Q2FY24 Review: Building Material: Demand a mixed bag, but outlook getting better

10 Nov 2023 , 10:20 AM

The Building material sector reported mixed set of earnings for Q2, with PVC Piping companies witnessing strong demand tailwinds, while Ceramic and Woodpanel companies hoping for demand revival in H2FY24. Input cost pressures eased off largely aiding ebitda margins; except for Woodpanel companies which continued to witness increase in Timber costs. Capex projects are largely on track, companies are hopeful of strong real estate launches CY21 onwards to aid demand growth over the medium term. While analysts of IIFL Capital Services earnings remain largely unchanged cumulatively over the Q2FY24 earnings cycle, they revise their target price upwards as they roll forward valuation to September’24. Re-iterate CPBI and KJC as analysts of IIFL Capital Services top picks. 

Ceramics – Demand weakness continues: 

Ceramic companies reported a muted 6% volume growth YoY, and up 6-10% QoQ. H1FY24 volume growth for KJC/SOMC was 7%/7%, vs FY24 mgmt guidance of 13-15%/double-digit growth respectively. Both KJC/ SOMC have cut their guidance to 9-10%/ high single digit respectively. Morbi industry continues to see capacity addition, though exports saw robust growth of 43% YoY to ~Rs100bn in H1FY24. Gross margins and Ebitda margins have marginally improved on a sequential basis on soft fuel costs, although they could harden a bit hereon. Sanitary/Bathware continues to do better than the Tiles industry; the increased competition coming in from ASTRA/PRINCPIP is largely focussed on the B2B segment. 

Pipes – on a strong footing: 

PVC/CPVC Pipe companies saw strong performance with SI/ASTRA reporting ~23/28% YoY volume growth for Q2 and 30/29% for H1FY24. This was also on account of strong housing demand and orders from government schemes like ‘Nal se Jal’. After SI, ASTRA has also upped its volume growth guidance from ~15% to >20% for FY24. Ebitda/kg was significantly higher YoY, on a weak base, and is now moving closer to LT average levels. CPVC prices further declined QoQ, impacting this segment’s volumes for SI (+1.2% in H1FY24). However, the outlook on CPVC remains healthy as prices seemed to have largely bottomed out.

Woodpanel – Increasing imports remains a challenge: 

Woodpanel companies reported healthy volume growth/margins across Plywood and Laminates, largely driven by growth in the economy segment. Timber costs have been increasing steadily although H2FY24 onwards companies expect a relief in prices. In MDF segment, imports have seen a sharp increase from 25-30K cbm/month in Q1 to 48k cbm amid addition in domestic capacities, leading to inability to pass on the Timber cost increase. Particle board segment is also facing the wrath of increasing imports; though demand for new panel products remains robust. With BIS standards becoming mandatory from February’24, the domestic supply is expected to become competitive against imports. 

H2 demand could fare better; re-iterate CPBI/KJC as top picks: 

Companies expect demand conditions to improve in H2, with H2 usually being the stronger half and expectations of buoyancy in real estate launches to drive demand as completions draw near. Within analysts of IIFL Capital Services coverage, they see CPBI and KJC as top picks, 1) strong earnings tailwinds especially over FY25/26 driven by demand recovery/capacity expansion led growth, 2) improving outlook on margins 3) strong brand recall and Industry leading A&P spending, and 4) reasonable valuations.