NGT order, focus on affordable housing to aid home decor players

Recent ruling by the National Green Tribunal (NGT), Delhi bench to shut down all ceramic units at Morbi and Wankaner in Gujarat that run on coal gasifier is a positive development for organised home decor players, analysts say. 

Besides, ongoing structural changes including stricter implementation of the E-Way Bill, recovery in rural demand in the wake of a good monsoon and the government focus on affordable housing, too, augur well for the industry.

The NGT on March 6 ordered shutdown of coal gasifiers at Morbi and Wankaner ceramic cluster to curb pollution. While this move is expected to cause major production disruption in the Rs 40,000 crore industry, organised players, experts believe, will remain unscathed as majority of their plants own liquified natural gas (LNG).

The order that stipulates Morbi ceramic units to move from coal gas input to natural gas will hit unorganised players hard as it would increase their costs, raise working capital requirements, and bring them under the purview of taxation. Consequently, organised players are going to benefit from it.

With shift from coal to gas, unorganised players will have no choice but to increase prices 7-10 per cent, experts believe.  

"With the high competitive intensity, organised players were finding it difficult to increase prices. Given the current ruling by NGT, we believe organised players will be in a better position to raise prices. As they will also benefit from declining gas costs, we expect structural improvement in their margins," the brokerage said.

Analayts at JM Financial agree. "This measure coupled with stricter implementation of GST and E-Way Bill regulations definitely bode well for organised players as the cost of doing business outside regulation will increase significantly. More importantly, this will also push incremental capacities in the organised fashion, thus benefiting organised players in general," wrote Achal Lohade, research analyst at JM Financial in a recent report co-authored by Shrenik Bachhawat and Manish Agrawal. 

TOP BETS

Most analysts tracking the sector are bullish on companies such as Kajaria Ceramics, Somany Ceramics, Cera Sanitaryware, Century Plyboards and Carborundum Universal. Most the listed players have seen a good run at the bourses in the last three years. 

While Carborundum Universal has rallied around 118 per cent between March 14, 2016 to March 14, 2019, the benchmark S&P BSE Sensex has moved up around 52 per cent during this period. Cera Sanitaryware and Kajaria Ceramics have gained 46 and 23 per cent, respectively during the window.

"We expect competitiveness of branded players to significantly improve particularly in ceramic wall and floor tiles and soluble salt vitrified tiles," said analyasts at ICICI Securities. The brokerage has 'buy' rating on Kajaria Ceramics and Somany Ceramics with the target price of Rs 625 and 375, respectively.

Maintaining a positive view on Cera Sanitaryware, analysts at Anand Rathi says apart from affordable housing and the e-way bill, the company is expected to do well owing to strong brand recall, prudent credit control and  after-sales service. The brokerage has maintained 'hold' rating on the stock with the target price of Rs 2,982.

On Century Plyboards, Edelweiss Securities says, "as management shifts focus to expanding distribution network and market share gain, we believe margin pressure will continue. We believe the company’s strategy to gain market share will help the company consolidate its leadership in the wood panel industry and support long-term growth."

Reiterating 'outperformer' rating on Carborundum Universal, IDFC Securities says improving supply-demand dynamics across segments would result in gradual price hikes and drive earnings of the company.

FINANCIALS

Carborundum Universal has reported a decent rise in its consolidated net sales, net profit and operating income during the last three financial years (FY15-FY18). Data fetched from ACE Equity show the company's net sales grew 15 per cent to Rs 2,367.76 crore while consolidated profit after tax (PAT) rose nearly 50 per cent during the period. Power and fuel cost at the end of FY15 stood at Rs 303.55 crore, which rose nearly 8 per cent to Rs 327.46 crore at the end of FY18.

Operating profit of the company increased nearly 52 per cent during the period.

Kajaria Ceramics, too, has put up a good show on the financials front. During the last three financial years, the company's consolidated net sales grew 24 per cent while operating profit increased 29 per cent. Profit after tax (PAT) rose 24 per cent. Power and fuel cost, on the other hand, rose 7 per cent during the same time.

Names	Closing price as on March 14, 2019	Closing price as on March 14, 2016	% change
Carborundum Universal Ltd.	377.30	173.30	117.71
S&P BSE Sensex	37754.89	24804.28	52.21
Cera Sanitaryware Ltd.	2622.75	1790.40	46.49
Kajaria Ceramics Ltd.	582.90	474.95	22.73
Century Plyboards (India) Ltd.	191.50	166.65	14.91
Somany Ceramics Ltd.	384.45	362.80	5.97

(Source: ACE Equity)