Somany Ceramics' Q3FY19 results (Neutral) - Bottoming out but wait for delivery…

Q3FY19 results highlights

• Operational Highlights: Tiles vol. grew by 8% yoy to ~12.8MSM (in line with exp. of 8.7%). Volume growth, though not spectacular, is decent in light of SOMC’s focus on lowering receivables. Blended realisation was up 2.9% yoy vs exp of flat largely led by strong improvement in outsourced volume realisations (possibly due to improved mix as loss of Commander JV volumes are now met through outsourcing).
• St. Performance: Rev. grew by 12.2% yoy to ~Rs4.26bn (in line) led by 11.2% yoy growth in Tile segment rev. (in line) and strong 23.5% yoy growth in Bathware segment rev. EBITDA declined by 12.7% yoy to Rs240m (vs exp. of Rs290m) led by 190bp fall in gross margin (on higher fuel expenses which manifested through higher ‘purchases’) and 70bp yoy increase in P&F expenses (attributable to own plants). EBITDA margin fell by 160bp yoy to 5.6% (IDFCe: 6.8%). Sharp miss in EBITDA along with higher tax rate (at 44% vs exp. of 35%) led to 40% yoy fall in adj. PAT at Rs83m vs. exp of Rs129m. Reported PAT stood at Rs136m including exception gain of Rs53.2m for exit from JV.
• Cons. Performance: Rev. grew 7.1% yoy to ~Rs4.26bn while EBITDA fell by 22.6% to Rs350m. Adj. PAT fell by 65% yoy to Rs87m.
• FY20E guidance: Management is extremely confident of posting double digit volume growth in FY20E and EBITDA margin also crossing 10% in FY20E. Margin levers include falling gas prices, strong growth in bathware segment, positive operating leverage and mix improvement. Realisations are expected to remain stable.

Key negatives: Huge miss in earnings.                                                                    

Impact on financials: Cut FY19E/20E EPS by 22.9%/16.8% respectively.

Valuation & view

Given SOMC’s lower margin profile, any hit on volume or increase in expenses has a far higher impact on earnings. Volume growth was inline and management’s confidence on FY20E growth expectation is noteworthy; we concur with the margin levers available in FY20E. Although the company is slightly behind the product curve (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) coupled with stable pricing and lower fuel prices would have a disproportionate impact on its bottom-line. We believe that earnings downgrade cycle for SOMC could be coming to an end; however, given its consistent underperformance we will wait for actual delivery before turning constructive on the name. Maintain Neutral with a revised TP of Rs317 (18x FY20E EPS, maintained).