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In-line quarter; Hopeful of recovery from 2HFY25

Somany Ceramics’ (Somany) 4QFY24 revenue was broadly in line with JMFe while lower than expected other expenses led to 5% beat on EBITDA front. Tiles revenue grew 5% YoY (+18% QoQ, +4% 5-year CAGR) , led by volume growth of 7% YoY (+20% QoQ, +4% 5 years CAGR) while realisation fell 2% YoY (-1% QoQ) on account of higher schemes/discounts. Demand for tiles remained sluggish through 4Q and further impacted in 1QFY25 on seasonality. Blended gas cost was down 6% YoY at INR 47/scm while lower other expenses and employee cost led to EBITDA margin expansion of 180bps YoY/110bps QoQ to 10.8%, 40bps above JMFe. Somany remain hopeful of recovery from 2QFY25 and guides for low double digit volume growth in FY25 with 100-150bps improvement in operating margins, assuming stable gas prices. We broadly maintain our FY25 -26EPS estimates to arrive at Mar’25 TP of INR 950, basis 22xMar’26EPS. Maintain BUY on attractive valuations(14.4xFY26EPS).

* 4QFY24 summary: Somany’s consolidated revenue grew 2% YoY (-7% QoQ, +9% 4-year CAGR, 1% above JMFe) as tile volume grew 7% YoY (+20% QoQ, +4% 5-year CAGR, 1% above JMFe) while realisation declined 2% YoY (-1% QoQ, 2% below JMFe). Bathware revenue grew 8% YoY (+5% 5-year CAGR). Power and fuel cost fell 9% YoY (+12% QoQ) to INR 104/sqm, led by reduction in gas price (INR 47/scm; -6% YoY). Gross margin (post P&F cost) expanded 130bps YoY (-220bps QoQ) to 32.8% (220bps below JMFe). EBITDA margin expanded 180bps YoY (+110bps QoQ, 40bps above JMFe) to 10.8%. Adj. PAT was INR 287mn (+18% YoY; -3% on 4-year CAGR; 21% below JMFe). The management has guided for low double digit volume growth for tiles and double digit growth for the bathware segment. On the profitability, management expects 100- 150bps YoY improvement in operating margins in FY25.

* Decent volume performance (+7% YoY): Somany’s tile volume grew 7% YoY (+20% QoQ) which was a tad above the industry leader (+6% YoY/+9% QoQ). Demand for tiles remained sluggish during the quarter on account of continued slowdown in home improvement activity and increased competitive intensity. The management highlighted, tile demand continues to remain weak in Q1 on account of seasonality as well as general elections. However, management remains optimistic on recovery on the back of a) demand tailwinds in the real estate sector b) aggressive distribution expansion in smaller cities, c) Morbi players’ focus on exports (India’s export market is expected to grow given the favourable position of Indian exports in the global tiles market), and d) Somany’s new capacities for GVT (Maxx plant), which will improve product mix and be margin-accretive.

* FY24 performance: During the year, revenue grew 5% YoY to INR 25.9bn. Demand for tiles remained weak; tile volume grew 5% YoY to 67msm while realisations declined 1% YoY. Softening in gas prices led to gross margin (post P&F) expansion of 290bps YoY to 33.6%. EBITDA margin expanded 220bps YoY to 9.8% which led to EBITDA growth of 34% YoY. Adj PAT during FY24 came at INR 984mn (+73% YoY). Working capital days reduced significantly to 18days vs. 31 days in FY23. The company generated net CFO of INR 3.9bn vs. INR 1.6bn in FY23. Somany’s net debt reduced to INR 2.6bn vs. INR 3.2bn in FY23.

* Maintain estimates, maintain BUY: We broadly maintain our FY25-26 EPS estimates to arrive at a Mar’25 TP of INR 950, basis 22xMar’26 EPS. We maintain BUY as the current valuation doesn’t adequately reflect a) continuous improvement in balance sheet (net debt and working capital improvement), b) demand tailwinds, c) capital allocation towards its core business (continuous capacity expansion), and d) gradual abatement of governance concerns.

* Other highlights:

* As per the management, total size of the tiles market is c. INR 565-580bn, of which exports market is c. INR 190-200bn.

* Somany’s GVT mix has improved to 36% from 32% in 4QFY23. For full year, GVT mix stood at 34% vs. 32% in FY23. Management has guided to improve the GVT mix to 38% next year and 40% in FY26.

* For Somany, retail segment contributes c.80% while institutional contributes c. 20%.

* The company’s large format tile/ slab plant was commissioned during 3Q and commenced commercial production in Jan’24. The management highlighted that this will strengthen the company’s value-added product portfolio.

* Capacity utilisation during the quarter stood at 89% in tiles, 39% in sanitaryware and 99% in faucets for Somany Ceramics.

* During the quarter, company spent 2.4% of sales in ad spend. For FY25, company will continue spending towards advertisement and branding and will spend c.3% of sales.

* Working capital days reduced to 18 days in Mar’24 vs. 31 days in Mar’23. Net debt was INR 2.6bn as of Mar’24 (vs. INR 3.1bn in Mar’23). Net debt/equity decreased to 0.36 from 0.39 in Mar’23.

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