Top 2 Stocks Recommendations By HDFC Securities: Demand Growth Expected

HDFC Securities, a renowned brokerage house has recommended two stocks from the ceramics and plastic industries. HDFC Securities stated, "We estimate pricing to remain firm YoY on account of earlier price hikes. Energy cost in the Morbi region remained elevated but was stable QoQ. However, long-term contract gas prices (outside of Morbi) have been on a rise due to rising crude prices. Domestic tiles prices largely remained flattish QoQ due to supply pressure from Morbi players (as export sales remained weak in Q4). Sanitaryware demand continues to be strong, which has helped players pass on raw material inflation." The firm is hopeful about both of the stocks' growth margins.

Stock recommendations

For Somany stock, HDFC has given a target price of Rs. 1110, and for Prince Pipes, the target price is Rs. 980. Somany Ceramics is expected to give around 63% return and Prince Pipes is expected to give 42% return.

The firm added, "Factoring in elevated gas prices, we have cut profit estimates for tiles companies Somany Ceramics. We maintain our BUY ratings on Kajaria Ceramics, Somany Ceramics, and Prince Pipes. We expect Somany to report ~200bps QoQ margin expansion to ~13% (down ~300bps YoY). For pipes companies, we expect volumes for Prince to rise 5% 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 Prince to contract ~3pp YoY to ~16% in Q4FY22."

Company performances

Somany Ceramics has reported an Rs. 6,801 mn net sales in Q4FY22 with a 20.4% YoY growth, and Prince Pipes Rs. 8,785 mn net sales in the same period with a 15.4% YoY growth. Somany Ceramics has reported an Rs. 445 mn adj. PAT in Q4FY22 with a 10% YoY growth, and Prince Pipes Rs. 918 mn adj. PAT in the same period with a 5.6% YoY growth.