Somany Ceramics' Q4FY18 results (Outperformer) - Disrupted FY18; all eyes on FY19E…

Q4FY18 results (standalone)

• Tiles volume grew 2.3% yoy to 15.9 MSM (on a very high base of 12.6% yoy but came in lower than our exp. of 7%). Within segments, outsourced volume grew ~49% yoy (stop-gap measure for slow ramp-up in various newly reopened lines), while own manufacturing/JV volumes declined 3%/9% yoy respectively. Blended realization was flat yoy (+1.7% qoq) despite the higher share of outsourced sales.
• Reported revenue declined 4.9% yoy to ~Rs5.3bn (4% miss). Adjusting for excise duty in traded goods segment in the base, net revenue grew 2.3% yoy.
• Despite weaker than estimated top-line, EBITDA came in 6% better than estimates at Rs466m (-4.7% yoy) due to lower other expenses (fell 18% yoy); fuel expenses increased by 26% yoy (in line). EBITDA margin was flat yoy at 8.9% (IDFCe: 8%).
• Adjusted PAT declined ~13% yoy to Rs 255m (adjusting for exceptional item of ~Rs19m – wage raise settlement) and came in 4% ahead of estimates on EBITDA beat.

Key positives: Realisations improved qoq / Better than est. margin.

Key negatives: Lower than est. volume growth.

Impact on financials: While our volume growth assumptions are largely maintained; our margin is sharply cut on higher than expected increase in power & fuel costs; cut FY19E/20E EPS by 26% / 27%.

Valuation & view

FY18 was the worst year in SOMC’s history (flat volume) led by multiple factors (SAP implementation, GST led disruption, upgradation of 5 lines out of its 20 lines, slow industry growth). The tile industry as a whole is expected to post 8-10% volume growth and SOMC is expected to outperform the same given the one-off nature of FY18. While our volume growth estimates were broadly in line with this expectation, our margins have been cut sharply to account for the sharp increase in gas prices. However, the 27% fall in stock price since Q3FY18 results and 45% fall since its peak in the past five months more than captures the revised outlook. SOMC continues to reap the benefits of improving brand equity as it emerges as the second-strongest brand in a highly fragmented market and its current trading multiple of 20x FY20E EPS offers an attractive entry point. We now expect volume CAGR of 16% over FY18-20E leading to a 29% CAGR in earnings on a depressed base of FY18. Maintain OP with revised PT of Rs690 (25x FY20E EPS).