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Research
Somany Ceramics Ltd - CMP Rs.90, Rating changed to 'Hold', Book Partial Profit - Sushil Finance
Posted On : 2013-10-23 20:49:00( TIMEZONE : IST )
We had released stock review on Somany Ceramics Ltd. with a 'Buy' recommendation on 25th June 2013 at Rs.68 with a target price of Rs.97. Since our release of report, there has been a good run-up in the share price and it has posted a high of Rs.92 today. At CMP of Rs.90, it reflects a gain of 32.4% from our initial recommendation vis-Ã -vis S&P BSE SMALL CAP return of 4.0%.
Company will announced its Q2FY14 result tomorrow (24th Oct 2013). We believe margins may be under pressure for Q2FY14 due to the higher cost on raw materials imports, oil & fuel (natural gas), freight and foreign exchange liabilities on books.
But, we are positive on the growth story of the ceramic tile industry and Somany Ceramics for the long-term. Long-term outlook of the ceramic tile industry in India is positive mainly due to inevitable need for rapid growth of construction and real estate sectors of economy backed by higher disposable incomes.
India's tile production and consumption grew at 12% CAGR between 2007 and 2012 about 2x the global average owing to rapid urbanization, rising disposable income and affordability. India's per capita tile consumption is merely 0.46 MSM while the world average is at 1.4 MSM. About 80%-85% of tile demand is driven by new housing or first-time users, while the balance is derived from replacement. Interestingly, new housing demand is expected to emerge from non-metro locations smaller urban centers, Tier-II and III towns. We thus believe that the Indian tile industry will continue to grow over 8% owing to demand from tier II & III cities and urbanization.
Somany Ceramics is likely to grow at 15% for the next two years on the back of rising tiles demand, targeting tier II and III cities, strong distribution network, focus on value added products & consistent capacity addition both organically as well as inorganically. At the CMP of Rs.90, the stock is trading at 8.6x & 6.5x its FY14E & FY15E EPS of Rs.10.5 & Rs.13.9 respectively. We change our rating 'Hold' with a target price of Rs.97 (7x its FY15E EPS).
It is advisable for investors to book partial profit.
