 "Nuvama bets on pipe, cautious on wood panel stocks ahead of Q1 FY25 results")
Nuvama on Home Decor segment: Analysts expect the Home Decor segment’s Q1FY25 results to be a mixed bag, potentially influenced by the recent general elections.
In the pipes segment, they anticipate that increased demand and higher PVC prices during the quarter will likely boost volumes and lead to margin expansion.
In contrast, tile manufacturers are projected to achieve 5–6 per cent year-on-year (Y-o-Y) volume growth with stable margins, according to Nuvama Institutional Equities.
Conversely, the wood panel segment may struggle due to high timber prices, oversupply in the MDF segment, and logistical challenges in exports.
However, analysts view the pipes sector favourably, citing a rebound in real estate and government infrastructure initiatives.
“Our top picks continue to be Venus Pipes, APL Apollo Tubes and Somany Ceramics,” Nuvama analysts said in a note.
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Analysts predict that Venus Pipes will see a major improvement in revenue, with top-line expected to increase by approximately 37 per cent year-on-year (YoY). The growth, analysts said, will be driven by higher utilisation of additional capacity and increased exports.
The company's shift towards direct sales and a greater proportion of seamless and large diameter welded pipes is anticipated to boost Ebitda margins by 460 basis points (bp) Y-o-Y to 20 per cent. Consequently, Ebitda and profit after tax (PAT) are projected to surge 79 per cent and 63 per cent Y-o-Y respectively, reaching Rs 49.2 crore and Rs 28.4 crore.
Meanwhile, Somany Ceramics is expected to achieve a 6 per cent Y-oY- growth in volume, although realisations may face pressure due to subdued demand.
Analysts foresee a 5 per cent improvement in the top line, driven particularly by a 45 per cent Y-o-Y growth in the bathware segment.
A higher mix of value-added products is likely to lift Ebitda margins by 100 bp Y-o-Y to 9.6 per cent. As a result, Ebitda and PAT are expected to grow 17 per cent and 22 per cent Y-o-Y respectively, amounting to Rs 59 crore and Rs 23.2 crore.
Here’s why Nuvama is betting on pipes and remains cautious on timbers:
Strong volume growth despite PVC price pressure
Despite a strong April and May, June saw cooling demand, particularly at the distributor level, amid stable PVC prices in the trade channel. Analysts suggest PVC may have peaked out due to a 9 per cent quarter-on-quarter (Q-o-Q) price increase.
With a higher share of lower-margin agri pipes, analysts believe, average realisations are expected to decrease, potentially impacting profitability despite double-digit volume growth forecasts. Inventory gains might not translate into visible profitability improvements.
Tile demand yet to pick up
Analysts predict tile companies to see a volume growth of 5–6 per cent YoY in both domestic and export markets amid weak demand.
Flat realisations, they said, are expected due to ongoing competitive pricing pressures, despite moderate gas prices.
Additionally, companies are expanding capacity and focusing on value-added products to enhance margins, anticipating growth from a real estate recovery. Revenue and Ebitda for tile players are projected to increase 5 per cent and 6 per cent Y-o-Y, respectively.
Wood panel in rough patch as elevated timber prices hurt
The rough patch of wood panel players is expected to continue in Q1FY25, according to Nuvama. Despite strong 15–20 per cent compound annual growth rate (CAGR) demand for MDF, analysts believe, oversupply in the domestic market and high costs, including elevated timber prices, are squeezing margins.
The logistic issues, meanwhile, are expected to impact laminate exports.
“Elevated timber cost continues to hurt the wooden players and is expected to ease only towards the year-end. Consequently, while revenues of wood panel players are expected to increase by 11 per cent Y-o-Y, their Ebitda is likely to fall by 4 per cent,” Nuvama said.