Somany Ceramics - Debt reduction on course - ICICI Securities

Somany Ceramics (SOMC) posted an impressive Q3FY21 beat on all counts: a) faster than estimated recovery in volumes (11.8% YoY growth vs I-Sec: 10%); b) higher than expected EBITDA margin (12.9% vs I-Sec: 12%); and c) sharp improvement in PAT, up 171% YoY. Sustained improvement in cashflow management amid stricter working capital management led to a sharp reduction in consolidated net debt by Rs2.2bn in 9MFY21. With the Morbi exports story likely to sustain in the near-to-medium term, management expects the volume growth traction and firm margins to sustain despite the likely increase in fuel costs going forward. Maintain BUY.

- Valuation and outlook: Factoring-in the Q3FY21 performance, we increase our consolidated revenue and PAT estimates by 6.8%/5.9%/7.8% and 47.9%/12%/15% respectively for FY21E/FY22E/FY23E. We now expect SOMC to report revenue and PAT CAGRs of 10.3% and 102% respectively over FY20-FY23E. We maintain our BUY rating on the stock with a revised target price of Rs525 (earlier: Rs418), valuing it at 18x FY23E earnings. Key downside risks: 1) sharp rise in gas prices, and 2) increase in competitive intensity.

- Volume growth at 11.8% YoY. SOMC posted 12.9% YoY increase in its consolidated revenues to Rs4.93bn. This is attributable to 11.8% YoY increase in tile segment volumes. With higher mix of GVT, SOMC was able to improve its realisation by 0.7% YoY despite higher growth in outsourcing revenues. Allied product revenues however witnessed slower growth of 8.4% YoY. Going forward, with double-digit revenue growth in tiles likely in Q4FY21 and FY22 aided by market share gains, and expected recovery in its allied product segment, we expect SOMC to report revenue CAGR of 10.3% over FY20-FY23E.

- EBITDA margin at 12.9% vs estimate of 12% continues to improve. SOMC surprised with 12.9% EBITDA margin (I-Sec: 12%) led by better product mix and operating leverage. Gross margin improved by 290bps QoQ on the back of higher mix of GVT. If not for reversal of salary cuts during the quarter and higher gas cost QoQ, EBITDA margins would have been even higher. With likely improvement of EBITDA margin going forward (driven by the expected higher capacity utilisation and better product mix), we model higher EBIDTA margin of 12.5% for FY22E & FY23E.

- RoCEs likely to inch towards 15.7% by FY23E. SOMC's consolidated PAT of Rs282mn (I-Sec: Rs257mn) in Q3FY21 is largely attributable to the better-than expected operational performance. Sustained improvement in cashflow management amid stricter working capital management led to a sharp reduction in consolidated net debt by Rs2.2bn in 9MFY21. We expect SOMC's RoCE to improve to 15.0% in FY23E from 9% in FY20. This we believe would lead to further rerating of the stock going forward.

Shares of SOMANY CERAMICS LTD. was last trading in BSE at Rs.385.45 as compared to the previous close of Rs. 400.4. The total number of shares traded during the day was 9518 in over 690 trades.

The stock hit an intraday high of Rs. 410 and intraday low of 369.3. The net turnover during the day was Rs. 3699916.

Source : Equity Bulls

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