Somany Ceramics' Q4FY19 results (Upgrade to Outperformer) - Disruptions mostly over, volume growth ahead…

Q4FY19 results highlights

• Operational Highlights: Tiles vol. fell 3% yoy to ~15.4MSM (exp. Of 4% growth) – the decline is not bad, given that it has come in a scenario where receivables have been tightened (89 days vs 107 yoy). Blended realisation fell marginally by 0.6% yoy vs exp of flat largely led by strong improvement in outsourced volume realisations.
• St. Performance: Rev. fell by 2.2% yoy to ~Rs5.15bn (7% miss) led by 3.8% yoy fall in Tile segment rev. (9% miss) while Bathware segment grew by 7.6% yoy to ~Rs635m (7% beat). However, EBITDA grew 10.5% yoy to ~Rs515m (24% beat) on account of sharp fall in fuel costs (down 17.8% yoy) as well as decline in other expenses (down 4.9% yoy, some saving in A&P). Margin improved 110 bps yoy to 10.0% (IDFCe: 7.5%). Consequently, adj. PAT grew 27.7% yoy to ~Rs325m (46% beat). Reported PAT stood at Rs198m (16% yoy decline) which included a ~Rs127m exceptional loss booked due to employee fraud (mostly recoverable by insurance).
• Cons. Performance: Rev. fell 4.1% yoy to ~Rs5.18bn while EBITDA grew by 13.4% to Rs705m. Adj. PAT grew by 32.2% yoy to Rs368m.
• Balance Sheet: Net working capital has fallen to 101 days in FY19 versus 113 yoy (DSO fell 18 days yoy to 89; DIO fell 1 day yoy to 54; DPO fell 7 days yoy at 42). Cons. net debt stood at ~Rs5.33bn (vs ~Rs5.26 bn in FY18).

Key positives: EBITDA performance due to lower costs

Key negatives: Tiles volume decline.

Impact on financials: Cut FY20E EPS by 11%; Introduce FY21E.

Valuation & view

With macro conditions improving in favour of organized tiles players (NGT order banning coal-based gasifiers/GST/eWay bill implementation, we believe that organized players are well placed to exploit the disruption amongst unorganized players and capture some market-share. SOMC has commendable advantages including brand equity, distribution reach, and production capacities, which would ensure that the company would be able to increase its current market share especially when the unorganised industry is under severe stress. Given its high cost base, any uptick in volume growth, and manageable fuel prices would have a disproportionate impact on SOMC’s bottom-line. We believe SOMC has turned the corner, finally, with receivables under control and value-added GVT capacity operationalized in South India and is poised to deliver ~10% volume CAGR over FY19-21E, thus we upgrade it to Outperformer, valuing the company at 22.5x FY21E EPS (25% discount to KJC’s target multiple) with a revised target price of Rs474.