Strong volume recovery…
Somany Ceramics (Somany), like its key peer, reported resilient Q2FY21 reported numbers as organised tiles players exhibited stronger recovery back to pre-Covid volumes. The tiles sales volume was up 2.7% YoY at 12.9 MSM with realisations down 1.9% YoY, owing to sales mix. Overall revenues were up 0.4% YoY. EBITDA at | 49.4 crore was up 10.4% YoY, (margins 11.7%, up 110 bps), largely driven by cost rationalisation initiatives (employee and other expenses down ~12% YoY) along with benign power & fuel expenses that was down 12% YoY due to lower gas prices. PAT was at | 20.5 crore, up 2.2x YoY, with growth aided by superior operating performance, lower interest costs as well as some one-offs in base quarter.
Benefits from exports led Morbi volume diversion…
Anti-dumping duty levied on China by many countries (including the US, Brazil, Indonesia) along with “China plus one” strategy have favoured Indian tiles and sanitaryware manufacturers, due to which Morbi has become an export hub for unorganised units there. Also, dealers are favouring organised players in the domestic market with a) better stock availability, b) convenience to customers at its exclusive showrooms in uncertain times of Covid-19 pandemic, and c) absence of deep discounts/better pricing from Morbi players. The sustainability of these key trend will be the key monitorable, going ahead. Overall, we expect tiles sales volumes and revenues to grow at 4.7% CAGR to 53.5 MSM and | 1548 crore in FY20-22E.
EBITDA margins expected to remain healthy…
We highlight that while gross profit margins at 36.4% were down 250 bps YoY, margin expansion was largely driven by lower power & fuel costs coupled with cost rationalisation across admin/ employee costs, lower marketing and travelling expenses. While some of these costs will return over the next couple of quarters, the management expects margin improvement with a) gas prices likely to come down from the current level by ~ | 0.5-1.0/SCM in the coming months, b) higher operational efficiencies with plants running at 100% capacities, and c) better product mix. Overall, we expect EBITDA margins at 9.5%, 11% in FY21E, FY22E, respectively.
Valuation & Outlook
Somany has become prudent with credit control measures aiding working capital management and debt reduction. Consolidated debt was down | 84 crore in H1FY21 to | 382 crore, driven by working capital optimisation. It will be important to monitor how the sales traction pick up from here coupled with cost rationalisation sustainability. Given the alluring valuations, improved margins trajectory and balance sheet repair initiatives, we upgrade to BUY recommendation (vs. HOLD, earlier) a revised target price of | 290/share (14x FY22E EPS).
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