Companies in the home decor industry that manufacture tiles, sanitaryware and plywood are expected to post muted earnings in the September quarter. While the recent corporate tax cuts could result in some savings, revival still depends on how soon loopholes are plugged in the e-way bills operating mechanism.
On corporate tax cuts, analysts at Edelweiss Securities Ltd, Antique Stocking Broking Ltd and ICICI Securities Ltd see a one-time impact on earnings and expect a gradual improvement on the free cash flow front. However, the impact of this on stock prices has already played out, with stocks in these sectors surging soon after the announcement. A meaningful upside in shares of these companies from here on would be driven by improvement in demand and market share gains.
Unfortunately, the near-term demand outlook for the sector remains grim. Given the slump in the real estate sector, the organized building material industry would remain challenged with muted demand, curtailment of discretionary spends and liquidity issues.
For the September quarter, analysts estimate that tile firms would post mid-single digit volume growth. Plywood companies are expected to see low-single digit volume growth. Sanitaryware makers would report a subdued quarter as core category volumes remain in a slump. For the pipes segment, volumes would be modest given the seasonally soft quarter.
Not just demand, expectations are muted on revenue and profit parameters as well. Analysts are working with single-digit revenue growth of around 7-9% year-on-year for the industry and profit after tax is seen rising 3-4% from a year ago.
What has also soured sentiment towards the industry is that the much-anticipated goods and services tax (GST)-led market share shift hasn’t happened meaningfully. Lower taxes, along with greater compliance, was expected to accelerate market share gains for organized businesses. Due to misuse of e-way bills, competitive intensity for listed firms from those in the unorganized sector remains high. Unorganized firms are estimated to have a share of 50-75%.
Time and again, the managements of listed companies have talked out about how the menace of fake e-way bills is a niggling worry. In the wake of poor GST revenue collections, the government is expected to take stricter steps to scrutinize the e-way bills mechanism and curb tax evasion. Until then, analysts suggest these companies could partially pass on tax savings by way of promotional spends or discounts to achieve market share gains.
In short, investors shouldn’t expect much from the September quarter earnings of the building materials industry. Going by the forecast of Antique Stocking Broking, growth momentum is expected to be back on track from fiscal year 2021 onwards, riding the effective implementation of e-way bills.