Somany Ceramics' Q1FY19 results (Downgrade to Neutral) - Goalpost of ‘bottom quarter’ continues to shift!

Q1FY19 results (standalone)

• Tiles volume grew 17.9% yoy to 11 MSM on a very favourable base of decline of 15.8% in Q1FY18 and was lower than our exp. of +23% yoy given overall weak demand and Somany’s focus on curtailing debtor days. Within segments, outsourced volume grew ~66% yoy (stop-gap measure for slow ramp-up in various newly reopened lines), while own manufacturing/JV volumes grew by 10%/11% yoy respectively. Blended realization fell by 3.6% yoy (fell by 1.1% qoq) as realisations are broadly stable sequentially.
• Sanitaryware and faucet segment rev. grew by strong 66% yoy and contributed 11% to overall sales in this quarter.
• Overall grew by 9.4% yoy to ~Rs3.6bn (4% miss). Adjusting for excise duty in traded goods segment in the base, net rev. grew by 18% yoy.
• EBITDA at Rs216m grew by 33.7% yoy but still came in 30% below est. on rev. miss; yoy growth appears optically higher because Q1FY18 was a particularly bad qtr. P&F expenses increased by 27% yoy on higher gas prices yoy and had a –ve impact of 180bp on margin. EBITDA margin improved by 110bp yoy to 6% (came below our est. of 8.1%).
• Adj. PAT grew by 39.4% yoy to Rs84m, sharply lower than our est. of Rs159m led by EBITDA miss and higher than exp. interest exp on higher WC days (while debtors came down but inventory increased).

Key positives: N/A

Key negatives: Miss on all counts.

Impact on financials: Cut volume growth CAGR to 12.5% over FY18-20E and cut FY19E/20E EPS by 20.6% / 12.1%.

Valuation & view

We overestimated the positive impact of GST/eWay bill implementation and underestimated the innovative ways in which the unorganised industry could continue to evade taxes. This along with overall weakness in residential real-estate and company specific issues (SAP implementation, upgradation of 5 lines out of its 20 lines, higher debtors) made us trim our volume growth estimates consistently over the past three quarters. Given SOMC’s lower margin profile, this led to a sharp cut in earnings and the earnings downgrade cycle continues in this quarter and the outlook has been further revised downwards by the management. We believe the market would like to see the proof of execution in financials before becoming constructive on the name again; as a result we cut our target multiple to 20x FY20E (from 25x) and downgrade SOMC to a Neutral with a revised price target of Rs485.