Better  working  capital  aids  new capex plans, financials of home décor firms

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Key listed companies in the home décor sector posted robust earnings in the December quarter. Leading manufacturers of tiles, pipes and plywood saw double-digit volume growth in Q3 FY21. The sharp expansion in operating margins were largely aided by cost rationalization measures.

However, analysts say, a key takeaway for investors from the December quarter earnings of these companies is the improvement in their working capital.

“Working capital cycle of all companies in our coverage improved as credit days offered to distributors were slashed given favourable demand-supply. Furthermore, inventory across companies corrected given the increase in cost of raw materials, leading to a reduction in inventory levels and improvement in cash flow,” Edelweiss Securities Ltd said in a report on 16 February.

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Robust recovery

This has helped companies in the building materials space focus on expanding capacity and improving their balance sheets.

The management of Somany Ceramics Ltd told analysts, that the capital expenditure (capex) at the end of fiscal year 2021 would be at 35 crore. However, it is looking at some aggressive capex for FY22, which is likely to be announced before the next quarter, the management said.

Peer Kajaria Ceramics Ltd is looking at a capex of 50 crore for FY21 and FY22, it also aims to spend around 200 crore on expanding existing plants.

Century Plyboard is looking at a capex of 600-625 crore for expansion of its Hoshiarpur unit and a greenfield plant in the South. The management of competitor Greenlam Industries Ltd has said that in FY22, apart from a routine capex of 25-30 crore, the company is likely to invest in greenfield expansion across South India.

The management of leading pipe manufacturer Supreme Industries Ltd said that aided by better working capital, the company has a net cash surplus of 430 crore at the end of the December quarter compared to net borrowings of 217 crore in March 2020.

Similarly, Prince Pipes and Fittings continues to generate robust cash flows on the back of a sharp reduction in their working capital and has turned net cash at 37 crore. This excludes the proceeds garnered from the initial public offering, the management said.

Meanwhile, shares of key companies in the ceramic tiles, pipes and wood panel sectors have hit their respective new 52-week highs in February.

Analysts attribute the sharp rally in listed stocks to market share gains from the unorganized sector. That said, since many of these companies belong to the midcap and smallcap category, at the time of a market correction, these stocks could see an equally sharp fall.

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