Green shoots of GST benefits in building materials; go grab – Economic Times

GST has done the trick and squeezed the unorganised space of the economy. The benefit is already accruing to the organised space.

The building material space is showing the first signs of it, as organised players are logging more enquiries from dealers and distributors, who had previous worked only with unorganised players, suggests a report by brokerage JM Financial.

In the runup to GST implementation, building material players across sub-segments witnessed a substantial drop in volumes due to destocking by trade channel in June. However, stock prices of building material companies including textiles, cement, glass and plywood makers remained stable on expectation of a quick return of normalcy.

Massive destocking dented revenue growth of companies like Kajaria Ceramics, Somany Ceramics, Cera Sanitaryware and Greenply Industries in the last 15-20 days of Q1 of FY18, the brokerage said.

Since the beginning of this financial year, shares of Kajaria Ceramics have advanced 18 per cent, whereas those of Somany Ceramics and HSIL have jumped 15 per cent and 9 per cent, respectively. BSE benchmark Sensex is up 6 per cent since April 3.

The management of Somany Ceramics has highlighted that unorganised players are trying to rework their business models, including increased levels of invoicing, and they may have to go for price hikes once the e-way billing system comes into effect.

Dealers that were previously working with players based out of Morbi, Gujarat, are seeking to work with registered branded players such as Somany (some enquiries received), according to JM Financial.

The Cera management highlighted that Morbi is expected to remain a hub for the ceramics industry, as the entrepreneurs would not be discontinuing their business. There will be consolidation over the medium term, it said.

Shares of paint companies such as Shalimar Paints and Asian Paints have advanced 31 per cent and 10 per cent this year. Brokerage Edelweiss Securities has a ‘buy’ rating on Asian Paints with a target price of Rs 1,249.

Market experts say the ongoing quarter will be soft for building material companies after a disastrous June quarter.

It will be a soft quarter, but likely to be better than the first quarter, as channel partners are still in the process of understanding GST modalities, the JM Financial report said.

Companies have indicated prospects of robust growth in the second half of 2017-18, led by demand improvement and stocking up by channel, especially for branded products.”

Going with the present scenario, building materials firms are structurally well placed on growing urbanisation (31-40 per cent by 2025), rising disposable income, growing customer preference for branded products, government initiatives such as affordable housing and housing for all and GST rollout, which should curtail prospects for unorganised players.

GST-related ambiguities are likely to result in a soft H1FY17. Expect a pickup from third quarter, with the momentum sustaining in FY19 (double-digit volume growth and operating leverage for companies across our coverage universe), JM Financial said.

The brokerage has a ‘hold’ rating on Kajaria Ceramics, Cera, Greenply, Century Ply and Greenlam, but had a ‘buy’ rating on Somany Ceramics on reasonable valuation and the possibility of a positive surprise on margins and earnings fronts.

For the quarter ended June 30, 2017, Century Plyboards reported a drop in volume (around 3 per cent YoY) led by destocking ahead of GST rollout, as the tax rate on laminates was reduced by 10 percentage points.

Greenlam reported strong high double-digit growth in the domestic market (despite destocking impact in June); but its exports were impacted by GST-related issues (systems were posing problems and export orders could not be served), resulting in a meagre 6 per cent YoY overall volume growth. Centuryply saw strong growth in exports.

Greenlam has been doing well in the domestic laminates market (being the market leader) on intensified sales and marketing activity and traction in new product launches. Shares of the company soared 40 per cent to Rs 937 on September 5, 2017 from Rs 670 on April 3, 2017.

Green shoots of GST benefits in building materials; go grab

Sanjeev Jain, Associate Vice-President, Ashika Stock Broking, is positive on the cement and tiles industry from the building materials space. “The government thrust on affordable housing amid a rise in cement prices in select states coupled with GST implementation will benefit the cement and tiles sector.

“We may see improvement in financials of these companies in the coming quarters. I am bullish on Kajaria Ceramics and JK Lakshmi Cement. Ultratech Cement also looks good,” he said.

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