The Economic Times daily newspaper is available online now.

    Housing boom can bring smiles to these two tile stocks

    Synopsis

    Currently, the Indian tiles industry is confronting seasonality-led weak demand as well as input cost pressure on the back of increasing gas prices. Nonetheless, brokerage firm B&K Securities is of the view that the tiles players in the country shall likely register a pickup in sales from the third quarter of FY23.

    B&K Securities is bullish on two counters -- Kajaria Ceramics and Somany CeramicsiStock
    The uptrend in the housing segment, recent price hikes by tiles manufacturers as well as moderation in energy prices are expected to boost the prospects of the domestic tiles industry.

    Currently, the Indian tiles industry is confronting seasonality-led weak demand as well as input cost pressure on the back of increasing gas prices. Nonetheless, brokerage firm B&K Securities is of the view that the tiles players in the country shall likely register a pickup in sales from the third quarter of FY23. Against this backdrop, the domestic brokerage is bullish on two counters from the space -- Kajaria Ceramics and Somany Ceramics.

    Kajaria Ceramics | Buy| Target price- Rs 1,439| Potential upside- 20%

    Amid capacity expansion and acquisitions together with industry tailwinds, the company’s management guided for 15-20% volume growth and 20-25% revenue growth in FY23.

    Moreover, for the faucet and sanitaryware segments that witnessed robust growth over the last five years, the brokerage expects growth matrix to be strong on the back of industry tailwinds, product innovations as well as strengthening of dealer network and brand recall.

    In FY22, the company delivered a healthy profit with Ebitda of 16.5%. “Now, with natural gas prices expected to moderate in the coming quarter, increase in mix of value-added products, benefits of scale, brand premium, regional diversification and plant efficiencies, Kajaria Ceramics will be able to deliver higher margins in the forthcoming quarters,” added the brokerage.

    “The company has a healthy balance sheet with net cash at Rs 3.4 billion and over the next three years envisages around Rs 2-2.5 billion annual capex. Return ratios have improved with RoE/RoCE expansion by 370 bps/160 bps to 18.9%/22.9% during FY19-22. With improvement in profitability, we expect these to further improve in FY22-24E,” noted the brokerage.

    The brokerage believes that Kajaria would continue to trade at a premium valuation and gives a ‘buy’ rating for an upgraded target price of Rs 1,439 (from Rs 1,289 earlier, based on 38x PER (10% premium to five-year average) on FY24E.

    Somany Ceramics | Buy| Target price- Rs 720| Potential upside- 28%

    On the back of company-specific issues as well as slowdown in the real estate market, Somany posted flat sales volume during FY17-21. “However, with the re-alignment of the company’s fundamentals and positive traction from housing sector, it reported a strong turnaround with 27% YoY volume growth to 59.7 msm in FY22,” noted the brokerage.

    “Recent installed capacity expansion by 20% to around 60 msm, upcoming 4 msm slab plant expansion by 1HFY24, coupled with strong brand recall and improved industry dynamics would lead to approximately 14% CAGR volume growth over FY22- 24E. Focus on retail segment, increasing value-added mix would lead to around 17% CAGR PAT growth during this period. Somany’s capital allocation strategy has improved post FY21, which could lead to valuations to get re-rated,” said the brokerage.

    The company’s earnings visibility has improved given the recent enhancement in tile capacities.

    “Further, favourable dynamics for leading domestic players amid increasing focus of Morbi players towards exports and housing upcycle would lead to around 14% CAGR volume for Somany over FY22-24E.

    “On the other hand, while there are near-term margin pressures due to high gas prices, commissioning of new plants, increase in share of value-added products and scale benefits bode well for the profitability improvement over the medium-term. This would lead to better return ratios as well as further improve balance sheet strength”, added the brokerage.

    The brokerage assigned a ‘buy’ on the stock with a target price of Rs 720 based on 25x PER on FY24E -- 35% discount to KJC’s valuation.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)




    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in