Manufacturers of ceramic tiles, wood panels and plastic pipes are aiming to add more capacity even as home decor companies are battling higher input costs in the June quarter (Q1FY23), thus putting pressure on their margins. These include Kajaria Ceramics Limited, Supreme Industries Limited and Greenlam Industries Limited. Management’s comments on the longer-term demand outlook are also upbeat.
A confluence of favorable factors is driving the capital expenditure plans of the industry.
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Achal Lohde, Consumer Discretionary Research Analyst, JM Financial Institutional Securities Ltd, said, the volume growth of these companies was quite good in Q1FY23 based on the three-year compound annual growth rate. The increase in demand, market share due to distribution, expansion and disruption in the unorganized sector has helped in the growth of most of the listed companies. “As a result, their capacity utilization is nearing peak and so are the announcements of capacity expansion,” Lohde said.
Consolidation has accelerated in the industry, following the COVID-19 pandemic. The increased cost burden caused small and regional manufacturers to lose their business to listed companies, who were in a better position to handle the cost. After the recent surge in input prices, the troubles of the regional players have only increased. In a report dated August 19, Edelweiss Securities Limited said that in the tiles segment, companies in Gujarat’s Morbi district are witnessing frequent plant shutdowns amid high costs, leaving large listed companies to meet domestic demand. The broking firm said that in the plastic pipe segment, heavy volatility in raw material prices is giving a boost to the industry.
He is not everything. Stringent restrictions on working capital and improved cash flow due to price hike have helped listed companies to fund capital expenditure. “The working capital cycle of these companies was largely stable in Q1FY23 and their balance sheets are not heavily leveraged,” said Mohit Agarwal, analyst at IIFL Securities Ltd.
Working capital days, which indicate the time required to convert working capital into revenue, are in good stead for these companies. Agarwal said the ongoing momentum in residential real estate sales and the impact on margins is temporary, as the demand trend is healthy. “Market leaders in the building materials space are valued at 25-30 times (FY24 price-to-earnings), which is not cheap. However, due to strong demand scenario, we do not expect de-rating of these stocks,” he said.
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