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Volume growth momentum to sustain

Volume growth for major branded building material categories is likely to accelerate QoQ in Q4FY21 driven by: a) impressive growth traction in secondary real estate market, b) pent-up demand in renovation / refurbishment segment, and c) sustained consolidation particularly in categories like plumbing pipes and laminates. We thus foresee all categories to recover beyond pre-Covid levels in Q4FY21.

With expected increase in input costs (due to higher crude prices which were not passed on fully in Q4), we expect categories like tiles, pipes and adhesives to witness gross margin moderation on sequential basis. However, EBITDA margins are likely to remain firm QoQ largely driven by operating leverage. We estimate our building material coverage universe to report aggregate revenue / EBITDA / PBT increase of 38.5% / 64% / 97.1% YoY respectively (ex-PIDI: 36.1% / 63.3% / 107.2% YoY) in Q4FY21.

Key highlights and monitorables for the quarter:

* Plumbing pipe sector: Sustained consolidation in PVC pipe segment is likely to drive high single-digit volume growth for PVC pipe processors. However, sustained sharp increase in PVC prices (18% rise QoQ) might impact gross/EBITDA margins QoQ for these players due to partial pass-on to consumers. CPVC pipe players on the other hand are likely to report strong volume offtake and firm margins QoQ. Key monitorables: 1) trend in polymer prices, and 2) availability of PVC resin.

* Ceramic tile sector: Branded tile players are likely to report high single-digit volume growth QoQ due to firm demand from tiers-2/3/4 cities and market share gains from Morbi players in particular. With higher gas cost QoQ, we expect gross margins to moderate for the quarter under preview. EBITDA margins however are likely to remain above pre-Covid levels driven by operating leverage and better product mix. Key monitorables: 1) trend in gas prices, 2) Morbi exports, and 3) product mix trend.

* Sanitaryware sector: While we expect volume recovery in branded sanitaryware sector to be much better than anticipated, the category is unlikely to grow like tiles with the category demand largely dependent on new real estate construction, which is still below pre-Covid levels particularly in metros and tier-1 cities. With better recovery QoQ and lower outsourcing mix, we expect sanitaryware segment to report better margins. Key monitorables: import substitution, and pricing trend in sanitaryware and faucet segment.

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