Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities
We expect tiles and plastic pipes companies to deliver a strong show in Q2FY22, driven by strong demand recovery. We expect both tiles and pipes volumes to rise ~10-15% YoY, led by robust sales across retail and real estate segments. Healthy demand has also buoyed the industry's pricing power amid rising fuel (gas prices for tiles cos) and raw material (PVC resin prices) prices. Subsequently, we expect aggregate revenue/EBITDA/APAT for our coverage universe to surge 40/31/36% YoY. We maintain a positive stance on both tiles and pipes sectors. Our top picks in the sector are Somany Ceramics and Prince Pipes.
- Tiles - strong demand and healthy pricing: The demand recovery that started at the end of Q1FY22 continued to firm up in Q2, driven by strong demand from real estate and individual housing. We estimate volumes from leaders to grow ~15% YoY. Further, as Morbi players remained export focused, the pan-India domestic players were able to take price hikes to pass the gas price inflation. We estimate ~3% QoQ increase in tiles realisation.
- Pipes companies - strong demand and inventory gains in Q2: Strong demand from the plumbing segment is expected to boost companies' volumes by 10-15% YoY. The rising PVC prices are further supporting bigger players' market share gains, boosting cost pass-through capabilities. During Q2, resin prices rose 6% (end to end), which should lead to companies reporting inventory gains in that quarter. Further, operating leverage gain on higher sales should support margin rebound QoQ.
- Performance of companies: We estimate that strong tiles volume growth and price increase would moderate gas price inflation impact on margins. Thus, we expect Kajaria's consolidated revenue/EBITDA/APAT to rise 22/8/7% YoY. For Somany, we expect these factors to drive up consolidated revenue/EBITDA/APAT by 19/10/11% YoY. In case of pipes companies, too, we expect a strong show YoY. We estimate that Supreme Industries' consolidated revenue/EBITDA/APAT would rise 46/38/42% YoY, mainly on account of higher realisation. For Astral, we estimate that revenue/EBITDA/APAT would jump 42/47/52% YoY. We expect pipes/adhesives EBITDA to grow 54/15% YoY respectively. For Prince Pipes, too, we expect revenue/EBITDA/APAT to soar 62/36/47% YoY.
- Stock views: We remain positive on the tiles and pipes companies, owing to continued healthy demand outlook in the long term. We roll forward valuations on Sep'23E (from Jun'23E earlier). We have also increased our valuation multiples for Kajaria and Supreme Ind to 21x (EV/EBITDA), from 19x earlier, owing to a strong outlook. We maintain our BUY ratings on Kajaria Ceramics, Somany Ceramics, and Prince Pipes. We maintain our ADD rating on Supreme Industries and REDUCE rating on Astral Ltd (due to its expensive valuation).