Published on 30/08/2019 10:20:15 AM | Source: Reliance Securities Ltd

Hold Somany Ceramics Ltd For Target Rs.335 - Reliance Securities

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Subdued Performance; Improvement Likely

Mainly marred by lower-than-expected realisation and higher operating expenses, Somany Ceramics (SOMC) has reported weak performance in 1QFY19. While sales volume grew by 8% YoY (-23% QoQ) to 11.9msm, average realisation declined by 1.4% YoY and 0.6% QoQ to Rs288/ sm vs. our estimate of Rs293/sm. EBITDA growth of 7% YoY to Rs209mn was significantly below of our estimate of Rs355mn, while EBITDA margin stood at mere 5.4% as against 5.44% in 1QFY19 and 10% in 4QFY19. Broadly in-line with our estimate, SOMC’s revenue grew by 8% YoY (-25% QoQ) to Rs3.9bn. While Input cost/sm (Power & Fuel + RM) declined by 3.4% QoQ (+1.2% YoY) to ~Rs234, operating cost/sm increased by 2.4% QoQ (flat on YoY basis) to Rs308.

Increase in other expenditures/sm resulted in higher opex. APAT stood at Rs87mn (+4% YoY and -56% QoQ). Considering a likely pick-up in consumption and capex revival in 2HFY20E, SOMC is expected to witness a decent traction mainly led by new capacity addition, gradual benefits for the organised players after the NGT ban at Morbi, favourable products-mix and persistent higher growth in Sanitaryware & Faucets segment. However, we trim our earnings estimate by 15%/10% for FY20/ FY21, mainly to factor in lower realisation and higher opex, following which even we do not envisage any meaningful upside from the current level. Notably, stock has corrected over ~12% since we downgraded our recommendation to HOLD. Further, in the absence of any significant recovery in return ratio, we do not find any scope for the stock to get re-rated. However, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs335 (from Rs370 earlier).


Decent Volume amid Challenging Environment

Despite slowdown in discretionary expenses or consumption slowdown led by liquidity crunch, SOMC managed to report 8% YoY growth in sales volume to 11.9msm. The Management continues to expect healthy volume growth in FY20 mainly on the back of of commissioning of a 3.7msm plant in the Southern region and improved utilisation rate of the extant capacities.


Subdued Operating Performance

Led to soft realisation (-1.4% YoY and -0.6% QoQ) and lower utilisation, SOMC reported subdued performance, as EBITDA grew by mere 7% YoY at Rs209mn vs. our estimate of Rs355mn. EBITDA margin stood merely at 5.4% as against 5.44% in 1QFY19 and 10% in 4QFY19. Going forward, we expect its operating performance to improve hereon on the back of higher revenue contribution from GVT (led by pick-up in Southern unit utilisation) and Sanitaryware & Faucets segment.


Outlook & Valuation

While 1QFY20 performance was marred by key factors for the second largest players having 7% market share, SOMC is expected to report decent improvement in its operating performance led by pick-up in new capacity and favourable product-mix. However, we believe that the current valuation appears to be reasonable, while in the absence of any meaningful recovery in return ratios, we do not envisage any re-rating in the stock. Hence, considering limited upside from the current level, we maintain our HOLD recommendation with a revised Target Price of Rs335 (18x FY21 EPS).


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