Ceramic stocks: Why Kajaria, Somany, Cera rallied up to 8% today

Shares of ceramic companies witnessed a surge in buying activities on Wednesday, in an otherwise muted broader market, amid strong volume. Among individual stocks, Somany Ceramics, Kajaria Ceramics, and Cera Sanitaryware rallied up to 8%, while the BSE benchmark Sensex settled 85 points, or 0.14%, higher at 63,228 levels.

Shares of Somany Ceramics ended near its day’s high of ₹704.2, up 6.5% against the previous closing price of ₹661.30 on the BSE. The stock opened at ₹659.20 and gained as much as 8.5% to touch an intraday high of ₹715.05 during the session.

In a similar trend, Kajaria Ceramics surged as much as 5.7% to ₹1,325.40, before settling at ₹1,293, up 3.1% against the previous closing price of ₹1,254.10 on the BSE.

Cera Sanitaryware closed day’s trade at ₹7,961.15, up 1.71% on the BSE. Earlier today, the ceramic stock opened at ₹7,876.15 and gained as much as 2.75% to hit an intraday high of ₹8,042.65 level.

According to a latest report by JM Financial, leading ceramic companies, Kajaria and Somany, registered improvement in volume during the March 2023 quarter as demand for home improvement and construction activity rose in Feb-Mar’23 after a weak Oct-Nov’22. Kajaria posted tile volume growth of 8% YoY and 10% QoQ in Q4FY23 as demand improved after a weak Q3FY23, while Somany registered a growth of 9% YoY and 9% QoQ, respectively, during the same period under review.

As per the report, companies remain optimistic about business momentum and have guided for 13-15% volume growth in FY24, owing to a demand revival in Tier 2, 3 cities and continued distribution network expansion in these cities. Adding to it, healthy real estate launches as well as Morbi’s focus on exports due to sustained demand momentum also boosted business.

Besides, the decline in fuel prices also improved the gross margin of these ceramic companies. Fuel prices, which remained elevated during most of CY22 and 1HCY23, have softened since Nov’22. RasGas prices have dipped 10% QoQ in Q4FY23 to ₹47.8/scm, and Gujarat Gas declined 22% QoQ in Q4FY23 on account of lower offtake from tile manufacturers in Morbi. Asia Spot LNG prices slumped by 43% QoQ to ₹60/scm in Q4FY23.

In the current quarter, spot prices further declined (-42% QoQ) to ₹34.8/scm, while Gujarat Gas prices are estimated to fall 13% QoQ. Further, gross margin (post P&F) of Kajaria / Somany expanded by 160bps /110bps QoQ on the back of reduction in gas prices coupled with a partial switch to alternative fuels such as propane, bio-fuels and LPG. Kajaria estimates savings of ₹150 crore in FY24 on account of fall in gas cost, some of which will be passed on to the channel in discounts/ schemes, the report noted.

On the export front, tiles exports have improved from a monthly average of ₹1,300 crore during Apr-Aug’22 to ₹1,500-1,700 crore during Nov’22-Apr’23. During FY23, tile exports grew 25% YoY to ₹16,000 crore. The industry expects tile exports to grow further by 25% YoY in FY24 to a record ₹20,000 crore. During FY23, Indian tile exporters became more cost competitive on account of higher electricity cost and gas cost in other exporting countries – Italy, Spain and China – while Morbi was highly competitive in export markets.

Going ahead, industry players expect Morbi’s cost competitiveness to sustain in the near term despite the marginal improvement in the gas situation in European countries. Moreover, the industry expects the removal of ADD on Indian tile manufacturers, which will further boost export momentum, the report highlighted.

JM Financial has maintained a “BUY” rating on Kajaria and Somany with a Mar’24 target price of ₹1,350 and ₹860, respectively. The domestic brokerage has maintained “HOLD” on Cera with a price target of ₹7,000, citing rich valuations.

The agency, however, said that it continues to prefer the wood panel sector over the ceramics sector given sector tailwinds (function of real estate inventory absorption) and construct of the industry (relatively lower competitive intensity).

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