Somany Ceramics' Q3FY18 results (Outperformer) - Disappointing quarter; FY18E an aberration year!

Q3FY18 results (standalone)

• Tiles volume grew at a healthy 6% yoy rate (base demonetisation qtr had a 1% yoy growth) to 11.8 mn sq. m. (IDFCe: +5% yoy) despite the quarter experiencing some wash out in sales due to dealers wait-and-watch strategy (prior to GST revision to 18%). December month was particularly strong for the company.
• Within segments, outsourced volumes more than doubled yoy as they replaced the Kassar production during the quarter while the Kadi plant ramp up was slow. Own Manufacturing/JV volumes declined 1%/12% yoy respectively. Blended realization declined 5% yoy/6% qoq largely due to adverse product mix (higher share of low value tiles).
• Adjusting for excise duty in traded goods segment, net revenue grew 0.5% to Rs3.8bn (5.5% miss). Revenue miss was on account sharp fall in realisation led by poor mix across segments.
• The weak performance on top-line weighed down on EBITDA led by negative operating leverage and higher spends on A&P in this quarter. EBITDA declined ~26% yoy to Rs288mn (IDFCe: Rs379m, 24% miss) while margin declined ~200 bps yoy to 7.5% (IDFCe: 9.3%). PAT came in sharply below estimates (30% miss) at Rs143mn, down 29.1% yoy.

Key positives: Decent volume growth.

Key negatives: Adverse product mix hit blended realization.

Impact on financials: Sharp cut of 21%/22%/20% in FY18E/18E/20E earnings led by lower volume growth and margin assumptions.

Valuation & view

Management highlighted that 9MFY18 performance (2% fall in volumes) is an aberration (SAP implementation, GST led destocking and delayed off-take on downward rate revision expectation) and volume growth will pick-up to mid-teens from FY19E onwards. While we acknowledge that FY18E was a one-off year, management’s outlook for FY19E is rather somber (given the one-off challenges led low base) and makes us cut our forward volume and margin assumption sharply. However, SOMC continues to reap the benefits of improving brand equity as it emerges as the second-strongest brand in a highly fragmented market. Moreover, we are optimistic about market-share gains by the organized industry over the medium-term led by formalization of the tiles space because of GST implementation. We now expect volume CAGR of 17% over FY18-20E leading to a 50% CAGR in earnings on a depressed base of FY18E. Maintain OP with revised PT of Rs948 (roll-forward to 25x FY20E EPS).