Our recent checks suggest that the top branded ceramic tile players have sustained their impressive recovery (witnessed post-Jul'20) into Q3-TD as well. This is largely attributable to market share gains for top branded players with Morbi firms intensifying their focus on exports. Pricing too has remained stable across ceramic, PVT and GVT categories. With Morbi exports likely to sustain their growth momentum in the near to medium term, we expect branded players to continue to gain market share. EBITDA margins too are likely to remain firm as higher operating leverage and product mix improvement offset marginal increase in gas prices.
- Roll over valuations to Sep'22 earnings. With improving demand and margin visibility for the top branded players, we now roll over valuations to Sep'22E earnings for our coverage universe. While retaining our revenue and PAT estimates over FY21E-FY23E, we downgrade KJC to ADD (from Buy earlier) with a revised TP of Rs711 (earlier: Rs700) valuing it at 33x Sep'22E earnings, and reiterate BUY on SOMC with a revised TP of Rs418 (earlier Rs380) valuing it at 18x Sep'22 earnings.
- Exports for Morbi players sustain after initial pent-up demand. Post the lockdown in Apr-May'20, Morbi's monthly exports surged to over Rs10bn in Jul'20 largely driven by pent-up demand. However, with Morbi witnessing a sharp spurt in shipments to the US, UK and Europe - driven by anti-China sentiment and US imposition of anti-dumping duty on Chinese tiles, Morbi's export turnover for the past three months (Aug-Oct'20) has crossed Rs35bn vs Rs100bn in FY20. Our interaction with various exporters in Morbi suggests export revenues could touch Rs100bn-120bn in the current fiscal.
- Volume visibility improves further for branded players. We expect demand tailwinds to sustain for top branded players like KJC and SOMC in the near to medium term, driven by: a) market share gains from Morbi players; b) sustained growth traction in tier-2 and above cities and towns; and c) recent opening up of demand in tier-1 and metro cities like Ahmedabad, Pune, Chennai, Delhi and Hyderabad. Realisations for both the players are also likely to improve in H2FY21 largely on the back of better product mix. We expect both KJC and SOMC to exhibit impressive revenue CAGRs of 16.1% and 14.5% respectively over FY21E-FY23E.
- Expect EBITDA margins to remain firm in near term despite marginal increase in gas prices. Despite marginal increase in gas prices, we expect gross margins for both the companies to improve in H2FY21 largely driven by product mix improvement. EBITDA margins too are likely to remain firm as a result of higher operating leverage and cost-cutting initiatives undertaken by both the companies in the wake of current pandemic. We estimate KJC to report relatively lower EBITDA margin in H2FY21 (18% vs 20.2% in Q2FY21) largely due to reversal of employee cost savings post Sep'20. SOMC on the other hand is estimated to maintain its margins at 11.5% levels in H2FY21 due to sustenance of lower employee costs.
- Balance Sheet strengthening to continue. Balance sheet of both the companies have seen material improvement post Covid breakout. The robust cash collections and inventory liquidation in the past two quarters has driven impressive free cash from operations (FCF) in H1FY21. Muted capex and likely strong FCF generation in H2FY21 are expected to result in material reduction in debt for SOMC in particular. Higher profitability and sharp debt reduction would lead to sharp improvement in RoCEs for both the companies in FY21E.