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Murudeshwar Ceramics


Murudeshwar Ceramics manufactures ceramic and vitrified tiles.

The demand scenario appears to possess tailwinds such as improving living standards, government emphasis on housing, rural penetration etc.   The company has also outsourced some manufacturing by licensing its brand name that has helped save costs and may improve competitiveness.

The company reported somewhat volatile operating performance over the last five years – reporting about 50cr of operating profits on revenues of about 200cr in the last twelve months.  It’s debt load of 140cr (at 31st March 2011), although not comfortable, appeared to be manageable particularly in relation to net current assets.

The business is exposed to changing consumer preferences and high competition - including the unorganised sector, which adversely impacts the retail market that forms the largest tiles market segment. 

The business model is characterised by heavy capital investment – both in fixed assets and working capital – resulting in reduced free cash flows.  It may also increase financial and operational leverage, which translates directly to diminished earnings at the slightest drop in revenues.

Increases in input costs - natural gas, power (unavailability of quality coal), etc., and transport costs - fuel (petrol) etc. adversely impacts profit margins.  Government increases in excise duties and delays in laying infrastructure such as natural gas pipelines could also hamper profits.  Retaining skilled personnel appears to be another challenge in this industry. 

Management does intend to raise additional funds in the near future, including via preferential allotments of warrants to promoters at INR 17/share, ostensibly to repay debt.  Overall, minority shareholders will have their stakes diluted from 45% to 32%.  Minority shareholders ought to note this dilution factor along with management’s attitude towards them before considering a commitment to the company’s equity.

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