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Business Markets

Analysis

RAK Ceramics shrugs off customs duty hike in Saudi Arabia with growth firmly back on track

Saudi Arabia and UAE will continue to provide foundation for another round of growth



The RAK Ceramics stock was up 70% in 2021 and there was the steady dividend payout too.
Image Credit: Gulf News Archive

RAK Ceramics is one of the world's most valuable brands in its space, with a market cap of Dh2.9 billion. Ceramic and porcelain wall and floor tiles as well as sanitaryware, are produced in the company's state-of-the-art facilities in the UAE, India, and Bangladesh.

The company put together a solid financial performance in the third quarter of 2021, which came about despite adverse market conditions such as the imposition of customs duty in Saudi Arabia and increase in logistics costs due to container shortages. Yet, revenue and profitability exceeded pre-pandemic levels. Total sales climbed 9.4 per cent year-on-year to Dh684.8 million, owing to robust growth in its core business. Net profit climbed by 86.5 per cent to Dh63.4 million year-on-year.

In the third quarter, the Saudi market was a key revenue driver with Dh127.5 million, Dh131.6 million was generated in the UAE, India provided Dh104.5 million, Dh68.1 million from Bangladesh, and Dh98.1 million in Europe. The company was able to successfully navigate through pandemic-related interruptions such as supply chain constraints and demonstrating its commitment to increasing shareholder value.

Despite the implementation of a 12 per cent customs levy, RAK Ceramics expanded its position in Saudi Arabia. It intends to open three new showrooms, two in Riyadh and one in Madinah. There are also plans to establish a manufacturing unit in Saudi Arabia to aid global expansion. The Kingdom has become a significant market for the UAE company and will continue to play an important part in its long-term expansion strategy.

A rebound in India

The India operations have seen a strong turnaround, with business surpassing pre-coronavirus levels thanks to upbeat business sentiment as Asia’s third-largest economy. The company's liquidity position is robust, cashflow from operating activities improved from Dh288.4 million in September 2020 to Dh388 million 12 months later. When compared to June 2021, net debt was reduced by Dh38 million, reaching Dh979 million. The company has a 3.42 per cent indicated dividend yield, which it maintained despite substantial headwinds during the pandemic.

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This will reassure investors in the company's ability to preserve long-term viability. RAK Ceramics’ capacity to seek expansion possibilities is gaining traction among investors, with the company's stock rising 70 per cent in the previous year.

More positives in sight

During the pandemic, RAK Ceramics bore the brunt of global supply chain disruptions, with rising freight costs squeezing profit margins. While supply chain bottlenecks remain acute, they have shown signs of easing. Container shipping costs from China to the US West Coast have fallen by 30 per cent from their peak in the Fall, while the number of containers lying idle at the Port of Los Angeles has dropped by 40 per cent since early November.

If these congestions do ease, 2022 might be a turning point for RAK Ceramics in terms of profitability. Furthermore, the company could exploit the growing demand in Saudi Arabia and take full advantage of construction activity in the UAE.

Vijay Valecha
The writer is Chief Investment Officer at Century Financial.