An overall weakness in demand dented the Q2FY23 performance of home décor sector companies, believes brokerage Nuvama Wealth Management Ltd, formerly known as Edelweiss Securities Ltd However, positively, higher realisations enabled growth in total revenues by 7% YoY.
The brokerage said that as demand slowed, margins suffered from inventory losses in pipes, higher gas costs in tiles, and timber inflation in the wood panel area, which caused EBITDA/PAT to decline by 38%/50% YoY.
Despite, higher realisations that helped add top-line growth, volumes dropped significantly for the title producers. “Volume across tile players were muted with leader Kajaria Ceramics Ltd reporting flat YoY volume growth, whereas Somany Ceramics, HR Johnson (Prism Johnson Ltd), and Orient Bell Ltd reported 2%/7%/10% YoY fall in volumes, said the brokerage house.
On the other side, wood panel company’s such as Greenply Industries Ltd exceeded volume expectation, while Century Plyboards Ltd met expectation.
According to the brokerage report, wood panel companies maintained their stellar performance in Q2FY23, with a 12% increase in sales driven by greater realisations. In contrast, as businesses gradually passed on increasing input costs, the drop in EBITDA/PAT was constrained at 7%/4% YoY.
On the other side, while tile firms also saw an 10% growth in revenue, driven by price hikes once more, EBITDA/PAT drastically slumped 31%/43% as a result of rising gas prices.
Despite top-line growth of 23% on year, plastic pipe companies continued to be worst performing category with EBITDA/PAT tanking 82%/62% YoY. This was caused by a decrease in PVC pricing, which resulted in inventory losses, and de-stocking at channel.
Further, the brokerage sees strong capital expenditure cycle to continue, despite the current demand weakness.
“Plastic pipe players are expanding their geographical footprint, wood panel players are executing aggressive capex in new age products such as MDF/particle board, and tile players too are not shying away from capex,” said Nuvama Wealth.
The brokerage firm also sees strong balance sheets across these companies with healthy operating cash flows.
“However, working capital deteriorated marginally as inventory increased amid the current weakness in demand and increase in finished stock given lower sales in Q2FY23,” added the brokerage.
Even though the demand situation is difficult, Prince Pipes & Fittings Ltd's recent underperformance in comparison to other companies in the plastic pipes market convinced the brokerage to upgrade the stock to a ‘buy’ rating.
In addition, the brokerage house favours, Greenpanel Industries due to a steep correction and positive management outlook.
In tiles, it prefers sticking to the leader, Kajaria Ceramics. “We have a ‘buy’ recommendation on all these companies,” it added.
