Pipe and ceramic tile companies saw a 19% and 23% decline in year-on-year (y-o-y) earnings before interest, tax, depreciation and amortization (Ebitda), respectively, in Q4 on an aggregate basis, according to analysis by Edelweiss Securities. On the brighter side, wood panel companies saw Ebitda growth of 17% y-o-y in Q4, led by strong double-digit growth in realisations across categories, stronger volumes and performance in the MDF business, said the Edelweiss report dated 6 June. Plastic pipe makers saw healthy volume in Q4, but trends were subdued for tile companies.
Companies, especially wood panel makers, hope to see robust demand. However, the significant presence of the unorganized sector makes it tough to raise prices as there is a risk of losing market share, especially when there are downside risks to near-term demand.
There is concern about spends on discretionary products such as home improvement, given significant inflation across other products and categories and the consequent impact on disposable incomes, said Achal Lohade, research analyst at JM Financial Institutional Securities Ltd. “There is a slight risk to FY23-24 (earnings) growth assumption for companies in this (home décor) sector," he said.Interest rate hikes by the Reserve of Bank India would make home loans expensive. This is a damper for realty sales, a crucial demand driver for the home décor industry.
Cost inflation is more of a concern for ceramic and wood panel companies because of the elevated prices of gas and timber, respectively, Lohade said. In the plastic pipe sector, there is a price correction in the key input material, resin, resulting in inventory loss, he said. As such, the prices of the final product are expected to fall. Thus, the inventory held by pipe companies will be valued at low levels and will tend to impact the re-stocking decision of pipe distributors.
Further, souring investors’ sentiment towards the mid-cap and small-cap segments after the recent market carnage has also kept home décor stocks under pressure. “The correction that we have seen in stocks of tile and pipe makers was bound to happen because the overall market mood is downbeat. In such times, mid-caps tend to fall more," said Archana Gude, lead midcap analyst, IDBI Capital Markets and Securities. The earnings performance in Q1FY23 is expected to remain subdued for tile and pipe makers, Gude said. So, she has trimmed the operating margin estimates for companies in these sectors by 100-300 basis points for FY23. “While the long-term growth outlook for these sectors is positive, stocks will see a gradual improvement from current levels," Gude said.
A slowdown in resident and commercial real estate remains a key concern for wood panel companies.
One catalyst for listed home decor companies has been market share gains from smaller companies on accelerating pace of consolidation, especially post covid. Channel checks by brokerages point to down-trading by customers in paints and fast-moving consumer goods but analysts are not too concerned about down-trading here, given the range of economy products most of these companies offer. That said, if raw material costs fail to cool down, the prices of economy products might also increase, hurting demand.
