We believe the Indian building products industry has around two years of strong
sales growth lined up, however, as new project completions taper off from FY16
onwards across metro & tier-2/3 cities, sales growth could be at risk. In this
report, we analyze the recent quarterly performance of India building products’
companies to discern the broad trends, gauge management commentary and the
growth outlook ahead.
Growth trends are divergent with the paints/ceramics/lighting segments
delivering strong volume growth on the back of higher replacement demand,
increased penetration in tier-2/3 markets and consolidation of market share
towards organized players (especially for tile players). Weak real estate
trends, however, have resulted in growth moderation in the interior
infrastructure (plywood, laminate, MDF), sanitary ware and domestic cable
segments. Capex commitments remain largely intact, although most of the new
expansion is coming for premium value-added products (vitrified polished tiles,
value-added MDF, etc.). Commentary from Kajaria Ceramics (Not covered
[NC]) sounded most positive on the demand outlook and the company has
announced sizeable expansion plans for high-end polished vitrified tiles. HSIL
(NC), on the other hand, has delayed work commencement for its sanitary ware
plant given the growth moderation seen by the company.
Margins pressured on high RM costs. Price hikes, value mix change should
provide an offset ahead – Margins across segments seem to have been adversely
impacted by higher RM costs and sharp rupee depreciation. Most companies also
highlighted elevated fuel & power costs as key reasons for margin disappointment.
However, we note that price hikes have been taken across segments to offset cost
pressures. Flow-through of these price increases, coupled with value mix change
(premiumization), should abate margin pressures ahead, in our view.
Valuations – There is sizeable valuation divergences between various segments
within the building products space, while underlying demand drivers and
fundamentals are largely similar. Within the space, the paints sector is trading at
a significant premium to the other segments, based on Bloomberg consensus
estimates. We note that Akzo Nobel (NC), HSIL and Greenply (NC) are
trading at significant discounts to peers (based on consensus valuations).
Please see inside for detailed segment and company wise commentary on
growth outlook, margins and capex
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sales growth lined up, however, as new project completions taper off from FY16
onwards across metro & tier-2/3 cities, sales growth could be at risk. In this
report, we analyze the recent quarterly performance of India building products’
companies to discern the broad trends, gauge management commentary and the
growth outlook ahead.
Growth trends are divergent with the paints/ceramics/lighting segments
delivering strong volume growth on the back of higher replacement demand,
increased penetration in tier-2/3 markets and consolidation of market share
towards organized players (especially for tile players). Weak real estate
trends, however, have resulted in growth moderation in the interior
infrastructure (plywood, laminate, MDF), sanitary ware and domestic cable
segments. Capex commitments remain largely intact, although most of the new
expansion is coming for premium value-added products (vitrified polished tiles,
value-added MDF, etc.). Commentary from Kajaria Ceramics (Not covered
[NC]) sounded most positive on the demand outlook and the company has
announced sizeable expansion plans for high-end polished vitrified tiles. HSIL
(NC), on the other hand, has delayed work commencement for its sanitary ware
plant given the growth moderation seen by the company.
Margins pressured on high RM costs. Price hikes, value mix change should
provide an offset ahead – Margins across segments seem to have been adversely
impacted by higher RM costs and sharp rupee depreciation. Most companies also
highlighted elevated fuel & power costs as key reasons for margin disappointment.
However, we note that price hikes have been taken across segments to offset cost
pressures. Flow-through of these price increases, coupled with value mix change
(premiumization), should abate margin pressures ahead, in our view.
Valuations – There is sizeable valuation divergences between various segments
within the building products space, while underlying demand drivers and
fundamentals are largely similar. Within the space, the paints sector is trading at
a significant premium to the other segments, based on Bloomberg consensus
estimates. We note that Akzo Nobel (NC), HSIL and Greenply (NC) are
trading at significant discounts to peers (based on consensus valuations).
Please see inside for detailed segment and company wise commentary on
growth outlook, margins and capex
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