Opal IPO: Niche play at attractive valuations

Incorporated in 1996, Pune- based Opal Luxury Time products (Opal) manufactures and sells designer wall and table clocks and has one plant at Roorkee, Uttarakhand. The company is coming out with a fresh issue of equity shares to raise Rs 13 crore via its Initial Public Offer (IPO). Post the issue, Opal will be listed on EMERGE - NSE's small and medium enterprises (SME) exchange. The issue is priced at a band of Rs 130-Rs 135 and will be open for subscription between March 25th and 28th. The company plans to use the issue proceeds to invest in moulds, tools and equipments and indigenisation of designs for expanding its manufacturing facility and to enhance its brand building activities.

The company has two brands namely Opal (premium clocks ranging between Rs 1,450 to Rs 27,500 per piece) and Caliber (budget clocks priced below Rs 690 a piece). The company gets about 95% of its revenues from the Opal brand and is one of the few organised players in the premium wall clocks segment in India. The company is well-placed to gain from up-trading of the Indian middle-class to premium products. In addition to a strong management team having rich experience in the clock industry, the company also enjoys a strong distribution network. It has about 207 dealers, 35 direct dealers and 91 shop-in-shops. It has a tie-up with leading retail chains such as Shoppers' Stop, Nilkamal Group, amongst others and ten on-line portals. Opal has also tied up with Marvin Traub associates to increase its presence in the US markets.

On the flip-side, it caters largely to tier-I cities in the Western and Northern Indian states, thus limiting its brand recall. The key challenge for Opal is that it sources about 60% of its inputs (moulds and movements) from countries such as Taiwan, China and Japan - which increases its procurement time to as much as 90 days. This acts as a major hindrance for the company to take large orders and scale up further. However, as per the management, it plans to use the IPO proceeds to source moulds locally which will nearly halve its lead time to 45-90 days. This would also enable Opal to improve its working capital cycle which stands at 200 days currently. High competition from unorganised players and limited bargaining power from its vendors (due to its smaller size) are some of the key challenges it faces. Given its smaller size and constant need of funds, the company's top management is paid relatively lower salaries, thus making it difficult to retain them.

Its revenues and net profit grew at a compounded rate of 26% and 41% respectively to Rs 17.3 crore and Rs 2.9 crore over FY10-12. Notably, the company will enjoy a 100% tax holiday for three more years, following which the rebate will come down to 30% as well as 100% excise duty exemption. While local sourcing of raw materials will reduce Opal's working capital and raw material costs, it will need to invest significantly in advertising and promotional activities to strengthen its brand recall. The company does not have any listed peer.  At the price band of Rs 130- Rs 135 and assuming a modest earnings growth of 15% in FY13, the issue is priced reasonably at 13.1-13.5 times its post issue earnings per share. These valuations seem to adequately capture the challenges facing the company.