IGI Logo

Higher gas cost impacts profitability; H2 to be better

Somany Ceramics (SOMC) reported in-line Q2FY23 consolidated revenue growth of 10.2% YoY (3-year CAGR of 13.5%) with tile realisation growth of 11.3% YoY (+1.3% QoQ) as tiles volume declined 1.7% YoY (+11.5% QoQ; 3-year CAGR of 8.1%) on a high base. Consolidated EBITDA margin declined 533bps YoY (-120bps QoQ) to 6.8% due to higher power and fuel cost (+721 bps YoY) resulting in an EBITDA/APAT decline of 38.1%/53.3% YoY. Management stated demand conditions were subdued which was further impacted for 10-15 days due to supply-chain disruptions (on account of month long Morbi shutdown). Going ahead, it is hopeful of domestic demand to pick up, coupled with export opportunities to Europe (due to freight cost normalisation and lower energy cost in India vs other exporting nations). SOMC expects to convert 60% of its plants to LPG by Nov’22 (which is ~20-25% cheaper to gas cost currently), which coupled with softening natural gas prices, will aid in margin growth sequentially. It has guided for 15-20% YoY revenue growth and double digit volume growth in FY23. We cut our PAT estimates for FY23/FY24E by ~9% to factor in higher gas cost. We believe SOMC has demand tailwinds due to pick up in housing market, but has near-term margin pressure on higher power & fuel cost. Maintain BUY with a rolled over Sept’23E target price of Rs896 (earlier: Rs941), set at an unchanged 22x PER.

* Revenue growth of 10.2% YoY on a high base: SOMC posted 10.2% YoY (3-year CAGR of 13.5%) consolidated revenue growth in Q2FY23 to ~Rs6.2bn on a high base, driven by tile realisation growth of 11.3% YoY, while tile volume declined 1.7% YoY (+11.5% QoQ; 3-year CAGR of 8.1%). Bathware segment revenue grew 8.8% YoY (+7% QoQ). Management stated demand was muted during Q2, which was further impacted by logistics issues due to month long shutdown in Morbi. However, it expects demand to improve going ahead and has guided for double digit volume growth and 15-20% value growth in FY23. Working capital days were up by 2 days YoY to 49 days in Q2FY23 on higher inventory levels which were built up during Morbi shutdown and it is expected to normalise going forward.

* EBITDA margin at 6.8%: SOMC’s EBITDA margin stood at 6.8% (-533bps YoY/-120bps QoQ), primarily due to higher power and fuel cost (+721bps YoY), resulting in EBIDTA/PAT decline of 38.1%/53.3% YoY. Management has stated that softening gas prices and use of LPG in 60% of its plants by Nov’22 will lead to improvement in operating margin QoQ in Q3FY23 and more so in Q4FY23E. We have modelled margin of 10.6%/10.7% for FY24/25E, respectively (vs 9.6% in FY22).

* Valuations and view: SOMC’s operational performance has been impacted in H1FY23 due to higher gas prices. Going ahead, margins are expected to improve on falling gas prices and use of alternate fuel (LPG), which is cheaper. SOMC has demand tailwinds due to pick up in housing market and we thus, maintain our BUY rating on the stock with a rolled over Sep’23 target price of Rs896, set at an unchanged 22x PER FY24E.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer