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The ceramic tiles industry is likely to post volume growth of 8 percent in FY19E and 13 percent in FY20E, due to a 1.6x YoY rise in FY18 projects under execution under the Pradhan Mantri Awas Yojana (Urban) and 42 percent YoY pre-sales growth in FY18 of listed real estate firms, Elara Capital said in a note.
The brokerage firm expects South India to grow faster than all-India growth, as it accounts for 44 percent of the projects under execution. Hence, firms with a higher presence there, like Prism Johnson & Asian Granito India, are likely to benefit the most.
Prism Johnson and Somany Ceramics are still available at low valuation while Kajaria Ceramics is the market leader (9 percentas on FY18) and margin leader (17 percent as on FY18) in the ceramic tiles industry, it does not enjoy pricing power, given dominance of unorganized companies, said the note.
India posted a ceramic tiles production CAGR of 11 percent over CY06-16. The country accounts for 7 percent of global ceramic tiles production as on CY16, and among major ceramic tiles production countries, India’s production growth is the highest.
Market leaders in other building materials, such as plywood & sanitary ware, where unorganised firms have a higher market share trade at a P/E of 23-25x compared to Kajaria’s 24x. Thus, there is the limited possibility of rerating.
However, firms with a higher proportion of low-to-mid-priced products in their product basket could see a multiple re-rating, due to a revival in profitability in PVT and ceramic tiles segments, explains Elara Capital.
Prism Johnson: Buy| Target: Rs 148| CMP: Rs 101| Return 46%
Prism Johnson’s tiles, bath & kitchen (TBK) business enjoyed leadership position over FY03-12. During the same period, sale CAGR was at 17 percent. The division’s consolidated margin was also in FY10 in line with margin leaders at 14.6 percent.
Consolidated EBITDA of the TBK business increased by 6x to INR 0.6bn in FY18. Consolidated EBITDA margin in Q4FY18 stood at 8.9% vs 0.5% in FY17. At a CMP of INR 101, the stock is trading at 14x FY20E P/E.
Apart from the recovery in profit of the TBK business, the cement business is also expected to report improvement in profitability. The central region in which the plants are based is attractive from a long-term perspective.
In the next few years, only one major integrated plant is likely to come on-stream there. As a result, the margin is likely to improve further.
Somany Ceramics: Accumulate| Target: Rs 611| CMP: Rs 527| Return 16%
Somany Ceramics (SOMC IN) FY18 volume contracted by 0.4 percent YoY due to plant shutdown for upgradation (five out of 20 lines), SAP implication issues and change in top management.
The brokerage firm expects the company to post volume growth of 12% over FY19-20E on a low base. Strong volume growth should enable better-fixed cost absorption, and, hence, Elara Capital expects the margin to expand by 100bp over FY18-20E.
Elara has initiated coverage on Somany Ceramics with an Accumulate rating and a price target of Rs 611 based on 20x FY20E earnings (PEG of 0.6x). It expects earnings to recover on the back of margin expansion, volume growth and deleveraging of the balance sheet.
The company is expected to have the highest earnings CAGR of 36 percent over FY18-20E among our coverage universe of pure ceramic tile companies.
Asian Granito India: Accumulate| Target: Rs 356| LTP: 335| Return 6%
Asian Granito India (ASIAN IN) has a 40 percent market share in high margin business of quartz manufacturing. The EBITDA margins in quarts business are 20-25 percent. Currently, there is a 40 percent import duty on quartz from China, which makes it 15 percent costlier than domestic quartz.
Apart from India, a court case has been filed in the US by Cambria for antidumping & countervailing duty on imports from China. If the US imposes the anti-dumping duty, it could be a big boost to India’s firms.
Elara Capital has initiated a coverage on Asian Granito India with an Accumulate rating and a price target of Rs 356 based on 12x FY20E earnings (PEG of 0.4x). At a CMP of INR 335, the stock is trading at 11x FY20E earnings, the lowest in the ceramic tiles industry.
Taking into account possible margin expansion from quartz manufacturing and reduction in working capital due to an increased focus on retail sales, Elara Capital expects ROCE and ROE to improve by 460bp and 400bp to reach 19 percent and 16 percent in FY20E, respectively.
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