INSUBCONTINENT EXCLUSIVE:
ICICI Direct has a buy call on Somany Ceramics with a target price of Rs 410.
The current market price of Somany Ceramics is Rs 327.
Time
period given by the analyst is one year when Somany Ceramics price can reach the defined target
However, with these issues now settled, we believe the worst is behind for the company and volume growth should pick up in H2FY19E and FY20E
increase in share of value-added products
Additionally, strict credit control measures incorporated by the company have made it structurally strong
Thus, we anticipate double-digit volume growth in FY20E and expect revenues to grow at 9.7 per cent CAGR to Rs 2,054.8 crore in
FY18-20E.
EBITDA margin bottoms out at 6.7 per cent; could improve to 10.0 per centin FY20E: Somany took price hikes across its product
portfolio to the tune of 2.0-2.5 per cent for tiles and 5-6 per cent for sanitaryware faucets in Q3FY19
Secondly, Andhra GVT capacity addition will help the company increase share of value-added products in its portfolio (nearly 21 per cent
Thirdly, gas prices (currently nearly Rs 40/SCM) are expected to fall in Q4FY19E following the recent sharp fall in crude oil prices
All these factors are set to place it on a margin revival trajectory
Additionally, Somany aims to achieve revenues of Rs 350 crore by FY21E (implying CAGR of 32.3 per cent)
The revenue contribution from high-margin bathware division should also act as a trigger for margin improvement
Hence, we believe EBITDA margins have bottomed out at 6.7 per cent in Q2FY19 and could improve to 10.0 per cent in FY20E.
Expect improvement
In our view, the current valuation discount for Somany has widened (nearly 15 per cent historically) on account of its underperformance
following operational disruption such as software related issues and credit control measures
The improvement in financial performance should narrow down the valuation gap between Somany and Kajaria
Hence, we maintain our BUY recommendation on Somany with a target price of Rs 410/share (20x FY20E EPS).
