Analysts positive on Somany Ceramics, expect 15% upside on strong earnings growth hope

Somany Ceramics share price rallied nearly 3 percent intraday Tuesday after analysts remained bullish on the stock and expect it to rally up to 15 percent.

BOB Capital Markets has initiated 'Buy' rating on the stock with a price target of Rs 975 per share, implying a potential upside of 15 percent from Monday's close.

Cut in GST rate on tiles, expanded value-added portfolio and focus on fast-growing tier-2 & 3 cities are positive factors, the research house said while expecting revenue and net profit to grow at a compound annual growth rate of 12 percent and 23 percent respectively by March 2020.

Somany Ceramics, the third largest organized tile manufacturer in India, forayed into sanitary-ware and allied products to offer high margins.

Asset-light model will expand return ratios to 21.3 percent by March 2020, BOB Capital feels.

Edelweiss said it remained confident that anchored by demand shift to the organised sector driven by GST and opportunity to gain market share & margin expansion, Somany Ceramics' earnings are likely to pick up in ensuing quarters.

The research house has maintained a buy call on the stock with target price of Rs 900 per share.

Somany Ceramics posted weak Q2FY18 numbers with adjusted revenue growing mere 5 percent YoY (against Edelweiss' 9 percent estimate) led by increase in volumes.

Revenue from the sanitary division jumped 36 percent YoY and accounted for 9 percent of total revenue.

EBITDA (earnings before interest, tax, depreciation and amortisation) and profit at Rs 40.9 crore and Rs 20.2 crore came below its Rs 46 crore and Rs 24.9 crore estimates, respectively, Edelweiss said.

The subdued performance was a result of tepid sales volumes (up 4 percent YoY) impacted by significant non-compliance by unorganised players, deep discounting by Somany to push volumes, pressure on GVT prices, high gas cost for Haryana plant, increase in advertising spends and Rs 1.41 crore exceptional loss.

Management has guided for single digit revenue growth in FY18 (impacted by SAP implementation in Q1FY18) and double digit from FY19 with steady 60-70bps margin expansion each year.