Building Materials - Q1FY22 Results Preview Report - A temporary blip! - HDFC Securities

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

We expect tiles and plastic pipes companies to deliver a weak performance QoQ, as the second wave has hit sales of both the segments in April and May. In case of pipes, agri sales were severely impacted during the peak demand period. Reversal in PVC prices mid-quarter has also led to slower channel stocking and, hence, sales. Thus, operating margins across both segments declined QoQ on account of lower utilisation, higher gas prices (for tiles) and expected inventory loss for pipes companies. However, demand has been picking up June onwards with easing of lockdown restrictions across India. Thus, we maintain a positive stance on the profit prospects for both the sectors. Our top picks - Kajaria Ceramics, Somany Ceramics, and Prince Pipes.

Tiles - domestic sales hit by the second wave: The second wave hit both the urban and rural regions in Q1FY22. Hence, the countrywide lockdowns during Q1FY22 led to poor offtake QoQ in domestic markets during April/May, with the situation improving in June. Thus, domestic players will be hit both on account of lower-than-usual demand and subsequent op-lev loss, although the low base of Q1FY21 ensures that companies will still deliver growth. Even gas prices have gone up though companies have taken price hikes to pass on the same.

Pipes companies - sales hit by pandemic and inventory destocking: Pipes sales also been hit sharply during April/May. The agri demand (Q1 peak period) was severely affected by the lockdown. Plumbing demand was less impacted in Q1. As PVC prices started to cool off, leading to fall in pipes prices, even distributors deferred purchases, impacting Q1 sales. Thus, profitability will suffer in Q1, owing to lower sales and inventory losses (amidst falling resin prices).

Performance of companies: We estimate Kajaria's consolidated revenue/EBITDA/APAT to fall 39/63/73% QoQ on sales loss during April/May and elevated gas prices. For Somany, we expect these factors to drive down consolidated revenue/EBITDA/APAT by 38/69/93% QoQ. In case of pipes companies too, we expect a sharp decline QoQ. We estimate that Supreme Industries' consolidated revenue/EBITDA/APAT would fall 34/53/63% QoQ, mainly on account of higher sales loss in the pipes segment. For Astral, we estimate revenue/EBITDA/APAT would fall 37/51/59% QoQ. We estimate pipes EBITDA would decline 53%, while adhesives should decline at slower pace of 41% QoQ, in our view. For Prince Pipes, we estimate a revenue/EBITDA/APAT decline of 53/75/84% QoQ.

Stock views: We remain positive on the tiles and pipes companies, owing to continued healthy demand outlook in the long term. We have introduced FY24E estimates for our coverage universe and roll forward valuations on Jun'23E (from Mar'23E earlier). We maintain our BUY ratings on Kajaria Ceramics, Somany Ceramics and Prince Pipes. We maintain our ADD rating on Supreme Industries. We downgrade our rating on Astral Limited to REDUCE, given that the recent run-up has made its valuations expensive.

Source : Equity Bulls

Keywords