PL Sector Report- Building Materials - Apr-Jun'23 Earnings Preview

Building Material companies under our coverage universe are expected to report healthy volume growth with strong traction in real estate, agri. and infra. We expect companies to register sales growth of 1.2% YoY, given correction in RM prices which mainly impacted plastic pipe segment realizations. With sequential stable RM prices and correction in power & fuel expenses, we expect margins to go back to normal level (+250bps YoY) along with EBITDA/PAT growth of 20.8%/21.1% YoY (on high base). 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 rate Prince Pipe as our top pick, considering healthy volume growth of ~14% post Q1FY24 (next 9MFY24), as April & First week of May were impacted post migration to global ERP system. EBITDA margin is expected to be ~13-15% for the same period. We estimate FY23-25E Sales/EBITDA/PAT CAGR of 12.5%/41.3%/60.6% with volume CAGR of 12.3% and EBITDA margin of 13.5%/14.6% in FY24/FY25E.

§ Plastic Pipe Sector- Margins to improve; stability in RM prices: In Q1 Plastic pipe sector is expected to report EBITDA margin expansion of +300bps YoY to 15.2% with stability in raw material prices. Sales volume is expected to grow by 15.1%YoY. Demand continues to be healthy across segments like plumbing, agri and infra given a) less fluctuation in PVC resin prices, b) peak season for agri. and c) strong traction in real estate. In our universe, Supreme Industries is expected to outperform with strong volume growth of ~26% YoY in Pipe & Fittings segment.

§ Tiles & Bathware- Kajaria margin to improve; CERA continues to grow: Kajaria’s is expected to report revenue growth of 11.5%YoY mainly with tiles volume growth of 12.5%YoY. We expect EBITDA margin to improve to 16.1%YoY on account of reduction in fuel expenses, gas prices & use of alternate fuel. Cera Sanitaryware (CRS) is expected to witness revenue growth of 14.5% YoY. Faucets business will report healthy sales up 16%YoY & sanitary business is expected grow by 14%YoY. CRS is expected to report operating margin of 16.1% (up 60bps YoY) with PAT growth of 33.6% YoY.

§ Key Rating Changes: Post our Initiating coverage on Plastic pipe sector and Tiles & Bathware sector (in Mar-2023) along with positive commentary on FY24 performance from companies, the stocks had experienced significant run-up. As a result, most coverage stocks already reached their TP. However, we maintain our positive outlook for long-term on account of robust traction in real estate and infrastructure. We downgrade the rating of Prince Pipes & Supreme Industries to ‘Accumulate’ from Buy at TP of Rs 718 & Rs 3,245 (no change). We also downgrade rating of Astral, Kajaria and CERA to ‘HOLD’ from Buy at TP of Rs 1955 (earlier Rs 1830), Rs 1264 and Rs 7805 (no change).

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