IIFL Initiates Coverage On Somany Ceramics With ‘Buy’ Rating; Cites Firm Growth Outlook
Focused management and strong fundamentals underpin Somany Ceramics’ growth prospects, says IIFL
Brokerage IIFL Institutional Equities has initiated coverage on Somany Ceramics Ltd. with a 'Buy' rating, citing the tile maker’s strong growth prospects.
Somany is the second largest player in the tiles segment in India, with nearly 14 percent market share in the organised segment, according to an IIFL report. Also, it has the highest share of outsourced manufacturing at 60 percent among other listed building material companies, the report added.
A focused management coupled with strong fundamentals underpins the strong growth prospects.IIFL Institutional Equities Report
IIFL has set its 12-month target price at Rs 967, which represents an upside of 20 percent from current market price. 13 out of the 16 analysts who cover the stock have a buy rating, according to Bloomberg. The consensus 12-month target price is Rs 896.11 apiece, which indicates a 9.3 percent return potential.
IIFL expects Somany's revenues to rebound to 18 percent in financial year 2018-2019. The company reported 19 percent decline in revenue in the April to June quarter this year, as clients de-stocked ahead of the Goods and Services Tax rollout on July 1.
IIFL states the following reasons to support revenue growth
- Ramp up of joint-venture capacity
- Capacity expansion and better utilization
- Improved product mix
Given its strong brand visibility, we expect Somany Ceramics to be a major beneficiary of revival in the housing segment.IIFL Institutional Equities Report
The brokerage expects the company's earnings to grow at a compounded annual growth rate of 18 percent, driven by volume growth and margin expansion. The return on equity is expected to grow at 21 percent, a sign of a healthy balance sheet, according to IIFL.
Somany has been delivering revenue growth in the past decade by increasing market share in the vitrified tiles segment which has seen exponential growth.
Earnings before interest, tax, depreciation and amortisation margin have improved over the past three years, led by lower fuel cost and improving product mix.