Review of the best Home Decor stocks (tiles, wood panel and plastic pipes) by Edelweiss

Recovery takes a breather; profits robust

Q1FY22 marked a pause in the solid recovery that was underway in the home décor sector with revenue/EBITDA/PAT dipping 36%/ 56%/ 62% QoQ (up 62%/196%/951% YoY). While revenue/volumes were down compared to Q1FY20, profitability was up (EBITDA/PAT up 11%/39%) led by several cost cutting measures and operating leverage. Although April and May saw significant impact on sales due to lockdowns, June and July saw strong pick up in sales.
Despite weak Q1FY22, most companies are going for large capex given the robust demand outlook. We prefer Supreme Industries (SIL), Somany Ceramics (SOMC) and Greenlam Industries (GRLM) in light of recent correction and strong growth opportunities.

Lockdown impacted top line and profitability

In Q1FY22, home décor companies only posted a sharp QoQ dip in revenue at 36%, but also 56%/62% QoQ drop in aggregate EBITDA/PAT impacted by lower volumes, falling utilisation and inventory losses (for plastic pipe players). Volume declined across categories with MDF (22% dip QoQ) and laminates (23% dip) outperforming other segments – pipes (33% fall), tiles (40% dip) and ply (44% drop). Profitability too was impacted by lower volumes and inventory losses. We believe, Q1FY22 marked a pause in solid recovery that was underway and growth is likely to revive across categories. Further, plastic pipes players are unlikely to report any large inventory losses in the near term given prices are already on a rising trend.

Balance sheet strength continues along with capex announcements

FY21 had seen significant strengthening of balance sheets along with strong operating performance. While performance in Q1FY22 was weak given the impact of wave 2, balance sheets of all companies continued to remain robust. However, working capital deteriorated marginally in comparison to Q4FY21 given the increase in inventory due to lockdowns. Nevertheless, most companies continue to remain deleveraged with renewed capital expansion interest continuing across categories.

Outlook: Larger players continue to gain market share

Although the home décor industry (including tiles, wood panel and plastic pipes) is still recovering, top players in the industry are recording double-digit volume growth and gaining significant market share. In tiles, Morbi players are catering to strong exports, leaving the domestic market vacant for large national players like Kajaria (KJC) and Somany (SOMC). In the plastic pipes segment, unavailability and huge volatility in raw material prices (PVC) have led to shift in market share from small regional players to large national players.

We believe the much-anticipated demand shift from unorganised to organised segment could accelerate further if macro economy picks up. We prefer Supreme Industries, Somany Ceramics and Greenlam Industries in light of the recent correction and valuation comfort; we have a ‘BUY’ recommendation on all three.