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Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Gloomy demand outlook to keep home decor companies in cost-cutting mode

  • Until normalcy resumes, these companies may face working capital challenges
  • On the valuations front, they are trading at one year forward price-earnings multiples of 16-35 times

MUMBAI:The manufacturers of discretionary items have been severely impacted by the coronavirus crisis. Some of these casualties are tile, sanitaryware and plywood makers. For key listed companies in this sector, Kajaria Ceramics Ltd, peer Somany Ceramics Ltd, Century Plyboards Ltd and Greenlam Industries Ltd, March was a washout quarter. These companies put up a dismal show on most key earnings parameters.

Sales volumes saw steep declines in the March quarter, thus weighing on profits and realisations. While no guidance has been provided, management commentaries point to a bleak demand outlook. Until normalcy resumes, these companies may face working capital challenges. The companies thus plan to stick to their cost-cutting plans to wade through this crisis.

In a post earnings conference call with analysts, Somany’s management said that it has worked on controlling various costs like IT, employees cost, operating costs, etc. It targets to be profitable even with a 20-25% drop in sales. Similarly, competitor Kajaria is targeting a nearly 15% cut in employee cost and 10-12% reduction in other expenses. The company is expected to save Rs800 million with these moves.

Century Plywoods management said cost saving initiatives have led to savings of Rs100 million each in the last two months. Greenlam too is looking to rationalise fixed costs, particularly on employee costs and advertisement spends.

It remains to be seen how soon these steps yield the desired results and whether or not they lead to margin expansions in FY21. Until then, these stocks are likely to be under pressure. On a year-to-date basis, shares of these companies have taken a beating. On the valuations front, they are trading at one year forward price-earnings multiples of 16-35 times.

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