero debt company, can we expect even lower interest outgo in FY2015? SJ: Yes, interest outgo is expected to be much lower in FY2015. TDB: Despite a big rise in absolute terms, your exports as a percentage of sales are far way off the FY2009 high of 29.6. Is it a strategic decision to focus more at home or are there challenges abroad? SJ: Yes, it was a strategic decision to focus more on the domestic market. TDB: Last year, sales promotion and advertising expenses for you crossed the 10% threshold. What platforms do you primarily use for advertising and what’s the logic for it? SJ: We advertise both in print and television media. We also do below the line activities for trade promotion. TDB: The last five years have been excellent for La Opala. Can we expect similar growth over the next five years? SJ: Yes, but we feel the growth will be good subject to unforeseen circumstances. We are taking up a major expansion of our Uttarakhand plant this year, which is expected to be completed in FY2016.

Rising from the ashes - La opala RG

“The shift in focus back to the domestic market was strategic”- Sushil Jhunjhunwala, MD , La Opala RG

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