Lower gas prices and capacity additions will aid growth for both firms, though upside potential seems higher for the latter
Tile makers Kajaria Ceramics and Somany Ceramics have gained market share in recent years on the back of higher than industry volume growth. Capacity expansions and higher investment in brand-building are key factors.
Lower natural gas prices have aided operating margins, as this is a key raw material used by these companies. In fact, the ongoing renegotiations with Qatar-based RasGas on sourcing agreements and gas pricing are crucial for India, as it can lead to higher supplies at significantly lower prices. Likely imposition of anti-dumping duties on tiles imported from China will also allow these companies to take price increases (offsetting potential cost pressures) and aid their volumes, as Chinese imports impact eight to nine per cent of industry volumes in coastal regions such as Mumbai, Kolkata and Kochi, among others. This and implementation of a national goods and services tax (GST) will be key catalysts for these companies.
Kajaria and Somany plan to increase capacities of their facilities and joint ventures over the next two years, as they try to capture a larger part of the unorganised tiles market, nearly half the domestic industry. In this backdrop, analysts expect Kajaria and Somany's revenues and earnings to grow at a compounded annual rate (CAGR) of 20-25 per cent over the next two years.
While the Street remains positive on both stocks, Kajaria appears fairly valued from a short-term perspective. On the other hand, a recent qualified institutional placement (QIP) by Somany will enable it to reduce its net debt to equity ratio to 0.4, from 0.6 in FY15. The share price of Somany, third largest entity in the tiles market, trades at a discount to that of the industry leader Kajaria but this could narrow a little.
"We believe the discount between Somany and Kajaria's one-year forward price to earning (PE) will narrow down to 17 per cent, to align with the historical average, driven by strong earnings growth and an improvement in balance sheet of the former," says Deepak Purswani, analyst at ICICI Direct. At current levels, this discount has widened to about 35 per cent. Kajaria trades at 27 times its FY17 consensus earnings estimates, this ratio stands at about 18 for Somany. Analysts on an average expect Somany's share price to rise about 16 per cent from current levels, which in the case of Kajaria is pegged at three per cent. Thus, investors could consider Kajaria on corrections from a one to two year perspective.
Resource : http://www.business-standard.com/article/markets/better-times-ahead-for-kajaria-somany-115122700691_1.html
Lower natural gas prices have aided operating margins, as this is a key raw material used by these companies. In fact, the ongoing renegotiations with Qatar-based RasGas on sourcing agreements and gas pricing are crucial for India, as it can lead to higher supplies at significantly lower prices. Likely imposition of anti-dumping duties on tiles imported from China will also allow these companies to take price increases (offsetting potential cost pressures) and aid their volumes, as Chinese imports impact eight to nine per cent of industry volumes in coastal regions such as Mumbai, Kolkata and Kochi, among others. This and implementation of a national goods and services tax (GST) will be key catalysts for these companies.
Kajaria and Somany plan to increase capacities of their facilities and joint ventures over the next two years, as they try to capture a larger part of the unorganised tiles market, nearly half the domestic industry. In this backdrop, analysts expect Kajaria and Somany's revenues and earnings to grow at a compounded annual rate (CAGR) of 20-25 per cent over the next two years.
While the Street remains positive on both stocks, Kajaria appears fairly valued from a short-term perspective. On the other hand, a recent qualified institutional placement (QIP) by Somany will enable it to reduce its net debt to equity ratio to 0.4, from 0.6 in FY15. The share price of Somany, third largest entity in the tiles market, trades at a discount to that of the industry leader Kajaria but this could narrow a little.
"We believe the discount between Somany and Kajaria's one-year forward price to earning (PE) will narrow down to 17 per cent, to align with the historical average, driven by strong earnings growth and an improvement in balance sheet of the former," says Deepak Purswani, analyst at ICICI Direct. At current levels, this discount has widened to about 35 per cent. Kajaria trades at 27 times its FY17 consensus earnings estimates, this ratio stands at about 18 for Somany. Analysts on an average expect Somany's share price to rise about 16 per cent from current levels, which in the case of Kajaria is pegged at three per cent. Thus, investors could consider Kajaria on corrections from a one to two year perspective.
Resource : http://www.business-standard.com/article/markets/better-times-ahead-for-kajaria-somany-115122700691_1.html
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