Buy This Multibagger Cement Stock For 34% Upside: HDFC Securities

Somany Ceramics is a small-cap company that focuses on the ceramics and related goods market. The company's market capitalization is Rs 3,825.17 crore. This multibagger stock has climbed by 118.29 percent in the last year, and it is currently trading at a market price of Rs 839 as of 3:30 p.m. IST on February 4th. HDFC Securities has issued a buy call on the stock with a target price of Rs 1,130, implying that the stock would rise 34.68 percent in a year from its current market price.

Q3FY22 results of Somany Ceramics

According to the brokerage, the company's tiles sales volume declined 4% QoQ to 15.58 MSM, thus restricting YoY growth to +5%. This YoY volume growth is led by acceleration in outsourced sales, as own capacities are already operating at near-peak utilisation (95% vs 97% YoY). Somany noted that despite demand, it could not source PVT tiles in Morbi (owing to elevated gas price), which impacted its Q3 revenue to the extent of ~5%.

HDFC Securities has highlighted that the "Tiles NSR rose 7% QoQ (+14% YoY), riding on price hikes taken in the quarter to pass on the gas price inflation. However, the company highlighted that it could only pass on ~80-85% of the total inflation (amid a spike in gas prices), leading to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) compressing by ~220/155bps YoY/QoQ to 10.6%. Gas prices increased ~10% QoQ across Somany's north and south plants, while its plants in Gujarat saw ~50% gas price spike QoQ. Thus, consolidated EBITDA fell 2% YoY to INR 624mn. Despite lower EBITDA, APAT rose 14% YoY on higher other income and lower interest outgo."

The company's bathware segment reported 20% YoY revenue growth, maintaining an 11% share in the total revenue. The Bath-fittings plant operated at 102% (vs 98% YoY) while the Sanitaryware plant operated at 48% (vs 57% YoY). Overall, bathware revenue growth was led by a strong price increase, noted the brokerage.

Buy For A Target Price of Rs 1,130

The brokerage has claimed that "Somany's ~12MSM tiles capacity expansion (~INR 2.5bn in Capex) across the north, west and south will be commissioned in Q4FY22. It is also setting up another 4MSM slab/large tiles plant in Gujarat (Capex INR 1.7bn) by Q1FY24. It expects to increase GVT share (in the sales mix) to >35%, post the ramp-up of these capacities, from 29% currently."

As per HDFC Securities "Somany's bathware capacity can be doubled at marginal Capex of ~INR 30-40mn. These expansions should boost its volume growth and market share gain. While gas prices are expected to rise sequentially in Q4, healthy demand would help cost pass-through, in our view. We maintain our estimates and BUY rating on the company, with an unchanged TP of INR 1,130/sh."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.