Will GST be a shot in the arm for Prism Cement’s struggling tiles division?
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The tile, bath, kitchen (TBK) division of Prism Cement Ltd continues to be a drag on its overall earnings. In the March quarter, revenues from this segment declined nearly 14% year-on-year (y-o-y). Its contribution to overall revenues fell from 39% in FY16 to 34% in FY17. Though the company is taking steps to optimize costs and strengthen product positioning by scaling up marketing activities, a turnaround of this business is still awaited.
For a revival, the company’s focus is likely to be on volume growth and cost control rather than pricing growth since this industry is a highly competitive one, analysts said. Apart from capacity addition and streamlining distribution, implementation of goods and services tax (GST) is likely to boost offtake of this division.
Tiles and sanitary ware will be taxed at 28% under GST, which is more or less in line with the current tax incidence. But the company’s TBK division is poised to benefit from the shift to the organized sector. “The industry hopes that there will be better enforcement under GST regime which is likely to gradually reduce the unorganized segment share from 40% to 20% over a period of time,” IIFL Institutional Equities report said.
Prism Cement sells tiles under the brand name HR Johnson and will be undertaking a 13% capacity expansion in the tiles segment through its joint venture. Also, it is improving its product mix by increasing sales of tiles that would fetch higher realizations.
Similarly, its ready mixed concrete (RMC) division too could benefit from the aforementioned move in the GST-era since nearly 60% of the RMC market is unorganized. Currently, Prism Cement is the second largest player in this segment with a pan-India presence. In FY17, RMC contributed around 23% to the overall revenues. Margins of both the businesses were subdued in the March quarter.
Meanwhile, sales volumes of the company’s core business i.e. cement surged nearly 15% y-o-y. Cement realizations saw significant growth due to improvement in prices in key markets of central India and Bihar and an increase in sales of premium products. This aided operating performance.
On Monday, 3.55 million shares of Prism Cement changed hands in two blocks, said a media report. Following this development, the stock declined and ended the day’s session down nearly 2%. The stock has been under pressure after the March quarter earnings were announced.
On the valuation front, the stock trades at a one-year forward price-to-earnings multiple of 34 times. This is expensive considering that the benefits of GST will be gradual and the company’s efforts to revive the TBK segment are yet to yield any positive results in the near term.