This Small Cap Stock Zoomed 128.36% In 3 Years, Buy For Strong 61% Returns, Says HDFC Securities

HDFC Securities recommends "buy" the stock of Somany Ceramics Limited with a target price of Rs 800 apiece. If you buy the stock at the current market price, it would likely give you 61% robust return on investments considering the given target price by the brokerage. It is a small cap Building material sector company engaged in manufacturing and trading of complete decor solutions, its products include ceramic wall and floor tiles, polished vitrified tiles, glazed vitrified tiles, sanitary ware, bath fittings and allied products. It has a market capitalisation of Rs 2,120.74 crore.

Stock Outlook & Returns

On NSE, the stock last traded at Rs 499.30 apiece, falling 0.62% as compared to its previous close. The stock recorded its 52-week low  at Rs 446 on 23 December 2022 and its 52-week high at Rs 947 apiece on 7 January 2022, respectively. 

The stock has given 5.13% positive returns in the past 1 week. Whereas, in the past 1 month it has fallen 4.73% and 11.6% in the past 3 months, respectively. Over the past 1 year, the stock has fallen 45.23% and 47.01% in the past 5 years, respectively. However, it has given 128.36% multibagger returns in the past 3 years.

Strong volume growth outlook

Somany expanded its tiles capacity by 20% in Q1FY23. Newly added capacity along with strong domestic demand should support its 20% revenue growth in FY23E. It has strong focus on fastgrowing tier-2/3 markets (contributing >75% of its revenue) and it plans to increase retail sales, from ~80% currently. Somany is also expanding in the bathware segment where it has ~2% market share. It expects to deliver ~35% revenue growth in bathware in FY23 (on a low base). 

Focus on improving product mix

The company increased its GVT capacity by 8MSM, thus increasing the share of GVT capacity to 28% currently vs 19% YoY (and 16% in FY19). As Somany is further adding a 4.5MSM slab plant next year, the share of high value tiles will increase to 33% in FY24E. It has guided its GVT revenue share would expand to 35% by FY24E (vs 28% in FY22). Increasing share of value added products and higher retail sales will help the company improve margins. 

Capex and balance sheet

Somany would incur INR 1.7bn towards the slab plant (4.5MSM by Q2FY24) and would be doubling its faucet capacity to 1.3mn pieces annually (in H2FY23). We expect Somany to fund this through a mix of debt and internal accruals. The company continues to keep its working capital in shape. Its cash conversion cycle has steadily reduced to 50 days in FY22, vs the peak of 113 days in FY18. 

Outlook

Commenting on the valuation, HDFC Securities said, "We continue to like the company for its strong volume growth (new capacity ramp-up, demand tailwinds), improving product mix (new capacities to increase GVT sales share). Somany is targeting to add 300 dealers in FY23. We expect Somany to deliver 10% tiles volume CAGR during FY22- 25E leading to consolidated revenue/ EBITDA/APAT CAGRs of 14/13/10%. We maintain BUY, with a revised TP of INR 800, valuing it at 13x its Mar'25E EBITDA (roll forward from Sep'24E to Mar'25E)." 

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.