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Higher gas prices impact margins…

About the stock: Somany Ceramics (SCL) is the second largest tiles manufacturer in the domestic tiles market having ~63 MSM capacity and sanitaryware and faucets capacity of 1.15 mn pieces and 0.65 mn pieces, respectively.

SCL’s new capacity of 10 MSM (potential to generate ~| 250-300 crore worth of additional revenue at full capacity and incremental margin of 100- 150 bps) will come by Q4 end/Q1FY23

Q3FY22 Results: SCL reported a mixed bag performance.

The topline was up 19.3% YoY at | 587 crore led by tiles revenues (up 19.7% YoY) at | 512 crore with ~5% volume growth and ~14% realisation uptick)

The EBITDA was at | 62.4 crore down 1.5% YoY. The resultant margins were at 10.6%, down 223 bps YoY owing higher gas prices

PAT was at | 32.2 crore, up 14% YoY, aided by lower interest and taxes

What should investors do? SCL’s share price has grown by 40% over the past five years (from ~| 620 in January 2017 to ~| 865 levels in January 2022).

With strong underlying demand and likely improvement in margins when gas price cools off, we upgrade from HOLD to BUY

Target Price and Valuation: We value Somany at | 1000/share at 26x FY24 P/E.

Key triggers for future price performance:

New capacity of 10 MSM (with potential to generate ~| 250-300 crore worth of additional revenue at full capacity) and incremental margin of 100-150 bps will come by Q4 end/Q1FY23. Additionally, it has also announced setting up of greenfield manufacturing facility of large format/ slab tile of ~4 MSM/annum in Gujarat, which is expected to commence production during Q4FY23 at capex of ~| 170 crore

We expect 13% CAGR in tiles volume and realisations CAGR of ~2%, resulting in tiles revenues CAGR of 15% over FY22-24 to | 2473 crore

Any respite in gas price rise to aid margins

Alternate Stock Idea: Besides SCL, we like Mahindra Lifespace in realty/building material space

Play on expanding residential real estate portfolio

BUY with a target price of | 335

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