Lower gas prices to boost margins for Kajaria, Somany: ICICI Sec

Nehal Shah, VP, research, midcaps, ICICI Securities, expects falling gas prices will boost margins for companies like Kajaria Ceramic and Somany Ceramics. These companies have grown at 20-25 percent, their bottomlines have been very strong, Shah told CNBC-TV18. Going forward, lower gas prices will aid margins for Kajaria and Somany Ceramics, he said. We are positive on Somany Ceramics, he said.He said: "We're bullish on plyswood space" and the passage of GST Bill wil bolster the margins of Greenply Industries and Century Plyboard. He expects the two companies to log 15-18 percent growth going ahead.Below is the verbatim transcript of Nehal Shah's interview with Reema Tendulkar and Nigel D'Souza on CNBC-TV18.Nigel: A couple of stocks that you track closely like Kajaria Ceramics as well as Somany Ceramics. Over the last few years they have given big returns. How much more juice is left in these stocks looking at the valuations?A: Over the last five years these companies have grown at a phenomenal pace of around 20-25 percent. The bottomline has been very strong with margins scaling up. One thing we need to understand that between the phase FY10 and FY14, when the gas prices had rocked up at least by 2-2.5 times, even during those periods some of the companies were able to withstand margins while Kajaria took a leap up and had a great run in the margins as well. So that shows the kind of branding power all these companies have and now we are in a scenario wherein last six months we have seen carnage in gas prices and that is where there will be humongous opportunities for strong brands like both Kajaria and Somany to even further up their margins from these very high levels and that is where we get a high level of conviction while even if the topline would continue to remain under a bit of pressure like we do not see them going up to around 18-20 percent kind of growth anytime for the next couple of years but even if they showcase something like 10-12 percent kind of a growth, I think with the kind of inflection and gas prices or the savings in gas prices, we are going to see, I think that itself will give a strong bottoming growth for the next two-three years going forward. Reema: Did you increase your target price in Somany post good set of earnings. The stock has hit a fresh 52 week high. What is the new call, any change in estimates?A: No, in fact we recently came out with a report a couple of days back and we have already build traction in margins. I think this is a story where the margins can definitely play out incrementally going forward. If I look at the gap between Somany's margin and Kajaria's margins, it has gone up to 1,200 bps but now everything in Somany to play for and with the kind of value addition the company is now bringing on the table the large format tiles coming into play. The company has recently commissioned 4 million square meter of glazed vitrified tile (GVT), which is going to add to their value addition and the company also is now focusing on very important aspects of this industry which is organised display protocol at the exclusive showrooms. So company over the last two years has been very focused on exclusive side of the story which is where Kajaria has been predominantly doing it over the last five years and this is why Somany is strongly catching up and that is where we see very high conviction growth coming in as far as Somany is concerned going forward.Nigel: Greenply Industries as well as Century Plyboards, what do you prefer over there. They have some capacities that are going to come on stream as well in the next couple of years. What is your take on both those stocks? What is your preference?A: I wouldn't want to comment on any of the stocks in the space but yes, we are very bullish on the plywood space in general. This industry has lot of levers going forward and one of the biggest levers is the shift from unorganised to organised; even today we have 14,000 crore of the industry with still organised of the total 18,000 crore.However, in the last ten years both Greenply and Century Ply grew at 28 percent and 23 percent respectively - that is topline CAGR which is very strong. Now because of the rise in inventories and real estate, all of a sudden you are seeing premium segment and both the cases has shown a dip and that is why we have seen the topline not growing for either of these company in the last four quarters. Where the story would now come in, is the mid segment which is the commercial grade segment, which is where of the 18,000 crore industry, you have 10,500 crore of industry which is sitting there and that is where both Green and Century been focusing very strongly over the last couple of years and that is where we will see a significant opportunity as far as shift from unbranded to branded play is concerned and that is why for both these brands growing at 6-7 percent till the time the inventory issues pass them - that is where they will grow at 6-7 percent but one of the biggest levers going forward would be GST as and when it comes in. As and when GST comes in, you will straight away see both these stocks and these are the only two stocks in the industry. It's basically as duopolistic industry wherein both these plays command nearly 50 percent market share as far as the organised industry is concerned. I think with GST coming in both these brands will again start growing at 15-20 percent over the next five years or so and that is where the story lies ahead for both these brands.