Broking house, Karvy Stock Broking has recommended an underperformer rating on the Nitco Tiles.

Karvy Stock Broking report on Nitco Tiles:

"Nitco Tiles has entered into contract manufacturing arrangement with FOSHAN LUNGO CERAMICS; part of New Zhong Yuan (NZY) Group, China, for manufacturing and importing of vitrified tiles. NZY is the world's largest tile manufacturing group having turnover in the region of USD 500 million and manufacturing capacity of approx 100 million sqm. The contract is valid for a period of 3 years. Under the said contract, Nitco tiles has committed to procure 3 million sqm of vitrified tiles in the first 12 months, 4.5 million sqm in the next 12 months and 6.0 million sqm in the remaining 12 months."

"The procurement prices will remain fixed during the first two years of the contract. The Chinese counterpart will manufacture the vitrified tiles as per the designs and other requirements specified by Nitco.  Earlier the company had entered into a similar contract with Foshan  Chancheng Oulian Construction Ceramic Co. China wherein they had  committed procurement of 1.5 million sqm of vitrified tiles. However, the company procured around 3.5 million sqm of tiles in FY2006 under the 1st contract The company was dependent on single supplier to fulfill its requirement and by entering into the new contract the company has mitigated this risk. The import of vitrified tiles from China attracts an anti dumping duty of USD 8.28 per sqm. However Nitco has been exempted from this anti dumping duty."

"Strong volume growth from the vitrified tiles had lead to a significant growth in the overall revenues of the company in FY06. The company sold 3.3mn square meter (sqm) of vitrified tiles in FY06, a massive 134% increase from FY05 sales volume of 1.4mn sqm. We expect the company to sell 4.6 million sqm and 5.8 million sqm in FY07 and FY08 respectively. Due to sustained demand of vitrified tiles from the residential and commercial construction sector we expect the strong demand for vitrified tiles to continue over the next 3 years."

"At the current market price of Rs 232 the stock is trading at 10.9x FY07E and 8.4x FY08E earnings. Due to sharp increase in share price, we are downgrading our recommendation on the stock from Out Performer to Under Performer and maintain our price target of Rs 222."