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Tepid quarter; strong guidance for FY23

Somany Ceramics (SOMC) has reported lower-than-expected consolidated Q3FY22 revenue growth of 19.2% YoY on tile volume growth of 4.8% YoY. EBITDA margin shrank 219bps/154bps YoY/QoQ to 10.6% due to higher input prices, resulting in an EBITDA decline of 1.2% YoY. Management stated it faced procurement challenges for outsourced PVT tiles during the quarter which resulted in lower sales of ~Rs250- 300mn and also adversely affected operating margins by ~1%-1.5%. Management believes demand trends remain strong and has guided for high double-digit volume growth in FY23 with better margins (assuming gas prices do not move up from here significantly) . The company has announced more capex of ~Rs1.7bn for FY23 to meet growing demand. We believe SOMC has demand tailwinds due to a pick-up in housing market. Maintain BUY with an unchanged Mar’23E target price of Rs1,166.

Tile volume growth of 4.8% YoY: SOMC posted 19.2% YoY growth in revenue in Q3FY22 to Rs5.87bn (I-Sec est.: Rs6.02bn), driven by tile volume growth of 4.8% YoY (2-year volume CAGR of 8.2%) and realisation increase of 14.4% YoY. Bathware segment revenue increased 20% YoY. As per management, due to supply issues from Morbi for outsourced PVT tiles, SOMC had lower sales of Rs250-300mn and margin loss of 1-1.5% in the quarter. These supply issues still persist and will affect Q4 to some extent, too after affecting Q3 already. However, demand remains strong and management has guided for high double-digit volume growth in FY23 aided by expansion of three new plants. Working capital days stood at 48 days (+1 days QoQ) in Q3FY22 and management believes these are sustainable and can be improved upon to some extent going ahead.

EBITDA margin shrinks: SOMC’s EBITDA margin stood at 10.6% (-219bps YoY/- 154bps QoQ), primarily due to higher power & fuel cost (+809bps/531bps YoY/QoQ), resulting in EBIDTA fall of 1.2% YoY. SOMC has taken price increase in tiles of ~7-8% to offset higher input cost pressure which enabled it to pass on ~85% of cost and rest can be managed, as per management, through operating leverage due to better volumes. Management believes FY23 margins should improve as SOMC’s new capacities get commissioned which have better margins if gas prices do not go up rapidly yet again.

Capacity expansion: The company’s expansion plan, which entailed a capex of ~Rs2bn, is on track and all the three plants should be operational in the ongoing quarter (Q4). The company has announced another capex of Rs1.7bn to set up a plant for largesized tiles of 4 MSM capacity in Gujarat which is expected to complete by Q1FY24. The expansion will be funded by internal accruals and debt.

Valuations & view: SOMC has demand tailwinds due to a pick-up in the residential housing market. It trades at a PER of 18.6x FY24E which is reasonable given EBIDTA CAGR of 25% during FY21-24E with strong return ratios. Maintain BUY with an unchanged Mar’23E target price of Rs1,166.

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