Expanding Glazed Vitrified Tiles Production Will Strengthen Future Prospects

Key Takeaways

• Strategic divestment and expansion of high-value products could enhance margins and earnings amid market pressures.
  
• Distribution network growth and acquisition initiatives are expected to drive revenue diversification and enhance overall profitability.
  
• Weak domestic and export demand paired with rising costs and operational challenges could pressure Somany Ceramics’ revenue and profitability.

Catalysts

Engages in the manufacture and sale of ceramic tiles and related products in India.

• Somany Ceramics is poised for future growth as the company continues to boost its distribution network by adding 134 new dealers and 46 showrooms, expected to drive revenue growth.
  
• The strategic divestment from underperforming joint ventures will improve operating efficiencies, likely benefiting net margins as less profitable operations are shed.
  
• A focus on expanding the production of high-value glazed vitrified tiles, coupled with maintaining pricing despite market pressures, has the potential to enhance earnings.
  
• The stabilization and upcoming capacity expansion of the Somany Max plant, which is on track for profitability, are expected to result in an increase in revenue and improved operating margins.
  
• The acquisition of a construction chemical business aligns with existing operations and is strategically expected to contribute to revenue diversification and overall earnings growth.

Somany Ceramics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Somany Ceramics's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 5.1% in 3 years time.
• Analysts expect earnings to reach ₹1.8 billion (and earnings per share of ₹44.18) by about April 2028, up from ₹695.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹796 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, down from 26.3x today. This future PE is lower than the current PE for the IN Building industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.07%, as per the Simply Wall St company report.

Somany Ceramics Future Earnings Per Share Growth

Risks

• The weaker domestic and export demand for the tiles industry could lead to reduced revenue growth for Somany Ceramics, as highlighted by the industry-wide negative sales trend.
  
• Rising gas prices due to dollar movement and increased spot natural gas prices could pressure operating margins, reducing profitability.
  
• The company's decision to disinvest from two joint ventures due to lack of profitability and increased competition in the ceramic wall and glazed vitrified tiles segments could impact future earnings.
  
• Capacity utilization challenges, such as the Somany Max plant operating at only 51%, suggest hurdles in scaling operations effectively, potentially affecting revenue and net profit margins.
  
• Economic conditions, such as overall market slowdown and deferred purchases in the building materials sector, could delay demand recovery and impact revenues and earnings.

Valuation

• The analysts have a consensus price target of ₹680.5 for Somany Ceramics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹778.0, and the most bearish reporting a price target of just ₹555.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹35.5 billion, earnings will come to ₹1.8 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 15.1%.
• Given the current share price of ₹446.8, the analyst price target of ₹680.5 is 34.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.