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Growth priced in…

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

* Somany has announced a large capex of | 160-170 crore (seeing strong demand and higher utilisation) in FY22, which will increase its overall capacity by 10 MSM and generate ~| 250-300 crore worth of additional revenue (at full capacity) and incremental margin of 200 bps.

Q1FY22 Results: Somany reported weak Q1FY22 sequential results.

* The topline was up 95% YoY, down 41% QoQ at | 329.9 crore. Tiles revenues were up 98% YoY, down 41% QoQ at | 292 crore

* EBITDA was at | 23.1 crore vs. loss in Q1FY21 but decline of ~74% QoQ. The resultant margins were at 7%

* PAT was at | 4.5 crore vs. loss in Q1FY21 but down 85% QoQ

What should investors do?

Somany’s share price has grown by 20% over the past five years (from ~| 592 in August 2016 to ~| 710 levels in August 2021).

* We downgrade from BUY to HOLD after the sharp price run up (up 84% in six months) as we believe the growth outlook is largely priced in

Target Price and Valuation: We value Somany at | 750/share.

Key triggers for future price performance:

* Increased exports demand for Morbi based unorganised players provide better opportunity to organised players focusing on domestic markets

* Somany has announced a large capex of | 160-170 crore (seeing strong demand and higher utilisation) in FY22, which will increase its overall capacity by 10 MSM and generate ~| 250-300 crore worth of additional revenue (at full capacity) and incremental margin of 200 bps

* We expect 14% CAGR in tiles volume and realisations CAGR of ~2%, resulting in tiles revenues CAGR of 16% over FY21-23 to | 1948 crore

Alternate Stock Idea: Besides Somany, we like Kajaria Ceramics in the tiles space.

* Quality on improving growth potential of tiles sector

* BUY with a target price of | 1185

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