Optimism is driven by the company’s lower base, commencement of its south plant and the likely shift of business from unorganised Morbi players to organised players
9MFY19F performance much weaker than expected, we cut FY19-21F earnings and TP, but risk-reward likely favourable following corrections SOMC experienced a weak FY18, and we expected FY19F to be another weak year. However, with revenue growth of just 2% y-y and EBITDA /PAT decline of 25/50%, 9MFY19 results came in much lower than our assumptions .
Thus we cut FY19-21F earnings by 16- 28% and our TP by 18%. That said, we maintain our stance that FY20F will be a turnaround year for SOMC. Following sharp corrections (SOMC was down 55% over the past year vs the Nifty 50, which was up 4%), we believe the risk- reward is favourable. We maintain our Buy rating.
Volume growth should improve significantly to 12-14% in FY20-21F from 7% in FY19F and CAGR of just 3% over FY17-19F.
Our optimism is driven by the company’s lower base, commencement of its south plant and the likely shift of business from unorganised Morbi players to organised players due to the current liquidity stress in Morbi and likely increase in government focus on tax compliance post-elections. SOMC’s EBITDA margin should improve from 8.4% in FY19F (8.1% in 3Q) to 10.2% in FY20F and 12% in FY21F, driven by a reduction in gas prices, the full impact of price hikes, operating leverage and likely inclusion of natural gas in goods and services tax. After two consecutive years of earnings declines (28/36% for FY18/19F), we think FY20F will be a turnaround year. We anticipate a solid 57-66% EPS growth for FY20-21F.
We continue to value SOMC at 22x average FY20-21F P/E (based on DCF model, c.20% discount to our target multiple for industry leader KJC [KJC IN, ‘buy’, TP: Rs 635]).