Somany Ceramics' Q2FY19 results (Neutral) - Another weak quarter; more earnings downgrade!

Q2FY19 results highlights

• Operation Highlights: Tiles vol. fell ~4% yoy to ~12 mn sq. m. (IDFCe: -5%). In-house (incl. JV) volume fell ~7% yoy to 9.1 mn sq. m. while outsourced volumes rose ~9% yoy to 2.7 mn sq. m. Blended realisation fell ~7% yoy/2% qoq, a reflection of the inferior product mix. This was visible on gross margins which came off 220 bps yoy to 36.2%. Sanitaryware revenue grew ~15% yoy to ~Rs469m (2% miss).
• St. Performance: Rev. fell 8% yoy to ~Rs3.9bn (4% miss) – due to volume/realization fall. Management attributed the fall in rev. to trucker strike, Kerala floods, disruption in gas supply from GAIL and tightening of debtors. EBITDA saw a sharper decline, falling ~60% yoy to ~Rs164m (48% miss) due to inferior product mix, and higher fuel costs (+34% yoy). Operating margins fell ~540bps yoy to 4.2% (IDFCe: 7.7%). PAT was down ~80% yoy to ~Rs46m (70% miss).
• Cons. Performance: Rev. fell ~11% yoy to ~Rs3.9bn while EBITDA fell ~49% yoy to ~Rs265m. PBT/PAT fell ~74%/~78% yoy to ~Rs89m/~Rs46m respectively..
• One-Offs as per the management: Trucking strike in late July, Kerala  (~12% of rev) flood in August from this state), and 1 week Kassar plant shutdown due to gas pipeline maintenance impacted rev by Rs400m.

Key negatives: Miss on all counts.

Impact on financials: Cut FY19E/20E EPS by 24%/13% respectively.

Valuation & view

SOMC has delivered another forgetful quarter, given industry-wide disruptions, weak overall ground-level demand, and rising fuel prices. Given SOMC’s lower margin profile, any hit on volume and expenses has a far higher impact on earnings. Focus on reducing receivables and potential bottoming out of pricing at the industry level are silver linings in the otherwise gloomy environment. While it may be slightly early to call out a bottom to the earnings downgrade cycle for Somany; its GVT plant (under a JV) will come on stream from Q4FY19E onwards and should help in improving operating metrics (realisation, margin etc). Although the company is slightly behind the curve in terms of product mix (GVT/value-added); brand equity, distribution reach and production capacities would ensure that the company remains at a respectable second rank in the industry. Given its high cost base, any uptick in volume growth (post eWay Bill settling down/demand revival), stable pricing and lower fuel prices would have a disproportionate impact on the bottom-line of the company. Maintain Neutral with a revised TP of Rs 381. We have a clear preference for Kajaria in the tiles space.