Markets
A confluence of favourable factors for home décor companies
Summary
Manufacturers of ceramic tiles, wood panels and plastic pipes aim to add more capacitiesManufacturers of ceramic tiles, wood panels and plastic pipes aim to add more capacities, even as home decor companies continue to battle high input costs in the June quarter (Q1FY23), thus keeping their margins under pressure. These include Kajaria Ceramics Ltd, Supreme Industries Ltd, and Greenlam Industries Ltd. Management commentaries on long-term demand outlook are also upbeat.
A confluence of favourable factors is driving the industry’s capital expenditure plans.
The volume growth of these companies was reasonably fine in Q1FY23 on a three-year compound annual growth rate basis, noted Achal Lohade, consumer discretionary research analyst, JM Financial Institutional Securities Ltd. As such, in the past couple of quarters, pent-up demand, market share gains led by distribution, expansion, and disruption in the unorganised segment has aided growth for most listed companies. “As a result, their capacity utilisations are closer to peak and hence the announcements of capacity expansion," Lohade said.
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Consolidation has accelerated in this industry, post the covid-19 pandemic. Increased cost burdens led small and regional manufacturers to lose their business to listed companies, which were better placed to handle costs. The problems of regional companies aggravated after the recent spike in input prices. In the tiles segment, companies in Gujarat’s Morbi district are seeing constant plant shutdowns amid high costs, leaving larger listed companies to cater to domestic demand, said Edelweiss Securities Ltd in a report dated 19 August. In the plastic pipes segment, huge volatility in raw material prices is spurring industry consolidation, the broking firm said.
That’s not all. Improving cash flows on the back of a tight leash on working capital and price hikes has helped listed companies deploy funds for capital expenditure. “The working capital cycle of these companies was broadly stable in Q1FY23 and their balance sheets are not very leveraged," said Mohit Agrawal, analyst, IIFL Securities Ltd.
Working capital days, which indicate the time required to convert working capital into revenue, is in a good stead for these companies. The demand trend is healthy because of the ongoing momentum in residential real estate sales and the impact on margins is transitory, Agrawal said. “Valuations of market leaders in the building materials space are 25-30 times (FY24 price-to-earnings), which is not cheap. However, because of the strong demand outlook, we do not expect a de-rating of these stocks," he said.
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