After the goods and services tax (GST) was introduced in 2017, home decor companies were in the spotlight because plywood, laminate and ceramic tile manufacturers had expected to benefit from the GST-led formalization. But from the looks of it, the change in the tax regime is yet to yield the desired results.
“Contrary to initial perception, the GST and e-way bill rollouts have only had limited impact on unorganized players with an increase in invoicing. Therefore, a shift in market share from unorganized to organized is still elusive," analysts from JM Financial Institutional Securities Ltd said in a report on 11 June.
Unorganized companies are estimated to have a share of 50-75%. Lower taxes, along with greater compliance, was expected to accelerate the market share gains for organized businesses.
Sharing a similar view, analysts at Edelweiss Securities Ltd said that the much-anticipated demand shift from unorganized to organized firms has fallen behind schedule. “Though industry dynamics seem to be improving for organized tiles players in the wake of the National Green Tribunal ruling, other segments—plywood, medium density fibreboard, laminates, plastic pipes—were weak," they said in a report on 7 June.
Abhishek Somany, managing director of Somany Ceramics Ltd, noted that the delay in invoice matching is a hindrance. “E-way bill implementation has not been a success until they start doing invoice matching. And, invoice matching, we believe, will start in June, or July hopefully. Once that happens, only then will the e-way bill be really of any use; but currently there are fake e-way bills, which are being generated at will," he said in a post-earnings conference call with analysts.
With the general election out of the way, analysts and managements of these companies hope there will be stricter compliance and surveillance for unorganized firms.
Besides, companies in these sectors continued to face challenges in the form of weak real estate demand, high operating costs and relentless competition from non-regulated manufacturers. One silver lining, however, is the recent drop in Brent crude prices, which is likely to help margin expansion.
The performance of stocks has been mixed. In 2019, shares of Somany Ceramics, Kajaria Ceramics Ltd and Greenply Industries Ltd have beaten the benchmark Nifty 500 index. However, shares of Greenlam Industries Ltd and Century Plyboards (India) Ltd lagged the broad-based index.
All these stocks have underperformed the Nifty 500 index by a huge margin when one looks at their returns since the GST implementation on 1 July 2017. On the valuation front, they quote at one-year forward price-to-earnings multiples of 18-30 times.