Top 2 Stocks Pick By HDFC Securities From Building Materials Industry: Volume Growth Expected

In Q4FY22, both tiles and plastic pipe companies' volumes are expected to grow significantly, despite the high base. According to HDFC Securities, "Despite earlier cost pass-through, we estimate margin compression YoY amid elevated gas prices for tiles companies, higher resin prices, and absence of inventory gains for plastic pipe companies. Hence, we expect aggregate revenue for our coverage universe to firm up 19% YoY. However, we expect overall YoY margin compression to drive aggregate EBITDA/APAT down by 7/18% YoY. We maintain a positive stance on both sectors." The brokerage firm maintained BUY rating on Kajaria Ceramics and Supreme Ind."

Stock recommendations

HDFC has recommended investors to buy the stock of Kajaria Ceramics with a target price of Rs. 1450 for a 40% return, and Supreme Ind with a target price of Rs. 2770 for a 38% return. The current market price (CMP) of Kajaria Ceramics is Rs. 1032.75, and the CMP of Supreme Ind is Rs. 1996. Supreme Industries, in the last 5 years has seen an 89% gain in its share price, which has been quite profitable for long-term investors. In the same period, the company has increased its earnings per share by 21% a year, and this EPS growth has been higher than the 14% average annual increase in the company's stock price.

Expected growth and performance

The firm is also expecting Kajaria to report ~100bps QoQ margin expansion to ~18% (down ~200bps YoY). On the other hand, HDFC is expecting volumes for Supreme to rise 6% YoY on healthy demand. However, owing to higher raw material costs and no expected inventory gains, we expect EBITDA margin to compress YoY. We estimate consolidated EBITDAM for Supreme ~8pp YoY to ~17% in Q4FY22.

Commenting on titles stocks, the firm said, "Domestic tiles sales have been positive in Q4 (we expect muted growth on a high base YoY), led by healthy demand from real estate and retail segments. Q4 volumes should also look up, owing to higher dealer stocking, as companies had been communicating of price hike late March to pass on gas price inflation." With the growth of the Building Materials industries, titles and pipes stocks will eventually stay bullish.

Disclaimer

The above stock was 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.