Somany Ceramics - Balance sheet strengthens; growth returns - ICICI Securities

Somany Ceramics (SOMC) posted an impressive Q2FY21 beat on all counts: a) faster than estimated recovery in volumes (3% YoY growth vs our expectation of 10% decline); b) higher than expected EBITDA margin (11.7% vs estimated 10.5%); and c) sharp improvement in balance sheet quality with strict working capital management leading to a sharp net debt decline of Rs1.92bn in H1FY21. Gross margin for the quarter was however down 220bps YoY. With the likely improvement in capacity utilisation (80% in Q2) and product mix in H2, we expect SOMC to improve its gross margins and further scale up EBITDA margins to >12% going ahead. We also expect volume growth momentum to sustain over the next 2-3 years driven by market share gains on the considerably low base of last five years and recent tightening of receivables. Maintain BUY.

- Valuation and outlook: Factoring-in the Q1FY21 performance, we increase our consolidated revenue and PAT estimates by 4.6%/1.1% and 65.1%/24.9% respectively for FY21E/FY22E. We now expect SOMC to report revenue and PAT CAGRs of 5.5% and 144.2% respectively over FY20-FY22E. We maintain our BUY on the stock with a revised target price of Rs380 (earlier: Rs304), valuing it at 18x FY22E earnings.

- Volume growth surprises at 3% YoY. SOMC posted 0.8% YoY increase in its consolidated revenues (vs >85% recovery guided by management post-Q1FY21 result) to Rs4.23bn. This is attributable to 2.9% YoY increase in tile segment volumes. Despite downtrading during the quarter (driving greater share of commodity product revenues), realisations declined merely 1.4% due to higher retail sales and lower discounting in the trade. Allied product revenues however witnessed 15% decline due to constraints in sanitaryware manufacturing owing to manpower availability woes. Going forward, with double-digit revenue growth in tiles likely in H2FY21 aided by market share gains, and expected recovery in its allied product segment, we expect SOMC to report revenue CAGR of 5.5% over FY20-FY22E.

- EBITDA margin hit double-digits in Q2 itself. Contrary to management guidance of 9-10%, SOMC surprised the street with 11.7% EBITDA margin (I-Sec: 10.5%) led by cost-control initiatives undertaken in the wake of Covid and benign fuel costs. Gross margin however was down 220bps YoY due to 1.4% cut in realisation in tiles amid adverse product mix. With the likely improvement of gross margin going forward (driven by expected improvement in capacity utilisation and product mix improvement), we model EBIDTA margins at 9.5% / 12% for FY21E / FY22E respectively.

- RoCEs likely to inch towards ~12% by FY22E. SOMC's consolidated PAT of Rs205mn (I-Sec: Rs128mn) in Q2FY21 is largely attributable to the better than expected operational performance. Sustained improvement in cashflow management and aggressive debt repayment in the near term is expected to improve RoCE to an impressive 11.7% in FY22E from 6.6% in FY20. This we believe should result in material rerating of the stock going forward.

Shares of SOMANY CERAMICS LTD. was last trading in BSE at Rs.220.4 as compared to the previous close of Rs. 203.95. The total number of shares traded during the day was 24878 in over 657 trades.

The stock hit an intraday high of Rs. 229 and intraday low of 204.4. The net turnover during the day was Rs. 5460426.

Source : Equity Bulls

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