Building Materials Sector Update : Industry awaits demand recovery, no major improvement yet! by Yes Securities Ltd
On our visit to Delhi, we interacted with (i) Somany Ceramics, (ii) Hindware Home Innovation, (iii) Greenlam Industries, & (iv) Greenpanel Industries, and following are the KTAs from our interaction:
Somany Ceramics Ltd:
* Demand continues to remain sluggish in domestic markets.
* Company expects demand to revive in coming 4-6months on the back of strong real-estate cycle.
* With new slab plant, company has expanded its product offerings & overall product-mix will improve with the same.
* Exports from Morbi have improved marginally but the overall utilization is ~65% (multi-quarter low).
* Management expects strong demand over 4-5years, and volume growth should be healthy owing to strong demand from real-estate segment & growing application of tiles (counter tops, walls etc.)
* Margins should improve with higher utilization & better product-mix.
Valuation:
At CMP, the stock trades at P/E(x) of 19x/16x on F26E/FY27E EPS of Rs36.9/43.6 respectively. We have a BUY rating on the stock with a target price of Rs873.
Hindware Home Innovation Ltd:
* Sanitaryware & faucets demand continues to remain soft.
* In Q2FY25, bathware biz was impacted due to higher discounting and lower sales.
* Company is integrating sanitaryware & faucets sales team, consolidating warehouses for Bathware & Consumer biz which should lead to reduction in expenses.
* For pipes, demand for CPVC has been healthy on the back of strong plumbing demand. PVC pipes should witness better volume off-take with stable resin prices.
* In plastic pipes, management is focusing on value added products which will lead to better profitability.
* New pipe plant of 125,000Te in North will commence operation from Q4FY25, and total capex for the same will be Rs1.8Bn.
* Proceedings from rights issue of Rs2.5Bn will be used for repayment of debt.
Valuation:
At CMP, the stock trades at P/E(x) of 56x/27x on FY26E/FY27E EPS of Rs5.0/10.6 respectively. We have a NEUTRAL rating on the stock with a target price of Rs265.
Greenlam Industries Ltd:
* Company expects laminate volume growth of ~12-14%.
* In order to mitigate the higher container cost, Greenlam took price hike of ~2.5- 3% in domestic markets.
* At current laminate capacity, peak utilization can be ~110%, next capex for laminates will be brownfield.
* Wooden floor and door segment performance is improving while decorative veneer segment continues to remain under pressure. The segment should break-even at EBITDA level.
* For plywood, company is following direct dealer model & current pricing is ~3-4% lower Vs peers.
* Timber prices in south have inched upwards & Greenlam has taken price hikes in plywood as well.
* Plywood plant should operate at ~50% in FY26E.
* For particle boards, year-1 utilization should be ~40-45%.
* Capex for H2FY25E will be Rs2.5Bn.
* Current debt of Rs10Bn should reduce FY26 onwards. Of total debt, Rs6.5Bn is for particle boards & Rs1Bn for laminates.
Valuation:
At CMP, the stock trades at P/E(x) of 37x/30x on FY26E/FY27E EPS of Rs15.8/19.9 respectively. We have an ADD rating on the stock with a target price of Rs600.
Greenpanel Industries Ltd:
* Demand in Oct’24 was decent while Nov’24 has been weak.
* Peers took price hike of ~3% & now the pricing is similar to Greenpanel.
* Total industry capacity post expansion will be 4.5-4.6mn cbm while domestic demand is ~2.7-2.8mn cbm.
* While timber prices in north remained elevated, south prices inched-up further post Q2FY25.
* VAP constitutes ~50% of product-mix wherein margins are ~2.5% better Vs base products.
* New plant will be commissioned from Jan’25 first week wherein company incurred capex of Rs6Bn and expects A/To of 1.1x and will gradually ramp-up to 1.3-1.4x.
* Higher timber prices & low volume off-take is likely to dent margins.
* Company is eyeing a capex for plywoods in coming 12-15months depending on demand.
Valuation:
At CMP, the stock trades at P/E(x) of 24x/20x on FY26E/FY27E EPS of Rs14.5/18.0 respectively. We have a BUY rating on the stock with a target price of Rs451.
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