Somany Ceramics' Q2FY20 results (Outperformer) - Healthy performance; valuations price in recent mishaps…

Q2FY20 consolidated results highlights

• Operational Highlights: Tiles volume grew 4.8% yoy to ~12.6 mn sq. m. (in-line), a commendable performance as this comes in a tightened receivable scenario (DSO down to 75 days as of H1, vs 84/89 in June/Mar 2019). Blended realisation grew 2%/1.4% yoy/qoq to ~Rs292 due to higher JV revenue, lower outsourcing, and additional GVT volumes in the mix. Tiles revenue grew 6.8% yoy to ~Rs3.7bn (in-line). Sanitaryware revenue grew 6.8% yoy to ~Rs502m (5% miss).
• Total revenue at ~Rs4.2bn grew 7.9% yoy (in-line). Better product mix (JV contribution increase/higher GVT volumes) led to ~250bps yoy improvement in gross margin to 59.2%. This, coupled with lower fuel costs led to EBITDA margin expansion of ~380 bps yoy to 10.6% (IDFCe: 8.0%). EBITDA grew 69% yoy to ~Rs448m (32% beat).
• Mentor default (~Rs262m cheque bounce by SOMC’s treasury operations broker) has been provided for in Q2. Adjusting for the same, PBT would stand at Rs185m (+108.2%; 4% beat; margin at 4.4% (+210 bps yoy)). Reported PBT loss stood at ~Rs77m.
• Adj. PAT stood at Rs326m (+614.2% yoy; +128% beat) on account of tax write-backs (lower tax rate/PBT loss).
• FY20E Guidance: Tiles – 6-7% vol. growth in H2 (double-digit margin). Sanitaryware – 17-18% growth in FY20E. DSO target of <70 days.

Key positives: Healthy tiles volume growth, Margin expansion.

Key negatives: Sluggish sanitaryware performance

Impact on financials: 7% cut in FY20E PBT. 2% upgrade in FY21E PBT.

Valuation & view

SOMC continues to track well on its business operations in FY20E so far. Volume growth in the current stressed market conditions, and in a tightened credit cycle scenario, are heartening, while higher GVT contribution from JVs should improve blended realizations in the near-term (even though overall GVT prices are under pressure). Long-term market conditions remains structurally in favour of organized players (NGT/GST/eWay Bill implementation) as unorganized players stress forces them to increase prices. The recent ADD announcement on exports to GCC could hurt near-term tile prices, but in the long-run should lead to further industry consolidation. However, recent non operation-level mishaps like (1) employee fraud, (2) broker default, and (3) loans made to financial firms while chasing yields, would keep a cap on valuations in the near-term, despite an improving operating scenario. The stock price correction, in our opinion, factors in these risks. We maintain Outperformer on SOMC with a revised TP of Rs357 (~17x FY21E EPS; 40% discount to KJC multiple).