Asian Granito (NSE:ASIANTILES)

The companies I invest in usually tend to have negative sentiment around them due to bad news or being in an unpopular industry. Today’s company is no different.

In the last two months, ASIANTILES has seen its share price fall over 50% (down > 60% YTD) on the back of negative news around the company (customs evasion and IT searches) and a recent rights issue.

I still see value. I’m betting that the market may have overestimated the extent to which the news and rights issue have impacted the company and as a result provides the potential for exceptional returns on a risk-adjusted basis. My reasons for investing in the company are extremely simple and concise. Investment theses don’t have to be complex.

This isn’t a high conviction play (not every investment has to be), so I keep the position size small.  

About the company

Asian Granito is one of the leading ceramic companies in India. Its product portfolio comprises of tiles, marble, quartz and a wide range of wall/flooring solutions as well as sanitary ware products. While the company accounts for 36% of organised quartz market in India, its sanitary ware and CP fittings range coupled with its recently launched AGL Bath ware range provide complete bathroom solutions.. It has built a reputation for itself in India and the global markets. The company has a global footprint and exports its goods to ~100 countries.

The company has a pan-India distribution network with over 6,500+ dealers it also operates 300+ showrooms also owns & operates 13 company-owned display centres across India.

Understanding the Rights Issue

Rights Issues are generally viewed negatively because they imply that the company is cash strapped and has no better alternative of raising capital. Further, non-participating investors usually don’t like it because it negatively affects share price and dilutes their ownership in the company. But that’s not always the case. Rights can also be issued to fund large Capex and/or when management views it as a better alternative of raising funds to taking on additional debt. Done right, and for the right reasons, it can provide capital appreciation for shareholders.

ASIANTILES is raising capital through a right issue to fund Capex and not because it needs help paying off debt. The company has been reducing debt, now at the lowest levels since 2012, and has a decent enough current and interest coverage ratio. ICRA rates its outstanding loans A+ and A1, even after accounting for the recent IT raids.

Some ratios and comparisons.

As a result of the recent rights issue, the company’s shares outstanding rose from 3.63 crore to 12.67 crores. To get an understanding of how the recent change in share price relates to its financials, we’ll need to make some adjustments.

Adjusting for the recent rights issue, the company currently trades at just 0.38x 3 year average revenue and just 5x 3 year average net income. Cash per share stands at 10.15 (~25% of CMP).

The company trades at an acquirers multiple (EV/EBIT) of 5 and a P/B of just 0.55. Comparing that to it’s closest comparable in similar market cap (500-100cr), Orient Bell and Exxaro Tiles, these numbers stand at 26 and 14 (acquirers multiple) and 3.7 and 1.8 (P/B) respectively. To add to that, its sales are far superior- 2.5x sales of Orient Bell and nearly 5x sales of Exxaro.

Thesis

Now, to the reasons I’m investing.

The EV/EBIT and P/B it currently trades at seem stupidly low. Historically, the company has traded at EV/EBIT and P/B of 10 and 1.15 and higher, even though debt levels were higher than they are now.

Assuming the company receives no economic benefit from the resulting Capex, its current multiples still don’t make much sense. Unless I’m missing something major, some tax and customs issues shouldn’t beat a stock so far down.

A move to P/B of 1 (lower than historical norm) would result in a 75% appreciation in share price and if sentiment changes, the share price could very well double.

So there’s the possibility of high returns, but what’s the downside? It’s tough to know how far down a share price can go, but Ben Graham came up with a good estimate for what it’s worth at the very least - its net current asset value per share (NCAVPS).

NCAVPS is current assets less total liabilities divided by its outstanding shares. It’s a proxy for a company’s estimated liquidation value. Post rights issue, the NCAVPS is 31.5. If the company continues paying down debt and/or assets increase as a result of Capex, this number could very well increase as well. Assuming the company can be liquidated at ~31/share, that would be around a 25% downside. If the share price nears this, I’ll cut my losses and sell. Like I said, this isn't a high conviction investment, so I'm better off knowing beforehand where I give up on the investment.

All said, I see the potential for high returns and limited (known) downside. I’m investing around 5% of my portfolio in ASIANTILES.

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