PL Sector Report: Building Materials - Jul-Sep’23 Earnings Preview – Margin expected to improve, healthy PAT
Prabhudas Lilladher Pvt Ltd
Building Materials - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd.
Jul-Sep’23 Earnings Preview – Margin expected to improve, healthy PAT
Building Material companies under our coverage universe are expected to report moderate volume growth. However, we anticipate robust volume expansion in the plastic pipe sector, while the tiles and woodpanel sectors are likely to experience lower growth. We expect companies to register sales growth of 4.7% YoY, given correction in RM prices which mainly impacted plastic pipe segment realizations and de-growth in woodpanel companies. With sequential stable RM prices and correction in power & fuel expenses, we expect margins to go back to normal level (+580bps YoY) along with EBITDA/PAT growth of 78.6%/87.5% YoY (on lower base), excluding Finolex Ind., EBITDA/PAT growth of 27.2%/28.0% YoY. We remain positive on the sector considering 1) buoyancy in real estate market (despite interest rate hike), 2) Govt. focus of housing, sanitation and infrastructure, 3) improvement in agri. segment with normalization in RM prices, 4) pick up in export, and 5) increase in branded/large players market share.
We prefer Plastic pipe companies with robust volume growth, our top pick is Supreme Industries considering Revenue/EBITDA/PAT CAGR of 15.1%/21.9%/21.6% over FY23-26. Considering buoyancy in real estate, tiles demand with lag in real estate cycle will benefit Kajaria being leader in sector. We continue to like Greenpanel Industries, given its 1) leading position in domestic MDF segment, 2) strong growth prospects in domestic MDF demand, 3) planned capacity increase of 35% over FY23-25 and 4) extensive distribution network.
§ Plastic Pipe Sector- Margins to improve; stability in RM prices: In Q2 Plastic pipe sector is expected to report EBITDA margin expansion of +870bps YoY to 12.3% with stability in raw material prices and severe contraction in margin previous year same quarter with PVC resin fall. Sales volume is expected to grow by 22.4%YoY. Demand continues to be healthy across segments like plumbing, agri and infra even after seasonally weak quarter. In our universe, Supreme Industries and Astral is expected to deliver strong volume growth of 26%/25% YoY in Pipe & Fittings segment. We have maintained our earnings estimates for Astral and tweaked for Supreme & Finolex Ind. for FY24/FY25E.
§ Tiles & Bathware- Kajaria yet to pick in volume; CERA continues to grow: Kajaria is expected to report revenue growth of 6.1%YoY mainly with tiles volume growth of 7.3%YoY. We expect EBITDA margin to improve to 16.6% on account of reduction in fuel expenses, gas prices & use of alternate fuel. Cera Sanitaryware (CRS) is expected to witness revenue growth of 8.6% YoY. Faucets business will report healthy sales up 10%YoY & sanitary business is expected grow by 7%YoY. CRS is expected to report operating margin of 16.1% (+20bps YoY) with PAT growth of 10.0% YoY.
§ Woodpanel – Muted performance continue: The woodpanel sector is anticipated to experience continued muted performance in Q2 due to several factors. Moderation in volume growth and elevated timber prices are expected to contribute to this subdued performance. We expect MDF volume growth of 12.5%/4.2% for Century Plyboards/Greenpanel Ind. and plywood volume growth of 3.0%/-20.2% for Century Plyboards/Greenpanel Ind. PAT expected to be subdued for CPBI/GREENP in Q2FY24, with PAT est. -15.2%/-18.8% YoY, respectively.
§ Key Rating Changes: In our coverage universe, we have roll forward to Sept-25, upward revised our target price for all companies and introduced FY26 numbers. We maintain our rating on Astral/Finolex Ind./Century Plyboards/Greenpanel Ind. and upgrade to Accumulate from HOLD for Supreme Ind/Kajaria/CERA.