On road to recovery
The faster than anticipated recovery in Somany Ceramics’ (SOMC) volumes in Jun’20 led to a beat in Q1FY21 revenues at Rs1.69bn (I-Sec: Rs1.4bn), down 57% YoY. Cost saving initiatives and lower fuel costs too led to a beat in EBITDA, which came in at -Rs116mn (I-Sec: -Rs210mn). The silver lining for the quarter was balance sheet discipline with stricter control on working capital (receivables declined to Rs1.98bn in Q1FY21 vs Rs2.7bn in Mar’20), which led to debt repayment of Rs500mn-600mn during the quarter. With sales recovery likely to accelerate, management expects Q2FY21 sales at >85% of Q2FY20 levels, which would drive sharp improvement in EBIDTA margins. Upgrade to BUY.
* Valuation and outlook: Factoring-in the Q1FY21 performance, we increase our consolidated revenue and PAT estimates by 7.4%/5.9% and 18.6%/28.2% respectively for FY21E/FY22E. We now expect SOMC to report revenue and adjusted PAT CAGRs of 3.5% and 60.5% respectively over FY20-FY22E. With better visibility on revenues and improved balance sheet management, we upgrade the stock to BUY (from Hold), with a revised target price of Rs162 (earlier: Rs125), valuing it at 11x FY22E earnings.
* Pent-up demand at Q1FY21-end aids revenue beat: SOMC posted 56.9% YoY decline in its consolidated revenues at Rs1.69bn. This is attributed to 56.5%/1% YoY decline in tile volumes/realisation and 51% YoY drop in allied product revenues. Despite downtrading during the quarter (driving greater share of commodity product revenues), realisations declined merely 1% due to higher retail sales and lower discounting in the trade. Going forward, while the economic environment remains uncertain, the company expects 85% of Q2FY20 sales in Q2FY21 while maintaining a stricter control on its working capital. We expect SOMC to report volume / revenue CAGRs of 3.2% / 3.5% respectively over FY20-FY22E.
* Cost-cutting initiatives and lower gas costs to drive margin recovery through rest of the year. SOMC’s consolidated gross margin declined by 1,100bps to 24.7% vs 35.7% YoY leading to the company reporting a negative EBIDTA margin. The consolidated EBITDA margin came in at -6.9% (I-Sec: -15%). The beat was largely attributed to cost-cutting initiatives undertaken by the company, particularly with respect to manpower costs and brand spend. Going forward, with expected traction in tile volumes and certain cost saving initiatives likely to be sustainable in the medium term, we model EBIDTA margins at 8.3% / 10.5% for FY21E / FY22E respectively.
* Consolidated losses lower than anticipated. SOMC’s reported consolidated posttax loss of Rs220mn (I-Sec: loss of Rs285mn) in Q1FY21 was largely due to better than expected operational performance. Likely improvement in cashflow management and debt repayment in the near term would aid gradual improvement in RoCE to 8.9% in FY22E from 6.9% in FY20.
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