10 August 2018 BRS Quarterly Result Snapshot

BRS Quarterly Result Snapshot - 1Q FY 19

Royal Ceramics Lanka PLC (RCL SL: LKR 93.80)

RCL reported an EPS of LKR 3.15 (-32.7% YoY) for the quarter, against BRS forecast of LKR 4.64. The negative variance was due to
flat revenue and higher than anticipated operating and finance expenses.

Exhibit 01: Quarterly Earnings and Variances

Income Statement (LKR mn) 1Q 19A 1Q 18A YoY % Q1 19F Var % Comments
Net revenue 6,116 5,771 6.0% 6,167 -0.8% Almost in line
Gross profit 2,029 2,089 -2.8% 2,148 -5.5% Higher CoGS
EBIT recurring 634 893 -29.0% 878 -27.8% Higher operating expenses
Finance income 12 32 -62.8% 26 -54.1%
Finance expense (410) (296) 38.5% (387) -6.2%
Share of associate company profit 286 248 15.7% 313 -8.5% Lower contribution from LFIN
Tax expense (163) (197) -17.4% (145) -12.3%
Net income recurring before DO* 360 679 -47.1% 686 -47.6%
Discontinued operations (DO)* (1.89) (13) 85.2% - 0.0%
Net income after deducting for DO* 358 667 -46.3% 686 -47.9%
EPS (LKR) 3.15 4.68 -32.7% 4.64 -32.2%
DO* - Discontinued Operations

Bottom line: Declined 46.3% YoY for the quarter to LKR 358mn, impacted by higher CoGS of 11% YoY, operating expense by 14% YoY and finance cost of
38.5% YoY respectively. The finance segment led by LFIN (associate stake) was the major contributor to NPAT replacing the pre dominantly strong Tiles &
Associated Products (TIA). The 23 % growth in the finance segment contributed to a bulk ~81% of NPAT. Tiles & Associated products (TIA) contribution was
limited to 35% comparatively lower to the previously posted 49.2% impacted by higher CoGS as expected, operating expenses and finance cost. Aluminium
segment posted a negative contribution of 7.1% for the first time while the plantation segment too ended in red with 9.5%.

Top line: Grew 6% YoY to LKR 6.12bn aided by the growth in all segments excluding plantations. TIA remained the highest contributor of 61.8% maintaining
the same contribution YoY. Packaging segment posted the highest growth of 34% YoY contributing in second place with 13.4%. All other segments contrib-
uted lower YoY. RCL company net revenue growth slowed down for 1Q FY 19 albeit growing 5% while TILE net revenue grew 13% YoY aided by local and ex-
port sales. We believe imports from India and China continued to benefit TILE local sales. LWL company continued to post a stagnant revenue. RCL company
has concluded its capacity enhancement while TILE 30% increase is expected to conclude in 3Q FY 19. We believe the general slowdown in business has re-
stricted top line growth for Swisstek Aluminium with revenue growth being limited to 5.6%, albeit capacity being increased to 1,000/MT per month. The
plantation segment was impacted by lower NSA for tea and rubber.

GP & EBIT margin: GP and EBIT margin declined to 33.2% and 10.4% (previously - 36.2% and 15.5% respectively) impacted by the higher CoGS of LKR 4.09bn
(+11%) and operating expenses to LKR 1.4bn (+14%). Higher aluminium prices, world LPG prices and weakening rupee against the USD contributed to the
increase in CoGS. We expect persistent pressure on margins during the forecast period with energy cost to remain high.

Finance expense: Expanded by 38.5% YoY to LKR 410mn. The 18% YoY increment in short term interest bearing borrowings to LKR 10.61bn has resulted in a
higher finance burden to the RCL (group). Gearing increase to 45% was due to debt financing obtained for the capacity expansion. We believe debt to in-
crease on financing new projects going forward.

Taxation: Income tax for the quarter declined by 17% YoY to LKR 163mn, with effective tax at 31%. RCL is taxed at 28% on local sales, 12% on export sales
profits and dividend income at 14% at present.

DPS: DPS of LKR 7 was declared for FY 2018. RCL is trading at dividend yield of 7.5% on CMP.

Relative Valuation: In terms of relative valuation RCL trades at a PER of 3.8x on a TTM EPS of LKR 24.50 (sector - 7.6x) and PBV of 0.5x (sector - 0.9x).

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Analyst: Nusrath Mohideen

94 (115)220210 I nusrath@bartleetreligare.com

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Summary Financials

Exhibit 02: 12 months and QoQ Performance

12 months
Income Statement (LKR mn) FY 2018 FY 2017 YoY % 1Q 19A 4Q 18A QoQ%

Revenue 29,090 26,412 10.1% 6,116 7,956 -23.1%

Gross profit 10,933 10,862 0.7% 2,029 2,852 -28.9%
EBIT recurring 5,498 6,076 -9.5% 634 1,464 -56.7%
Finance income 132 152 -13.6% 12 46 -73.8%
Finance expense (1,363) (1,104) -23.5% (410) (361) 13.7%
Share of associate company profit 1,107 1,042 6.3% 286 310 -7.6%
Tax expense (1,501) (1,335) 12.5% (163) (515) -68.4%
Net income recurring before DO 3,872 4,831 -19.9% 360 944 -61.9%
Discontinued operations (DO) (21) (196) 89.3% (1.89) 1.83 -203.3%
Net income after deducting for DO 3,851 4,636 -16.9% 358 946 -62.2%
EPS (LKR) 26.00 30.46 -14.6% 3.15 7.12 -55.8%

Exhibit 03: Balance Sheet Summary Exhibit 04: Margin Analysis

Statement of Financial Position (LKR mn) 1Q 19A 1Q 18A YoY % Key ratios 1Q 19A 1Q 18A
Cash and cash equivalents 616 1,419 -56.5% Gross profit margin (%) 33.2% 36.2%
Fixed assets 26,145 21,977 19.0% EBIT margin (%) 10.4% 15.5%
Inventories 12,395 9,282 33.5% ROCE % 6.8% 12.8%
Total assets 54,419 45,153 20.5% ROE % 7.0% 16.8%
Equity 20,462 17,713 15.5% Debt/equity (%) 81.8% 71.7%
Interest bearing debt 16,742 12,693 31.9% Gearing (%) 45.0% 41.7%
Total liabilities 25,094 18,829 33.3% Interest cover (x) 1.55 3.01
Net debt (cash) 16,126 11,274 43.0% NAVS (LKR) 184.70 159.89
Total capital employed 37,204 30,406 22.4% PER (x) 3.8x 3.4x
PBV (x) 0.5x 0.6x

Exhibit 05: Segmental Performance

Sector Revenue Net profit (inclu. Associates stake)

LKR 'mn 1Q 19A 1Q 18A Growth % Contribution 1Q 19A 1Q 18A Growth % Contribution Margin - 19A Margin - 18A

Tiles & Associated products 3,842 3,598 6.8% 61.8% 131 339 -61.4% 35.0% 3.4% 9.4%
Sanitaryware 448 404 10.7% 7.2% 13 50 -74.8% 3.4% 2.8% 12.5%
Plantation 478 626 -23.7% 7.7% -35 15 -329.6% -9.5% -7.4% 2.5%
Aluminium 582 551 5.6% 9.4% -26 20 -235.3% -7.1% -4.5% 3.5%
Packaging 831 620 34.1% 13.4% 1 18 -97.1% 0.1% 0.1% 2.9%
*Finance - - - - 302 245 23.1% 80.6% - -
Other 39 33 19.5% 0.6% (10) 1 -812.9% -2.6% -25.3% 4.2%
Total 6,219 5,832 6.6% - 374 689 -45.7% - 6.0% 11.8%
* Associate stake in LB Finance PLC

Source: Company Data & BRS Research

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Exhibit 06: Revenue and Profit Contribution %

For Q1 FY 19 Tiles & Associated

products
-3%
Net profits 4% Sanitaryware
1%
13% 35%
Plantation
9%
Aluminium
8% Revenue 3%
62%
81% 7% -9% Packaging

-7%
*Finance
-0.1%
Other

Source: Company Data & BRS Research

Exhibit 07: Price and volume movement

Source : CSE

* A detailed Earnings Review will follow.

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 BRS Quarterly Result Snapshot

Bartleet Religare Securities (Pvt) Ltd

www.bartleetreligare.com

BRS Equity Research - research@bartleetreligare.com

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