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Walking the talk

We believe Somany Ceramics is on the cusp of major rerating with the management walking the talk on several key issues (which led to significant de-rating in the past) including a) cleaning up of balance sheet over the last few quarters including fully providing for its investments in SREI Infra bonds in Q4FY21 as a prudent accounting practice (despite no stress at the moment); b) its strong cashflow management driven by superior working capital discipline; c) calling off its treasury operations by recalling all the ICDs and utilising it to pay off its debt; and d) correcting major flaws in its systems and processes by introducing appropriate checks and replacing few KMPs. Besides correcting the balance sheet, the company also seems geared to post industry leading volume growth aided by low base (of last 5 years), recent capex initiatives and structural improvement in EBITDA margins driven by superior product mix and operating leverage. We now rate SOMC as our top pick in building materials space. Maintain BUY.

Valuation and outlook:

Factoring in Q4FY21 performance, we increase our consolidated revenue and PAT estimates by 4.2%/6.3% and 5.8%/19%, respectively for FY22E/FY23E. We now expect SOMC to report revenue and adj. PAT CAGRs of 17.9% and 39.1%, respectively over FY21-FY23E. We maintain our BUY rating on the stock with a revised target price of Rs870 (earlier: Rs525), valuing it at 25x (earlier 18x) FY23E earnings. Key downside risks: 1) Sharp rise in gas prices and 2) increase in competitive intensity.

Volume growth at 13.4% QoQ.

SOMC posted 14.7% QoQ increase in its consolidated revenue to Rs5.65bn (I-Sec: Rs5.45bn). This is attributable to 13.4% QoQ increase in tile segment volumes. With higher mix of GVT, SOMC was able to improve its realisation by 1.1% QoQ despite higher growth in outsourcing revenues. Allied product revenues witnessed growth of 19.6% QoQ. Going forward, with double-digit revenue growth in tiles likely in FY22 aided by market share gains, expected recovery in its allied product segment and expansion led growth in FY23, we expect SOMC to report revenue CAGR of 17.9% over FY21-FY23E.

EBITDA margin record high at 15.9% (I-Sec: 12.5%).

SOMC surprised with 15.9% EBITDA margin (I-Sec: 12.5%) led by better product mix, savings in brand spends and operating leverage. We expect 12.5% EBITDA margin in FY22 led by impact of higher gas cost, higher branding and staff cost on a low base. However, in FY22 higher utilisation and better mix will help improve margin. With likely improvement in GVT mix to 30% from 26% currently and operating leverage, we model on a conservative basis (led by commissioning of all the three expanded capacities at one go in FY23 start) EBIDTA margin of 13.5% by FY23E from 11.6% in FY21.

RoCEs likely to inch towards 16.7% by FY23E.

Sharp improvement in profitability and strong cashflow generation in FY21 and FY22 along with stricter balance sheet are likely to help SOMC absorb higher capex over the next one year and improve RoCE to 16.7% in FY23E from 11.8% in FY21. This, we believe, will lead to further rerating of the stock going forward.

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