Buy This Small-Cap Ceramic Stock For A Likely Gain Of 44.52%, Says ICICI Securities

Stock-broking firm, ICICI Securities believes that investing in the stock of Somany Ceramic can likely fetch a return of 44.52%. Somany Ceramic is a small-cap company, which is part of the building materials space. It was founded in 1969, that operates in home décor solutions, manufacturing ceramic tiles. This ceramic company showed margin improvement when it announced its March quarter and full-year results recently.

March Performance
Somany Ceramics Q4FY23 reported a consolidated revenue growth of 10.1% YoY (4-year CAGR of 7.0%) driven by tile volume growth of 9.2% YoY (4-year CAGR of 3.4%), in line with ICICI Securities estimates, while tile realisation remained flat YoY (-1.4% QoQ).

The consolidated EBITDA margin expanded 77bps YoY (+246bps QoQ) to 9.0% primarily due to lower raw material cost (gross margin up 219bps YoY), partly negated by higher employee expense (+116bps YoY), resulting in EBITDA/PBT growth of 20.4%/19.3% YoY, respectively.

Management Guidance
As per the ICICI Securities research note, the company management stated that the demand was subdued during Q4 and it continues to be so in Q1FY24-TD. However, it expects that the company to outpace industry growth in FY24 and has guided for mid-teens revenue growth and 12-13% YoY volume growth (vs industry expected growth of 6-7%).

In order to achieve higher-than-industry growth in FY24, the company plans to add more dealers (>300 in FY24) and also increase the number of exclusive showrooms. For the bathware segment, management expects revenue to grow at 20-25% YoY in FY24. It has also guided for a consolidated EBITDA margin of 9.5-10% in FY24, the research note stated.

Valuation
ICICI Securities suggests that Somany Ceramics has near-term demand and margin tailwinds due to a pick-up in the domestic housing market and increased exports from Morbi (thus possibly lower domestic competition and pricing pressure) along with lower gas prices.

"The stock trades at a PER of 15.6x FY25E which is attractive led by high growth prospects (EBITDA CAGR of 31.4% during FY23-25E driven by tiles volume CAGR of 12.2%) and healthy return ratios (RoE of 17.5% FY25E). We thus, continue to like the company and maintain BUY with Mar'24 target price of Rs896, set at unchanged 22x FY25E PER." the stock broking firm added.

Share Price Movement
The latest market price of Somany Ceramics stock closed at Rs 616.15, it was down by 2.56% over the previous day's closing price. The share price has rallied by 4.08% in the last one year and over three years it has skyrocketed by 498.79%.

Disclaimer
The stock has been picked up from the brokerage report of ICICI Securities. Greynium Information Technologies, the author, or the brokerage firm will not be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.