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Gas prices continue to weigh on margins…

About the stock: Somany Ceramics (SCL) is the second largest tiles manufacturers in the domestic tiles market having ~73 MSM capacity and sanitaryware, faucets capacity of 1.15 million (mn) pieces and 0.65 mn pieces, respectively

* SCL’s new capacity of 11 MSM has potential to generate ~| 250-300 crore worth of additional revenue (at full capacity) which will drive FY23 growth

Q1FY23 Results: SCL reported a soft performance on the margins front

* The topline was up 69.5% YoY at | 559.1 crore, on a washout base. Tiles revenues were up 64.4% YoY at | 480 crore with volumes up 42.4% YoY and realisations up 15.5% YoY. QoQ volumes were down 11.5%

* EBITDA was at | 44.9 crore, a decline of ~QoQ%, owing to higher input and gas prices leading to a decline of 20 bps in margins to 8%

* PAT was at | 20.5 crore, up 19.7% QoQ given the lower depreciation, tax rate and higher other income.

What should investors do? SCL’s share price has declined ~12% over the past five years.

* Gas price uncertainty continues and there remains a risk of further global gas prices spike amid winters (H2) and continued geopolitical tensions. Thus, we downgrade from BUY to HOLD

Target Price and Valuation: We value SCL at | 730/share at 22x FY24 P/E amid gas price uncertainty and as we cut margins estimates slightly further.

Key triggers for future price performance:

* New capacity of 11 MSM (with potential to generate revenue of ~| 250-300 crore has started contributing. Additionally, greenfield manufacturing facility of slab tile of ~4 MSM/annum in Gujarat is expected to commence production during Q1FY24 at capex of ~| 170 crore

* We expect 13% CAGR in tiles volume and realisations CAGR of ~3%, resulting in tiles revenues CAGR of 16.5% over FY22-24 to | 2521 crore

* Any respite in gas price rise

Alternate Stock Idea: Besides SCL, we like Brigade in the real estate space.

* Quasi play on Bengaluru realty

* BUY with a target price of | 595

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