Somany Ceramics Report - Geared for growth - HDFC Securities

Mr Rajesh Ravi, Institutional Research Analyst, HDFC Securities and Mr. Saurabh Dugar, Institutional Research Analyst, HDFC Securities

We initiate coverage on Somany Ceramics (SOMC) with a BUY rating and target price of INR 940/share (13x Jun'23E consolidated EBITDA). SOMC is India's second-largest tiles player. We like it for its increased focus on retail sales through a robust distribution and showroom network across India and expanding share of premium tiles sales. We believe these would help its consolidated revenue to grow at a 16% CAGR, supported by capacity expansion and faster growth in the bathware segment. The improving product mix (rising share of premium products) and better pricing power should bolster margin and accelerate consolidated EBITDA/APAT CAGRs to 25/34% respectively. We expect the tightened working capital and healthy operating profits to keep the balance sheet in check during FY22-24E, despite a higher expected Capex outgo.

Brick by brick: SOMC is the second largest tiles company in India, after Kajaria Ceramics. While demand pangs hit the industry growth from FY17-21, the recovery in real estate Q3FY21 onwards and continued export growth are expected to bolster the industry's and SOMC's revenue growth. Over the past five years, the company has beefed up its distributor count and exclusive showroom network across India, increasing its retail sales share to 75-80% (65% earlier). This should support faster ramp-up of its upcoming capacity in FY22-23E, and bolster revenue growth to 16% CAGR. On a low base, we expect its bathware segment to grow at 27% CAGR.

Strong margin outlook: The rising domestic demand and expected low competition from export focused Morbi players have buoyed the pricing power that national players enjoy. SOMC has also increased the share of high-margin GVT and premium (value-added) products to 26% and 46% respectively (vs ~18% and 39% in FY16). These will further expand on commencement of its upcoming capacities, bolstering EBITDAM to 14-14.5% during FY23-24E, in our view.

Balance sheet tightened: SOMC has been able to stem its ballooning debtor days to below two months (in line with Kajaria's), thus tightening its working capital. Having suffered a major write-off on its treasury operations, SOMC is using its surplus cash to debt reduction and expansion. Thus, we expect its balance sheet to remain comfortable while Capex spend could accelerate during FY22-24E.

Initiate coverage with a BUY rating: We value SOMC at 13x (five-year mean multiple) its Jun'23E consolidated EBITDA, leading to a target price of INR 940/share. We initiate coverage on SOMC with a BUY rating.

Shares of SOMANY CERAMICS LTD. was last trading in BSE at Rs.665.05 as compared to the previous close of Rs. 662.3. The total number of shares traded during the day was 4016 in over 239 trades.

The stock hit an intraday high of Rs. 674.9 and intraday low of 660. The net turnover during the day was Rs. 2694251.

Source : Equity Bulls

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