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Building Materials - Most categories may recover beyond pre-Covid levels - ICICI Securities

Posted On: 2021-01-07 06:45:15 (Time Zone: Arizona, USA)

Volume recovery for major branded building material categories may sustain (in fact accelerate QoQ) into Q3FY21 driven by a) impressive growth traction in secondary real estate market, b) pent-up demand seen in renovation / refurbishment segment and c) market share gains (in categories like plumbing pipes and tiles in particular). We, thus, foresee categories like plumbing pipes, MDF, adhesives and construction chemicals, tiles and plywood to recover beyond pre-Covid levels in Q3FY21, while laminate and sanitaryware categories may recover fully with a quarter lag. With expected increase in input cost (driven by higher crude prices), we expect categories like wood panel, tiles and adhesives to witness some correction in their gross margins on a sequential basis. EBITDA margins, however, may remain firm driven by operating leverage and sustained cost rationalisation. We estimate our BM coverage universe to report aggregate revenue / EBITDA / PBT increase of 12.7% / 24.9% / 30.6% YoY, respectively (ex-PIDI: 12.2% / 27.7% / 45.9% YoY) in Q3FY21.

Key highlights and monitorables for the quarter:

- Plumbing pipe sector: Sustained consolidation in PVC and CPVC pipes segment and sharp increase in PVC prices (29% rise QoQ) may drive strong volume recovery and sharp improvement in gross/EBITDA margins for top plastic piping players. Key monitorables: 1) Trend in polymer prices, and 2) availability of PVC resin.

- Ceramic tile sector: Branded tile players can report high single digit volume growth due to firm demand from tier-2/3/4 cities and market share gains from Morbi players in particular. Despite higher gas cost QoQ, we expect EBITDA margins to remain firm driven by operating leverage, narrowing of trade discounts and sustained cost rationalisation. Key monitorables: 1) Trend in gas prices, 2) Morbi exports, and 3) product mix trend.

- Sanitaryware sector: While we expect volume recovery in branded sanitaryware sector to be much better than anticipated, the category is unlikely to grow like tiles with the category demand largely dependent on new real estate construction which is still below pre-Covid levels particularly in metros and tier-1 cities. Despite sustained cost-control measures, margins too may remain muted QoQ due to higher gas prices and operating deleverage. Key monitorables: 1) Import substitution and 2) pricing trend in sanitaryware and faucets segment.

- Wood panel sector: Demand for wood panel space (ex-laminates) is likely to return to pre-Covid levels in Q3FY21. With consumers preferring alternatives like ready-made furniture where MDF is largely used, demand for MDF is likely to remain robust. Key monitorables: 1) Volume recovery in each category, 2) trend in timber and resin prices and 3) MDF demand-supply trend and prices.

- Adhesives and construction chemicals sector: The space may witness a sharp recovery with likely sustenance of strong pent-up demand for maintenance-driven products in Q3FY21. Gross margins may, however, decline YoY due to sudden reversal in input costs post Q2. Key monitorables: 1) Trend in input costs and 2) volume recovery in PVA segment in particular.

Source: Equity Bulls

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