Initiating Coverage

March 24, 2015

Rating matrix
Rating
Target
Target Period
Potential Upside

:
:
:
:

Somany Ceramics (SPLIND)

Buy
| 426
12-18 months
18%

Somany JVs strategy to reap dividends!

YoY Growth (%)

(YoY Growth)
Net Sales
EBITDA
Net Profit
EPS (|)

FY14
19.8
(5.0)
(9.8)
7.4

FY15E
21.6
19.2
57.9
11.8

FY16E
30.6
30.2
38.8
16.3

FY17E
15.3
26.8
37.4
22.4

FY14
48.6
57.2
18.5
6.3
12.9
14.8

FY15E
30.8
36.2
15.5
5.4
17.6
17.6

FY16E
22.2
26.1
11.8
4.6
20.5
22.1

FY17E
16.1
19.0
9.0
3.7
23.1
26.5

Valuation summary
(x)
P/E
Target P/E
EV / EBITDA
P/BV
RoNW (%)
RoCE (%)

Stock data
Particular
Bloomberg/Reuters Code
Sensex / Nifty
30 Day Average Volume
Market Cap (| crore)
52 week H/L
Equity Capital (| crore)
Face value
Promoter's Stake (%)
FII Holding (%)
DII Holding (%)

Amount
SOMC IN / [Link]
28261 / 8570
44,580.0
1,406.2
425 / 154
7.8
|2
56.2
5.7
2.9

Comparative return matrix (%)

(% Return)
Somany Ceramics
Kajaria Ceramics
Cera Sanitaryware
HSIL

1M
-0.5
4.8
-1.2
6.1

3M
22.4
38.7
50.1
19.0

6M
20.0
24.4
56.9
25.7

12M
129.5
130.2
196.5
246.3

Price movement
10,000

500

8,000

400

6,000

300

4,000

200

2,000

100
Mar-15

Sep-14

Mar-14

Oct-13

Apr-13

Oct-12

0
Apr-12

Price (|) (R.H.S)

| 362

Nifty (L.H.S)

Research Analyst
Deepak Purswani, CFA
deepak,purswani@[Link]
Nikunj Gala
[Link]@[Link]

ICICI Securities Ltd | Retail Equity Research

Somany Ceramics (Somany) emerged as the third largest tiles player in

the Indian tiles industry. It witnessed 23.3% CAGR in topline in FY10-14
(industry average: 16.6%) through aggressive capacity expansion from
16.7 msm in FY10 to 42.5 msm currently largely through a JV model.
Going ahead, we remain positive on Somanys growth prospects
considering the structural shift in the industry post the Morbi
development, its aggressive expansion plans and shift towards JV model.
Consequently, we expect Somanys earnings to grow at 44.4% CAGR in
FY14-17E without any significant incremental capex resulting in an
improvement in return ratios. Hence, we initiate coverage on Somany
with a BUY rating with a target price of | 426 (19x FY17 EPS).
Becoming one of the leading players in industry through JV model
Somany has emerged as the third largest player in the growing tile
industry and is expected to grow its capacity to 47.5 msm (excluding
outsourcing tie-ups) in FY16E largely through an asset light model such as
JV with local players (currently: 21 msm & FY16E: 26 msm).
Consequently, revenue share from the JV model is expected to increase
from 20% in FY14 to 48.0% in FY16E with minimal incremental capex (~|
75-80 crore in FY15-16E) leading to improvement in the return ratios.
Morbi development Structurally positive for organised player
In November 2013, Gujarat Pollution Control Board issued closure notice
to Morbi (unorganised players hub) based ceramic units that run on coal
gas furnace. This development is structurally positive for organised
players like Kajaria & Somany as i) the organised pie will grow faster in
the absence of cost advantage enjoyed by unorganised players due to
coal gas furnace, ii) tone has been set for consolidation in the industry.
De-leveraging balance sheet lends us comfort
One of the major overhangs for Somany was its leverage position.
However, it managed to reduce its debt to equity from 1.7x in FY11 to
0.8x in FY14 through higher internal accruals and better WC management.
Furthermore, Somany raised | 50 crore by diluting 11.2% stake to private
equity firm Creador in January, 2014. Going ahead, with more focus on
the JV model, we expect its debt to equity to come down to 0.3x.
Strong earnings growth led by JV model; initiate with BUY
We highlight that we remain positive on Somanys growth considering a
structural shift in the industry, its strong brand recall, wide distribution
network and stable natural gas prices. With its renewed focus on growth
using asset light model translating into strong earnings growth and
improvement in return ratio, we initiate coverage on Somany with BUY
rating with a target price of | 426. We value Somany at 19x FY17 EPS,
which is at a 25% discount to Kajaria and implies a PEG of 0.4x.
Exhibit 1: Financial Performance
(| Crore)
Net Sales (| crore)
EBITDA (| crore)
Net Profit (| crore)
EPS (|)
P/E (x)
Price / Book (x)
EV/EBITDA (x)
RoCE (%)
RoE (%)

FY13
1,049.9
85.7
32.0
9.3
39.0
8.2
18.0
20.7
20.9

Source: Company, [Link] Research

FY14
1,258.0
81.4
28.9
7.4
48.6
6.3
18.5
14.8
12.9

FY15E
1,529.7
97.0
45.7
11.8
30.8
5.4
15.5
17.6
17.6

FY16E
1,998.6
126.3
63.4
16.3
22.2
4.6
11.8
22.1
20.5

FY17E
2,304.6
160.1
87.1
22.4
16.1
3.7
9.0
26.5
23.1

Company Background

FII & DII holding trend (%)

10.00

Somany Ceramics (Somany) was incorporated in 1968 and is a part of the

prestigious HL Somany Group. The company initially started operations in
collaboration with UK-based Pilkington Tiles (registered as Somany
Pilkington Ltd). Later it was renamed as Somany Ceramics in 2007. The
company is one of the leaders in the Indian tile industry.

8.00
(%)

6.00
4.00
2.00

5.35

1.78

5.64

5.57

2.76

2.64

5.66
2.90

0.00
Q4FY14 Q1FY15 Q2FY15 Q3FY15
FII

DII

Shareholding pattern (Q3FY15)

Shareholder
Promoters
Institutional investors
General public

Holding (%)
56.2
8.6
35.2

Somany Ceramics is the third largest tile manufacturer in India with a

current capacity of ~42.5 million square metres (msm) per annum
(including JVs and excluding outsourcing) behind Kajaria Ceramics (~54.1
msm) and H&R Johnson (~54 msm). The company is headquartered in
Noida, Uttar Pradesh with two own manufacturing units in Kassar,
Haryana (~13.1 msm) and Kadi, Gujarat (~6.0 msm) and five JV based
manufacturing facilities in Morbi, Gujarat (~21 msm). Somany also has
outsourcing tie-ups for capacity of ~9.5 msm.
Somanys product offerings include ceramic wall and floor tiles, glazed
and polished vitrified tiles, internationally-branded tiles, sanitary ware and
bathware fittings. The company markets these products though its robust
pan-India distribution network consisting of 1,200+ dealers, 10,000+ subdealers, 6,500+ touch points including 223 showrooms, 19 stock points
and 31 marketing offices. Sales from retail clientele form ~65% of total
sales with the remaining ~35% coming from institutional clientele. Its
institutional clients comprise developers like Lodha, Omaxe, Vatika,
Shapoorji Pallonji, corporates like Infosys, L&T, IBM, HDFC Bank,
government, PSUs like CPWD, BTPC, SAIL, AAI, ONGC, retailers,
hospitals, hospitality entities like Big Bazaar, Shoppers Stop, Cooper
hospital, The Lalit, etc.
In FY09-14, Somany posted healthy growth of 23.3% and 26.9% in
revenue and PAT, respectively. As on FY14, the company has ~13%
market share in the organised space and ~6.5% market share in the
overall Indian tiles market.

Exhibit 2: Major milestones

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 2

Investment Rationale
Global tile industry - bird's eye view!!!
Global tile production has grown at 8.5% CAGR in CY09-13 to 11,913
msm whereas Indias tile production has grown at a robust 11.2% CAGR
to 750 msm in the same period. Also, Indias share in global tile
production has increased to 6.3% in CY13 vs. 5.7% in CY09. With Asia
leading the production, China (5,700 msm), Brazil (871 msm) and India
were the top three producers. Indias transformation from the fifth largest
producer of tiles in CY08 to the third largest in CY13 is a result of its
innovation and capability enhancement.
Exhibit 3: Tile production trend

Exhibit 4: World production scenario (CY13)

14000
12000

10596

9619

8581

6.4
6.3

6.2

6000

5.8
490

5.8

5.7

5.7

4000
2000

6.2
6.0

8000

550

617

750

691

Africa
3.0%

North America
2.5%
Other Europe
5.0%

(%)

(In MSM)

10000

11913

11166

5.6

Central South
America
9.7%

Asia
69.8%

5.4

0
CY09
CY10
CY11
Global Tile Sector Production

CY12
CY13
Indian Tile Sector Production

Europe
10.0%

India Production Share

Source: Ceramic World Review, Company, [Link] Research

Source: Ceramic World Review, Company, [Link] Research

Furthermore, global tile consumption has grown at 7.9% CAGR in CY0913 to 11,574 msm wherein Indian tile consumption has exhibited healthy
growth of 10.9% to 748 msm in the same period. In addition, Indias share
in global tile consumption has increased to 6.5% in CY13 vs. 5.8% in
CY09 on the back of strong domestic demand. In consumption also, India
is placed third behind China (4,556 msm) and Brazil (837 msm).
Exhibit 5: Tile consumption trend

Exhibit 6: World consumption scenario (CY13)

12000
(In MSM)

10000

8535

6.2

8000
6000
4000
2000

5.8
494

10932

10436

9491

11574 6.5

5.9
557

6.6

Other Europe
4.9%

6.4
6.2
6.0

6.0

(%)

14000

North America
3.9%

Africa
6.0%

5.8
625

681

748

5.4

0
CY09
CY10
CY11
Global Tile Sector Consumption

5.6

CY12
CY13
India Tile Sector Consumption

India Consumption Share

Source: Ceramic World Review, Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Europe
7.4%

Asia
66.5%

Central South
America
11.3%

Source: Ceramic World Review, Company, [Link] Research

Page 3

Indian tile industry Moving up the value chain!!!

As on March 2014, the Indian tile market is valued at | 21,500
crore while in volume terms it is 748 msm

The Indian tiles industry has exhibited strong growth vis--vis its global
counterparts led by strong demand owing to the emergence of tiles as a
durable, cost-effective and convenient flooring solution over other
flooring material like natural stone, mud, cement, etc. Furthermore,
increasing disposable income, affordability, urbanisation, brand aspiration
and home aesthetics have led consumers to shift to branded and high
value products. Also, lower cost of equipment and imposition of antidumping duty had given a major push to the domestic tiles industry, on
the supply side.
In CY09-13, the Indian tiles industry grew at 15.7% CAGR to | 21,500
crore. On the volume front, it grew at 10.9% CAGR to | 748 msm. The
ceramic tiles category grew at 11.8% CAGR to | 10,000 crore while on the
volume front it grew at 7.7% CAGR to 450 msm during the same period.
However, the ceramic tiles category forms 46% of the overall Indian tile
industry in CY12 vs. 53% in CY09. This indicates a clear shift towards high
value products in the domestic industry.

Exhibit 7: Indian tile industry (value in | crore)

CY2009 (| 12,000 crore)

CY2013 (| 21,500 crore)

Glazed Vitrified
Tiles, 2500,
12%

Glazed Vitrified
Tiles, 900, 8%

Polished
Vitrified Tiles,
4700, 39%

Ceramic Tiles,
6400, 53%

Ceramic Tiles,
10000, 46%
Polished
Vitrified Tiles,
9000, 42%

Source: Company, [Link] Research

There has been a structural shift in ceramic tiles demand with preference
towards high-end vitrified tiles led by rising affordability, urbanisation,
brand aspiration and home aesthetics. We highlight that while volumes of
the domestic tile industry have grown at 10.9% CAGR in CY09-13,
polished vitrified tiles (PVT) and glazed vitrified tiles (GVT) have grown at
15.7% and 26.2% CAGR, respectively, during the same period.
Exhibit 8: Indian tile industry (volume in msm)
CY2009 (494 MSM)

CY2013 (748 MSM)

Glazed Vitrified
Tiles, 15, 3%

Polished
Vitrified Tiles,
145, 29%

Glazed Vitrified
Tiles, 38, 5%

Polished
Vitrified Tiles,
260, 35%
Ceramic Tiles,
334, 68%

Ceramic Tiles,
450, 60%

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 4

Morbi developmentStructural shift towards organised players

Morbi (Gujarat) is a hub of ceramic tile manufacturers in India with ~500
manufacturing units (mostly unorganised). The region, according to
various sources, produces 65-70% of the total ceramic products (vitrified
tiles, wall tiles, floor tiles, quartz stone, sanitary ware, roofing tiles and
mosaic tiles) in the country. One of the key reasons behind Morbi being
the ceramic city is easy availability of key raw materials like various types
of clay, red and black soil, minerals (including calcite and wollastonite)
with frits and glazes readily available either locally or from neighbouring
Rajasthan. It is also cost effective since Gujarat State Petroleum
Corporation (GSPC) has installed industrial gasoline in the region.
In the last few years, given the sharp rise in gas prices (~80% in the last
two years), cost of production has gone up substantially. Most Morbi
players were operating on coal based furnaces as opposed to organised
players who were operating on gas based plants. Due to this,
unorganised players had an undue cost advantage over organised players
due to the fact that a) cost of production using coal was cheaper by 5-6%
compared to using gas and b) on lower tax outflow due to under
reporting of production owing to clandestine sales.
In November 2013, the Gujarat High Court issued a closure notice to
Morbi based ceramic units that run on coal gas furnaces due to pollution
concerns. Also, since FY14 beginning, Gujarat Pollution Control Board
(GPCB) restricted cargo handling at the Navlakhi port (which handles 60%
of coal for the ceramic industry), leading to a severe shortage of coal.
Moreover, post the closure, Morbi players have to bring coal from Kandla
and Mundra ports where transportation cost is higher by ~50%.
Consequently, unorganised players had to shift back to gas fired furnaces
and the cost parity enjoyed by unorganised players went away. Hence,
these developments were structurally positive for organised players and
provided a level playing field to them. Going ahead, we expect the
organised pie to expand significantly on account of the reducing price
differential leading to customers shifting towards branded tiles.

Source: Google Maps

Furthermore, the current situation has set the tone for consolidation in the
industry. We believe that given the higher cost of operation and inability
of unorganised players to push their products amid growing preference
for branded products, they could now move towards either forming a
joint venture (JV) or being taken over by organised players.
Exhibit 9: Morbi development structurally positive for organised players
FY09 Market Share

Unorganised,
60.0

Organised,
40.0

FY14 Market Share

H&R Johnson,
8.0

Kajaria, 5.8
Somany, 3.9
Others, 22.4

Unorganised,
50.0

Organised,
50.0

H&R Johnson,
10.0

Kajaria, 9.5
Somany, 6.3
Others, 24.3

Morbi development, rising affordability, urbanisation, brand aspiration and home aesthetics have led to an increase in the pie of organised players to 50% in
FY14 from 40% in FY09. We also highlight that within organised space, Kajaria, Somany have gained significant market share compared to their peers
Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 5

Exhibit 10: Volume growth drivers

(%)

25.0

18.0

20.0

19.9

23.3

25.7

27.8

15.0
10.0
5.0
0.0
1961

1971

1981

1991

2001

2011

2014P 2021E

(Households in crore)

350
23

300

250

148

85

2
31

200
150
100

186

180

151

50
0
2008

2020E

Lower class

Middle class

2030E

4.8

(square meter)

3.1

3.7

0.5

1.0

4.0

1.1

Europe

Iran

Brazil

Vietnam

China

Russia

Indonesia

5.1

15

10

10

5.4

18.75.3
11.9

5.2

14.8

4.9

4.8

4.6

G
r
o
w
t
h

4.4
1961

1971

1981

1991

Number of households

2001

2011

Average household size

60.0
1.7
8.1

50.0

D
ri
v
e
r
s

40.0

3.3
6.2

30.0
20.0
10.0
0.0

5.5

0
India

20

5.6

24.7

5.5

5.3

2.4
4.4

2.0
4.9
6.4

11.8

1961

1971

Pucca house

3
2

25

Upper class

6
5

5.5

(nos)

30.0

32.3

32.0

31.2

(In crore)

35.0

30

V
o
l
u
m
e

(In millions)

Urbanisation rate

(%)
Material
Mud
Stone
Cement
Mosaic /
Floor tiles
Others

3.1
6.8

41.2

29.8
18.1
1981

1991

Semi pucca house

Percentage of households by material of floor

India
Rural
1991
2001
2011
2001
2011
67.0
57.1
46.5
72.3
62.6
0.0
5.8
8.1
4.5
6.2
21.3
26.5
31.1
18.0
24.2

2001
Kutcha house

Urban
2001
18.0
9.1
48.3

2011
12.2
12.2
45.8

3.8

7.3

10.8

2.2

3.7

20.5

25.9

7.9

3.3

3.5

3.0

3.2

4.1

3.8

Per capita consumption

Indias urban population has grown 2.47% annually over the last
decade, making it the most rapidly urbanising country. Indias urban
population is expected to increase from 32% today to 40% by 2020,
strengthening the prospects for tile manufacturers.
By 2030, India is likely to emerge as the worlds largest middle class
consumer market with aggregate consumer spends of nearly US$13
trillion. Nuclear families are the overwhelming norm in India with 70%
of households comprising just one married couple, driving the need
for quality housing.
There was significant growth in households living in pucca house in
the last decade. Also, Indias per capita consumption of 0.5 SM is
least in comparison to 3-4 SM in peer countries like China and Brazil.
In India, tiles are still considered interior products. Hence, they have
very limited usage while globally they are used equally outdoors.
These factors augur well for robust volume led growth for the Indian
tile industry, going ahead.

The current urban housing shortage (18.8 million units) will be gradually
made up, resulting in substantial sustained growth in Indias tile
industry. Also, according to the Asian Development Bank, India will
require 10 million new housing units a year by 2030. Furthermore, a
reduction in home renovation cycle from 15 years (a decade back) to
five years would lead to robust demand.
Office space supply in the top eight Indian cities is expected to reach
180 million square foot (mn sq ft) in 2012-16. Average mall size of
around 380000 sq ft expected to increase to 660000 sq ft by 2017.
Over 300 hotels are expected to be commissioned in India in the next
three years. By 2015, the Indian hospitality sector is estimated at
| 23000 crore growing at a robust 12.2% CAGR. The 1,50,000 shortage
of hotel rooms and 2:1 hotel room demand-supply ratio in India, can
catalyse the sustained growth in tile offtake
Indias healthcare sector is expected to grow from $78.6 billion in 2012
to $158.2 billion in 2017. The per capita healthcare expenditure has
been increasing at 10.3% CAGR

Source: Census Data, McKinsey Global Institute (MGI), MHUPA, Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 6

Exhibit 11: Value growth driver

100%

Consumptions has risen in

line with the disposable
income

2013-14

20%
0%
2012-13

2011-12

2010-11

Clothing & Footwear

2009-10

Per capita expense

The per capita disposable income has grown at 13% CAGR in the last
decade to | 74,920 in 2013-14. The sustained increase in per capita
incomes is putting more disposable money in the hands of Indians,
translating into increased spending on the home front. India has a
young population with an average age of 24 years, leading to higher
disposable incomes in the hands of those with aspirations for a better
lifestyle and stylish interiors

Medical Care & Health

Services
Furniture, Furnishings
Appliances & Services
Gross Rent, Fuel & Power

2008-09

2011-12

2009-10

2007-08

2005-06

2003-04

2001-02

1999-00

1997-98

1995-96

Per capita disposable income

Miscellaneous Goods &

Services
Recreation, Education &
Cultural Services
Transport & Communication

80%
Private Final
Consumption
60%
Expenditure
(PFCE)
40%
(Object-wise
% spend)

1993-94

(|)

Need based consumption stealthily dropping

80000.0
70000.0
60000.0
50000.0
40000.0
30000.0
20000.0
10000.0
0.0

Food, Beverage & Tobacco

It has been observed in the last few years that need based
consumption is stealthily dropping. Food, beverage & tobacco that
used to form 35% of total PFCE in 2008-09 dropped to 30.5% in 201213. Consumption of lifestyle items has increased significantly during
the same period. Hence, with the increase in disposable income and
high aspiration, consumption of value-added products increases
substantially.

Due to the recent ban on part of the Gujarat High Court on use of coal based gasifiers, all unbranded players in Morbi had to shift to natural gas reducing
their cost competitiveness vis--vis branded players. This may pave the way for an increase in overall sales realisation for the industry. Therefore, the
Morbi development, rise in disposable income, increasing urbanisation, brand aspiration and home aesthetics would lead to people shifting towards value
added products and, in turn, value growth for every player in the industry
Source: RBI, Company, [Link] Research

Exhibit 12: Other key initiatives/events that augur well for industry
Levy of anti-dumping on
Chinese tiles by European
countries
Development of
industrial
corridors

Swachh Bharat
Abhiyan

Key initiatives/events that

augur well for the industry

Contraction in
gas prices
Housing for all
by 2020

Development of
100 smart cities

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 7

Somany Well placed for future growth

Exhibit 13: Change in strategy with more focus on high RoCE JV model

Past event

Expected event

In November 2013, the Gujarat High Court issued a closure

notice to Morbi based ceramic units that run on coal gas
furnaces due to pollution concerns
Also, since the beginning of FY14, Gujarat Pollution Control
Board (GPCB) restricted cargo handling at the Navlakhi port
(that handles 60% of coal for the ceramic industry), leading to a
severe shortage of coal

Currently, the inequitable indirect duty structure provides a huge price

advantage to unorganised players over organised players.
Consequently, Indias unorganised tile sector accounts for 50% of the
total market size. Following the proposed implementation of GST, this
large indirect tax differential is expected to narrow down, bringing
organised and unorganised players on an even tax platform

Impact on unorganised players:

- Needed to shift to gas based furnaces leading to diminution
in earlier cost advantage due to coal based furnace
- Lack of brand and distribution set-up leads to built up in
inventory levels
- Lower capacity utilisation
- Fixed cost pressure
- Loss in market share

Benefits to organised players:

-Price differential between organised product and unorganised
product reduces due to Morbi development
-GST would make tax evasion difficult for unorganised players,
which, in turn, would provide a level playing field for all
-Diminishing competition from unorganised players
-Consequently, customer prefers branded products over others

Structural change in industry:

Given the higher cost of operation and inability of unorganised players to push their products amid growing preference for branded
products, they are either forming a JV with or being taken over by organised players

Win-Win situation
Unorganised players:
-Given assured offtake from branded players, there would be
an improvement in capacity utilisation and inventory levels
-Cost plus agreeable margins would lead to better profitability

Organised players:
-Faster access to capacity, reduction in lead time by almost a year and
faster payback as compared to greenfield project
-Low capital requirement and better return on capital employed
-Better quality control as most unorganised players are family-driven

Steps in right direction by Somany:

Somany is following a strategy of expansion by bringing in more and more unorganised players under its ambit. Hence, in the last two years the
company has invested | 20.6 crore for acquisition of a 26% stake in four JVs and 51% stake in one JV, which gave it the right to buy back the
entire capacity of 21.0 MSM
With this, the production capacity has been enhanced while the selling and distribution activities have been augmented with spare bandwidth.
Going forward, the company intends to partner with more such small players and enhance its outreach to domestic and global markets
This asset light model strategy would not only be high margin accretive for Somany but also provide a significant boost to its return profile

Source: [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 8

Somanys business strategy:

The significant advantage of expansion through the JV route over

greenfield projects has made Somany gravitate towards an asset light
model. This can be seen from the fact that the company has expanded its
JV capacity from 2.7 msm in FY12 to 15.5 msm currently. Subsequently,
revenues from the JV route account for 20% of overall revenues to
| 264.5 crore in FY14. Going ahead, Somanys strategy to grow via the JV
route without stressing its balance sheet would significantly improve its
revenues, margins, terms of trade and return on capital employed. In turn,
this is expected to translate to superior value in the hands of
shareholders.

Pursuing growth by maximising RoCE through production

outsourcing following an asset-light model
Source: Annual Report 2013-14

Exhibit 14: Capacity break-up (in msm)

Exhibit 15: Capacity break-up (%)

60.0

9.5

40.0
30.0

9.5

20.0

11.5
0.0

10.0

19.2

12.0

12.0

15.5

2.7

5.3

19.2

19.2

21.6

FY12

FY13

FY14

26.0

21.0

(%)

(In MSM)

50.0

9.5

21.6

21.6

FY15E

FY16E

0.0
FY11

Own Manufacturing

JV

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

20%

18%

17%

15%

33%

40%

46%

53%

46%

41%

38%

FY13

FY14

FY15E

FY16E

38%

36%

33%

0%

8%

62%

57%

FY11

Outsourcing

FY12

Own Manufacturing

Source: Company, [Link] Research

Source: Company, [Link] Research

Exhibit 16: Revenue break-up (| crore)

Exhibit 17: Revenue break-up (%)

2500
400

1500

354

1000
500
0

322
0
427
FY11

423

399
144

627

265

396
9
516

565

635

FY12

FY13

FY14

Own Manufacturing

999

(%)

(| crore)

2000

JV

614

701

FY15E

FY16E

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

43%

43%

36%

32%

0%

1%

13%

20%

57%

56%

51%

48%

FY11

FY12

FY13

Own Manufacturing

Outsourcing

Source: Company, [Link] Research

Exhibit 18: PBT margin expansion

Exhibit 19: RoE & RoCE expansion

6.0

4.1

4.7

4.3

5.0

20.0

4.0

3.5

36.2

47.8

43.6

66.5

93.2

3.0

FY11

FY12

FY13

FY14

FY15E

FY16E

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

RoNW

23.0
17.8

20.019.1

2.0

10.0

1.0

5.0

0.0

FY14
JV

Outsourcing

22%

19%

39%

48%

38%

33%

FY15E

FY16E

Outsourcing

RoCE

22.1
20.5

20.920.7
17.617.6
14.8
12.9

15.0
(%)

4.6

25.0

(%)

4.8

34.4

(| crore)

Source: Company, [Link] Research

100
90
80
70
60
50
40
30
20
10
0

JV

FY11

FY12

FY13

FY14

FY15E

FY16E

Source: Company, [Link] Research

Page 9

Formidable distribution and marketing network

Exhibit 20: Formidable distribution and marketing network
Commander Vitrified Pvt Ltd
Stake 26%
Capacity 2.04 MSM GVT, CoD Jun 2012
Capacity 2.72 MSM PVT, CoD Dec 2013
Capex | 3.3 crore
Formidable marketing network:

Vintage Tiles Pvt Ltd

Stake 26%
Capacity 2.55 MSM
Type PVT
CoD Jan 2012
Capex | 5 crore

Acer Granito Pvt Ltd

Stake 26%
Capacity 5.1 MSM
Type PVT
CoD Sept 2014
Capex | 5.1 crore

Marketing/Regional offices 31
Stock points - 19
Active dealers 1,200+
Sub-dealers 10,000+
Showrooms / display centres - 223

Kassar (Haryana)
Capacity 13.13 MSM

Kadi (Gujarat)
Capacity 21.55 MSM

Amora Tiles Pvt Ltd

Stake 51%
Capacity 4.58 MSM
Type Ceramics
CoD March and Oct 2014
Capex | 5.3 crore

Vicon Ceramics Pvt Ltd

Stake 26%
Capacity 1.84 MSM Parking Tiles
Capacity 2.14 MSM Ceramics
CoD March 2014
Capex | 1.9 crore

JV plants at Morbi (Gujarat)

Own plant

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 10

Somanys business strategy:

Growing the number of domestic customers through an
increase in the pan-India footprint
Source: Annual Report 2013-14

Considering the nature of the tiles products, they are manufactured in a

handful of locations but sold across India. Hence, it is imperative for
companies to create a marketing and distribution network that makes it
compelling and convenient for customers to make a purchase. Somany
has progressively invested in this capability to the point that it has now
become one of its most potent advantages.
Over the years, Somany has consciously chosen to increase the
proportion of its retail presence with the objective of generating higher
realisations & also progressively insulated itself from sectoral downtrends
through wider risk dispersal. Consequently, this strategy has led to a
formidable pan-India distribution and marketing network consisting of
1,200+ dealers, 10,000+ sub-dealers, 6,500+ touch points including 223
showrooms, 19 stock points and 31 marketing offices. This has led to a
significant increase in offtake in Somanys product from average of | 1.2
crore worth of products a day in 2007-08 (assuming 300 working days in a
year) to | 4.4 crore a day in 2013-14. This not only enables Somany to
push a larger quantity through its domestic distribution network but also
extend this network to emerging demand pockets. Furthermore, this has
also led to more broad based retail revenues for Somany wherein 50% of
revenues are derived from 20% of its dealers as against its competing
brands that derive 70% of revenue from 20% of their dealers.

Revenue break-up client-wise (FY14)

Institution
al
35%

Retail
Clientele
65%

Source: Company, [Link] Research

Strong presence in tier-II & tier-III cities

Somanys business strategy:
Providing impetus to capturing the value pyramid by
increasing the share of tier II and III towns in the sales
Source: Annual Report 2013-14

Indias urbanisation rate has seen significant growth in the past decade.
Indias urbanisation is expected to increase from 32% currently to an
estimated 40% by 2020, strengthening the prospects of tile
manufacturers. This urbanisation may largely happen in tier-II, tier-III cities
resulting in the creation of more homes, schools, colleges, hotels, malls
and restaurants. The spread of roads, telephones and electricity is helping
in creation of new population clusters. The number of census towns in
2011 was 3x that in 2001, resulting in the emergence of significant
housing demand from non-metro locations (smaller urban centres, Tier-II
and III cities). We expect this to translate to growth in the offtake of tiles
over conventional flooring material and as an extension, benefit the
leading branded players over the unorganised majority.
Over the years, Somany has created a significant presence in tier-II and
tier-III cities. The company is able to pump growing volumes through the
distribution network through a widening and deepening of Somanys
presence in these cities. This can be seen from the fact that the
contribution from tier-II and tier-III revenues increased from 66% in 200708 to 75% in 2013-14. Furthermore, Somany is also a geographically
diversified organisation as far as revenues are concerned. The northern
and southern Indian markets contribute around 67% of revenues.

Exhibit 21: Revenue break-up (%)

Exhibit 22: Region wise break-up (Q3FY15)

100%
80%

28

27

27

25

West
17%

Export
5%

(%)

60%
40%

North
39%
72

73

73

75
East
11%

20%
0%
FY11

FY12
Tier - II & III

FY13
Tier - I

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

FY14

South
28%

Source: Company, [Link] Research

Page 11

Brand Somany Strong brand equity

Somanys business strategy:
Brand strengthening through more value addition to the
brand with more effort in the direction
Source: Annual Report 2013-14

Investment in Intangibles
54.8

60

(| crore)

50
40
30
20

18.2

13.7

10
0
FY99-FY03

FY04-FY08

FY09-13

Overall Market Share

6.3

7
6

(%)

5
4

3.9

3
2
1
0
FY09

FY14

In a business marked by a declining lead between companies following

the launch of differentiated products, success comes down to one word:
Brand. How positively a brand is perceived is critical in sustainable
product offtake. Brand consciousness among consumers is also on the
rise given the trust and quality that they entail.
To enhance its brand image, Somany is investing more in its brand
presence through more rigorous effort by exploring new platforms. The
company has consistently invested 1.5-2.0% of its annual net sales in
brand building. In the five years leading to 2012-13, Somany invested a
consolidated | 55 crore in branding through advertisements in electronic,
print, social media, participation in prestigious exhibitions (nationally and
internationally) and via exclusive/shop-in-shop retail outlets. This has led
to increasing offtake, on the one hand, and a rising sales proportion of
high & medium-end products (and complementary products) on the other.
As a result, it has emerged as one of the fastest growing Indian brands for
high and medium-end products. Somanys determined pursuit in
delivering excellence has put its brand in an illustrious bracket.
The company has been investing sustainably in intangibles (brand and
distribution) to enhance market visibility and penetration. Somany has
invested in experiential showrooms to provide a unique shopping
ambience. These proactive branding and distribution initiatives translated
to a higher share of the market: ~6% of the Indian tile industry and ~12%
among branded players. As a result, what was once considered only an
urban label is now a broadly dispersed national brand. What was largely
an Indian label, until as recently as four years ago, is now a progressively
international brand.
Hence, the Somany brand commands a premium over unorganised
products. Going ahead, we believe Somanys top-of-the-mind brand recall
and focus on enhancing the brand equity along with improving industry
dynamics would translate to robust revenue growth.

Moving up the value chain

Somanys business strategy:
Moving up the value chain by focusing on value-addition
on existing polished and glazed vitrified tiles
Source: Annual Report 2013-14

Somanys product portfolio offers products at every price point from lowend to high-end, making it possible for prospective consumers to
graduate to the next higher-priced product with incremental spending.
The company is one of the brand leaders in the organised sector. Somany
has retained this position on account of its ability to create niche products
(prints and sizes) and stunning designs some of which are first-time
launches in the Indian market. This creative ability elicits a unique recall of
being a product conceptualiser among discerning customers, allowing it
to earn a premium over competing products.
Moreover, what makes the Somany story compelling is not just a
quantitative increase in off-take but a qualitative improvement as well. In
FY14, sales from polished vitrified tiles (PVT) and glazed vitrified tiles
(GVT) contributed to 42.5% of overall revenue as against 25.1% in FY11.
As a result, Somanys average realisation of its tile products increased
every single year over the last five years. The company reported 23%
CAGR in net sales that was considerably higher than the prevailing
industry average.

ICICI Securities Ltd | Retail Equity Research

Page 12

Exhibit 23: Capacity break-up (product-wise)

Exhibit 24: Revenue break-up (%)

(%)

GVT
10%

PVT
30%
Ceramic Tiles
60%

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

7%

8%

13%

27%
47%

52%

45%

35%

FY12
Low end

Source: Company, [Link] Research

Exhibit 25: Revenue break-up (| crore)

Exhibit 26: Revenue break-up (%)

(| crore)

1000
800
600
400
200

28.4
159.3

167.5

67.0
211.4

257.8

198.4

80%

363.7

60%
(%)

1200

542.9

614.3

648.1

705.0

FY11

FY12

FY13

FY14

40%

3.8%
21.3%

7.3%
22.9%

72.5%

66.7%

FY11

FY12

27%

FY13

Medium end

Source: Company, [Link] Research

100%

60%

66%

FY11

1400

13%

FY14
High end

15.1%

15.0%

23.3%

27.5%

58.5%

53.3%

FY13

FY14

20%
0%

0
Ceramic

PVT

GVT

Source: Company, [Link] Research

Ceramic

PVT

GVT

Source: Company, [Link] Research

One-stop-destination for all home dcor needs

Following a growing trend that customers preferred to buy all their tile
and related requirements from a single location, Somany forayed into the
business of sanity ware in 2007 and bathroom fitting in 2010. Till date, the
company has build capacity of 0.3 million pieces per annum. Both
businesses have created significant synergy with Somanys existing
business model. These products saw considerable offtake as they were
seen as complementary to tiles even though they were priced higher than
tiles. It also helped the company to strengthen its holistic branding.
Revenues from these segments have increased from 2.3% of Somanys
overall revenues in 2009-10 to 3.2% in 2012-13.
Going ahead, the outlook for these business segments continues to be
optimistic. There is a large untapped potential for sanitary ware products
in the form of housing shortages and inadequate sanitation facilities.
Going forward, the company is planning to ramp up its capacity to 1
million in the next five years.

ICICI Securities Ltd | Retail Equity Research

Page 13

Exhibit 27: Peer comparison

Kajaria and Somany clearly stand out among their peers. Kajaria and Somanys revenue grew 24% and 23.3%, respectively, in FY09-14. Also, during
the same period, where Kajaria and Somany reported a CAGR of 69.4% and 26.9% in net profit, others reported a decline in net profit. Both these
players not only gained market share from organised players but also from branded players like Nitco, Orient Bell, RAK Ceramics, etc.

34.0
Revenue Growth (FY09-FY14 CAGR)

Size represents FY14 Revenue

Kajaria

Somany

Asian Granito

Nitco

Orient Bell

30.0
26.0
22.0
18.0
14.0
10.0
6.0
2.0

-50.0

-25.0

-2.0

0.0

25.0
PAT Growth (FY09-FY14 CAGR)

75.0

100.0

EBITDA Margin

20.0

Kajaria has the highest EBITDA margin in the industry.

This is mainly due to higher share of own manufacturing
in total sales, which generates EBITDA margin of ~20%
vs. ~5-10% for outsourced revenues. Also, being a leader
in the industry, Kajarias products command a significant
premium over tiles of other brands

15.0
10.0
(%)

Somanys EBITDA margin has been lower than Kajarias

in the last few years on account of an increase in
proportion of revenue from outsourcing than own
manufacturing in contrast to Kajaria

50.0

5.0
0.0
Kajaria

Somany

Asian Granito

Nitco

Orient Bell

-5.0
FY10

-10.0

FY11

FY13

FY14

PAT Margin

8.0
6.0
4.0
2.0
(%)

The Morbi development has led to consolidation in the tile

industry. Hence, branded players are shifting towards the
JV model, which leads to an expansion in PBT margin due
to the asset light nature of the model. Kajaria and Somany
have both built up significant capacity through the JV
model over the last couple of years. Also, strong internal
accruals have helped them de-leverage their balance
sheet significantly. Hence, they are able to sustain their
PAT margin as opposed to their peers

FY12

0.0
-2.0

Kajaria

Somany

Asian Granito

Nitco

Orient Bell

-4.0
-6.0
-8.0

FY10

FY11

FY12

FY13

FY14

*Note: Nitcos FY13 & FY14 PAT Margin is not represented as it is <-20%
Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 14

Exhibit 28: Peer comparison

35.0
25.0

25.0

20.0

20.0

15.0

15.0

10.0

10.0

5.0

5.0

0.0
-5.0

0.0

Kajaria

Somany

Asian
Granito

-10.0
-15.0

FY10

250

FY11

FY12

Nitco

Orient Bell

FY10

(x)

150
100
50
0
Somany
FY10

Asian
Granito
FY11
FY12

Somany

Asian
Granito

-10.0

FY14

FY13

Working Capital

Kajaria

Kajaria

-5.0

200
(Days)

RoCE

30.0

(%)

(%)

35.0

RoE

30.0

Nitco

Orient Bell

FY13

FY11

2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

FY12

Orient Bell

FY13

FY14

Nitco
FY13

Orient Bell
FY14

D/E

Kajaria

FY14

Nitco

Somany FY11
Asian Granito
FY10
FY12

*Note: Nitcos FY13 & FY14 RoE and D/E are not represented as they are <-50% and >4x respectively, RoE and RoCE of Somany in FY14 is declined due to equity dilution

Particulars

Somany

kajaria

H&R Johnson

Asian Granito

Nitco

Orient Bell

Access to capacity
(including outsourcing tieups)

52 MSM

62.6 MSM

54 MSM

36 MSM

16 MSM

25 MSM

UP, Rajasthan,
Gujarat and AP

Maharashtra,
Gujarat, Karnataka,
Pondicherry, MP,
Andhra Pradesh
and HP

Gujarat

Maharashtra, Gujarat,
Dadra and Nagar
Haveli

UP, Gujarat and

Karnataka

Plant location

No. of plants

Gujarat & Haryana

7 manufacturing units 6 manufacturing units 11 manufacturing

including JVs
including JVs
units including JVs

Distribution network
Brand spending
Organised Market Share (%)
FY12
FY13
FY14

8 manufacturing units
including associates 2 manufacturing units 3 manufacturing units
and exclusive tie-ups

1,200 dealers and

10,000 sub-dealers

900 dealers and

10,000 sales points

1,200 dealers and

15,000 sub-dealers

2,800 dealers and

retailers

1,100 dealers and

5,000 retail outlets

3000 dealers

1.5-2% of Sales

1.5% of sales

NA

2% of Sales

2% of Sales

NA

11
12
13

17
18
19

20
19
20

7
7
7

11
9
8

7
7
6

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 15

Exhibit 29: Kajaria vs. Somany Leaders of the industry

Kajaria Capacity break-up
0.0

4.6

(In MSM)

80%
60%
40%

23.4

26.0

Somany Capacity break-up

100%

10.0

12.7

26.0

15.3

28.3

29.9

20%

22.8

0.0

2.7

80%
(In MSM)

100%

31.3

60%
40%

16.7

19.2

19.2

5.3
21.0

19.2

21.6

FY14

FY15E

19.2

20%

0%

15.5

0%
FY10

FY11

FY12

FY13

Own Manufacturing

FY14

FY15E

FY10

JV

Current average realisation (|/sq mt)

Own
JV
Outsourcing Overall realisation
383
361
397
378
335
416
400
379

Kajaria
Somany

FY11

FY12

Own Manufacturing

Common size comparison (FY14)

Particulars
Kajaria
Revenue
100.0
Raw material
22.8
Net purchase of stock
22.0
Power & fuel
20.2
Employee expense
9.4
Other expnese
10.3
Total operating expense
84.7
EBITDA
15.3
Oher income
0.3
Depreciation
2.6
EBIT
13.0
Interest
2.2
PBT
10.8
Taxes
3.6
PAT
7.2

Somany
100.0
13.8
48.3
13.1
6.6
12.1
93.9
6.1
0.6
1.8
4.9
1.5
3.4
1.3
2.1

FY13
JV

Kajaria entered into JVs from FY11 whereas Somany entered into JV
arrangements from FY12 onwards. Currently, the proportion of own
manufacturing to overall capacity is higher in case of Kajaria than
that of Somany.
Somanys significant capacity of own manufacturing is of ceramic
tiles. Hence, its average realisation is seen lower compared to that of
Kajaria. On the other hand, most of Somanys JV capacity is of PVT
and GVT type. Hence, its average realisation is seen higher than that
of Kajaria. On a blended basis, average realisation is more or less
same for both companies.

Since the proportion of own manufacturing is higher in case of

Kajaria, raw material cost and power & fuel cost are higher than that
of Somany. However, Somanys net purchase of stock is higher than
that of Kajaria due to significant JV and outsourcing capacity.
Consequently, Kajaria generates higher EBITDA margin than that of
Somany as own manufacturing earns margin of ~10-20% vs. ~510% in outsourcing and JVs.
As a result, Kajaria has better PAT margins than that of Somany.
However, Somanys prudent strategy to shift towards the JV model
would lead to an expansion in PBT margin and, in turn, PAT margin,
going ahead.

(|/sq m t)

Power & Fuel Cost for Own Manufacturing

100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0

83.5

92.0

71.2
44.8
41.9

FY10

76.6
37.3
50.6

63.6

FY11

FY12
kajaria

FY13

85.2

The LNG cost has significantly risen in the last few years, which has
adversely impacted the companys margin profile. It has become 2x
from FY10 to FY14. However, a recent reduction in gas price would
have a positive impact on the margin profile after a few years as
these companies have long term contracts for LNG supply where cost
is determined using last five years monthly moving average cost.
Hence, the benefit of the recent reduction in gas prices would be seen
after a few quarters

FY14

Somany

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 16

Financials
Revenues to grow at CAGR of 22% during FY14-17E
We expect revenues to witness robust growth at 22%

Even during the slowdown in the last few years, Somany has reported
healthy revenue CAGR of 23% in FY09-14. Going ahead, we expect
significant volume growth for the entire industry on account of our
aforementioned rationale for volume growth drivers (refer exhibit 11). In
addition to that this volume growth would also be complemented by
value growth (refer exhibit 12).

CAGR to | 2426 crore during FY14-17E

With a significant ramp up in capacity using the JV model, we expect

Somanys volumes to grow at 15% CAGR during FY14-17E. We highlight
that most of the incremental capacity through JV would be in value added
tiles i.e. PVT and GVT. Therefore, we expect 22% CAGR in consolidated
revenue for Somany during FY14-17E.
Exhibit 30: Volume trend

Exhibit 31: Average realisation trend

70.0

1400

60.0

1200
10.0

40.0
30.0
20.0
10.0

13.3
3.0
17.1

13.2
5.4
19.4

9.1
15.1
18.2

22.9

27.5

19.9

19.9

1000

(|\sq mt)

(In MSM)

50.0

10.0

300

320

390

400

420

472

484

416

436

458

331

332

337

352

369

FY14

FY15E

FY16E

FY17E

800
600
400
200

0.0

0
FY13

FY14

FY15E

Own manufacturing

JV

FY16E

FY17E

FY13

Outsourcing

Own manufacturing

JV

Source: Company, [Link] Research

Source: Company, [Link] Research

Exhibit 32: Model wise revenue break-up

Exhibit 33: Consolidated revenue growth

Outsourcing

3000
3000

2500
420
400

1500
1000
500

354
398
144
567

421
260

627

642

614

FY14

FY15E

999

1261

701

736

FY16E

FY17E

0
FY13

Own manufacturing

JV

Outsourcing

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

CAGR -22%

2500
(| crore)

(| crore)

2000

2000
1500

2,426.2
2,107.2

1,112.8

1,328.3

1,601.4

1000
500
0
FY13

FY14

FY15E

FY16E

FY17E

Source: Company, [Link] Research

Page 17

EBITDA to grow at 25% CAGR during FY14-17E

We expect an EBITDA margin expansion by 40 bps to 6.9%
in FY17E. Consequently, the EBITDA is expected to grow at
25% CAGR to | 160 crore during FY14-17E

There was a two-fold increase in LNG prices over the last five years
coupled with a sharp depreciation of the rupee during the same period.
This has adversely impacted its EBITDA margins. Moreover, Somanys
strategy to increase outsourcing in the last couple of years has also
impacted its EBITDA margin as own manufacturing earns margin of ~1520% vs. ~5% in outsourcing. However, going ahead, Somanys strategy
of expanding using the JV model would impact positively as margins in
the JV model are better than that in outsourcing. Hence, we expect an
EBITDA margin expansion of 40 bps to 6.9% in FY17E. Consequently, the
EBITDA is expected to grow at 25% CAGR to | 160 crore in FY14-17E.
Exhibit 34: EBITDA and EBITDA margin trend
9.0

180
8.2

8.0

140

6.5

6.3

7.0
6.0

60

3.0

40

2.0

20
0

160.1

4.0

126.3

80

97.0

5.0

81.4

100

85.7

(| crore)

120

6.9

6.3

FY13

FY14

FY15E

FY16E

FY17E

(%)

160

1.0
-

Source: Company, [Link] Research

PBT margin to expand 130 bps in FY17E

We envisage PAT will post healthy growth of 44% CAGR
during FY14-17E to | 87.1 crore

The asset light nature of the JV model and increasing proportion of value
added products would result in robust revenue growth, improvement in
debt to equity ratio as the JV requires minimum investment to build the
same capacity against the Greenfield mode. These attributes would result
in lower interest & depreciation cost. Consequently, we expect a 130 bps
improvement in PBT margin to 5.6% in FY17E. Furthermore, we expect
44% CAGR in PAT to | 87.1 crore in FY14-17E.
Exhibit 35: PBT and PAT margin trend
PBT

PAT

PBT Margin

140

5.6

120
4.6

4.0

3.5

80

3.0

60

2.0

FY13

FY14

FY15E

FY16E

87.1

129.0

63.4

93.2

45.7

66.5

28.9

43.6

32.0

47.8

40
20

(%)

(| crore)

100

5.0

4.7

4.3

6.0

1.0
-

FY17E

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 18

Leverage and working capital improvement.

One of major overhangs for Somany was its leverage position. However,
it managed to reduce its debt to equity from 1.7x in FY11 to 0.8x in FY14
and WC days from 67 days in FY11 to 37 days in FY14 through higher
internal accruals and better WC management. Furthermore, Somany has
raised | 50 crore by diluting an 11.2% stake to private equity firm Creador
in January, 2014, which was used to de-leverage its balance sheet and for
working capital requirement. Going ahead, with more focus on the JV
model, we expect its debt to equity to come down to 0.3x and WC days to
come down to 32 days in FY17E.
Exhibit 36: Leverage
1.2

Exhibit 37: Working capital days

50

1.1

1.0

37

40

34

33

32

FY15E

FY16E

FY17E

0.8

0.8

30
(Days)

0.6

0.6

(x)

47

0.5
0.3

0.4

20
10

0.2

0.0
FY13

FY14

FY15E

FY16E

FY13

FY17E

FY14

Source: Company, [Link] Research

Source: Company, [Link] Research

Healthy return ratios

The average RoE and RoCE of Somany during FY10-14 has remained at
20.3% and 17.8%, respectively. In FY14, there was a dip in return ratio
due to equity infusion by PE firm Creador. However, we estimate RoE and
RoCE will improve significantly due to the benefit from the asset light JV
model. We expect RoE and RoCE to go to 22.8% and 26.1%, respectively,
in FY17E mainly driven by an increase in PAT margins and asset turnover.
Exhibit 39: Asset turnover and PAT margin to drive future RoE

30.0

(%)

20.0
15.0

20.7
20.9

17.6

14.8

17.6

10.0

5.0

20.5

4.0
23.1

12.9

3.1

2.0

2.9
2.3

1.0

5.0

3.8

3.2

3.0
2.3

3.0
(x)

25.0

26.5
22.1

4.2

4.0
3.2

2.8
2.0

1.8

1.6

1.5

FY14

FY15E

FY16E

FY17E

0.0

0.0
FY13

FY14

FY15E
RoE

FY16E
RoCE

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

FY17E

FY13

Leverage (Liabilities/Equity)

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

(%)

Exhibit 38: RoE & RoCE trend

Asset Turnover (Sales/Assets)

PAT Margin (PAT/Sales) (RHS)

Source: Company, [Link] Research

Page 19

Risks & Concerns

Termination of JVs
Somany has significantly ramped up its capacity via the JV model in the
last couple of years from 2.7 msm in FY12 to 21 msm currently. For future
expansion plans also, it is looking at the JV route (26 msm JV capacity by
FY16E). The termination of the JV due to any reason can significantly
impact its sales volume and, in turn, future expected growth. However,
we believe the JV model is win-win situation for both local player and
Somany. Hence, the probability of occurrence of this event is low.

Demand slowdown
The primary demand driver for the ceramic tiles industry has been the
housing sector. With major realty markets such as Mumbai and NCR
witnessing muted volumes and Bengaluru showing initial signs of slower
volumes, demand could be affected. However, despite the persisting
economic slowdown and a sluggish housing sector over the last three
years, the demand for tiles registered healthy growth a trend, which is
expected to continue over the coming years as aspiration and
affordability of the average Indian continues to scale northward.
Moreover, the investment-favouring government policies are expected to
provide a thrust to the housing sector which could cascade into a
stronger demand for tiles.

Fuel price uncertainty and forex volatility

There was a two-fold increase in LNG prices over the last five years
coupled with a sharp depreciation of the rupee during the same period.
This has adversely impacted business margins. The profit margins of the
industry remained under pressure mainly due to inability on part of the
industry to fully pass on this cost burden to end consumers due to severe
competition. To mitigate this, Somany has entered into a long-term
agreement with Gail, IOC and GSPL. Also, Somany is trying to sustain its
operating margin on account of a) increasing proportion of value added
tiles in its sales mix b) continuous improvement in critical process, which
optimises consumption of gas.
Exhibit 40: FY17E EPS sensitivity to natural gas price and exchange rate
Natural Gas Price ($/Mmbtu)

Exchange
rate (|/$)

22.4
63.0
62.0
61.0
60.0
59.0

16.1
11.1
12.3
13.5
14.6
15.8

15.1
15.7
16.8
17.9
19.1
20.2

14.1
20.4
21.4
22.4
23.5
24.5

13.1
25.0
25.9
26.9
27.9
28.8

12.1
29.6
30.5
31.4
32.3
33.2

Source: Company, [Link] Research

Threats from imports

Chinese players have been the biggest threat to domestic players given
their lower cost of production. Hence, there was a huge dumping of
Chinese tiles during FY06-08, which adversely impacted Indian players.
To protect them, the Government of India levied an anti-dumping duty of
| 137 per square metre (sq m) on ceramic wall and floor tiles and | 155
per sq m on vitrified tiles in FY09. However, anti-dumping duty on the
tiles was withdrawn with effect from June 2013. Till date, there is statusquo on the same. If the government does not re-impose anti-dumping
duty then competition from Chinese tiles may intensify. Nonetheless, the
depreciating rupee has made imports expensive. Hence, imported
volumes have dropped. Further, the organised sector has developed
capability to offer reasonably-priced, internationally-benchmarked
products, which reduced the relevance of imports significantly.

ICICI Securities Ltd | Retail Equity Research

Page 20

Valuation
With its renewed focus on growth using asset light model
translating into strong earnings growth and improvement in
return ratio, we initiate coverage on Somany with BUY
rating with a target price of | 426. We value Somany at
19x FY17 EPS, which is at 25% discount to Kajaria &
implies the PEG of 0.4x.

Somany has exhibited impressive revenue and earnings growth of 23.3%

and 26.9%, respectively, in FY09-14 led by its capacity expansion and by
moving to the high value vitrified tiles. The return ratios are also expected
jump to ~18% in FY15E from ~13% in FY08 while net leverage has
reduced sharply to 0.7x in H1FY15, from 2.1x in FY09.
We expect its revenues and earnings to grow at a CAGR of 22% and 44%
in FY14-17E, respectively. Given its focus on the asset light strategy such
as JV with local players (revenue share to grow from ~20% in FY14 to
52% in FY17E), healthy growth is expected to come without any
incremental huge capex. Consequently, its return ratio is expected to
improve further to 26% in FY17E while its debt to equity is expected to
come down further to 0.3x in FY17E.
In terms of PE, with the consistent improvement in the fundamental
performance of the company, its average PE multiple has improved from
5-7x to 13x in the last three years. However, on a relative basis, it traded
at ~29% discount to Kajaria given the lower earnings growth and return
profile than Kajaria. We highlight that we remain positive on Somanys
growth considering a structural shift in the industry, its strong brand
recall, wide distribution network and stable natural gas prices.
Furthermore, with its renewed focus on growth using asset light model
translating into strong earnings growth and improvement in return ratio,
we initiate coverage on Somany with BUY rating with a target price of |
426. We value Somany at 19x FY17 EPS, which is at 25% discount to
Kajaria & implies the PEG of 0.4x.
Peer Matrix

Exhibit 41: Financial Metrics

Company

CMP

Mcap

Revenue (| crore)

FY1417E
CAGR

EBITDA
Margin
(FY14)

PAT (| crore)

(|)

(| cr)

FY14

FY15E

FY16E

FY14

FY15E

Somany Ceramics

362

1412

1258.0

1529.7

1998.6

2304.6

23%

22%

6%

28.9

45.7

63.4

87.1

26%

44%

Kajaria Ceramics

780

6162

1840.0

2245.3

2862.0

3448.3

23%

23%

15%

124.2

172.4

216.9

267.5

69%

29%

Cera Sanityware

36%

FY16E

FY09-14
CAGR
FY17E

FY1417E
CAGR

FY09-14
CAGR
FY17E

2582

3228

643.8

833.2

1023.7

1358.6

32%

28%

14%

48.2

69.0

85.0

120.2

26%

HSIL

430

2838

1784.6

2077.6

2421.9

2849.3

23%

17%

12%

38.9

78.5

130.3

173.1

3%

64%

Century Plyboard

243 5418.9

1390.6

1670.5

2017.7

2488.7

14%

21%

11%

67.0

140.0

182.4

235.1

43%

52%

Source: Company, [Link] Research

Exhibit 42: Valuation Metrics

Company

RoE

P/E

P/BV

EV/EBITDA

FY14

FY15E

FY16E

FY17E

FY14

FY15E

FY16E

FY17E

FY14

FY15E

FY16E

FY17E

FY14

FY15E

FY16E

Somany Ceramics

12.9

17.6

20.5

23.1

48.6

30.8

22.2

16.1

6.3

5.4

4.6

3.7

18.5

15.5

11.8

9.0

Kajaria Ceramics

23.5

24.3

24.8

24.9

50.0

35.9

28.6

23.1

11.1

8.7

7.1

5.8

22.5

18.0

14.2

11.7

Cera Sanityware

23.9

26.6

27.0

28.6

67.2

47.3

38.2

27.2

14.7

11.5

9.0

6.9

37.3

26.8

21.2

16.7

4.2

7.5

11.5

13.9

69.2

36.3

22.1

16.4

2.7

2.6

2.4

2.2

16.9

12.2

9.8

8.3

23.0

36.6

36.4

36.0

80.8

38.6

29.6

23.0

18.6

14.1

10.8

8.3

39.7

23.9

19.6

15.9

HSIL
Century Plyboard

FY17E

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 21

Exhibit 43: Somany vs. Kajaria (One year forward P/E)

Kajaria (Last 5 years)

Revenue growth: 23%
Earning growth: 69%
Avg. EBITDA Margin: 15.5%
Avg. RoE/RoCE: 25.4%/25.8%
D/E: 1.4x in FY10 to 0.4x in FY14

Somany (Last 5 years)

Revenue growth: 23%
Earning growth: 26%
Avg. EBITDA Margin: 8.5%
Avg. RoE/RoCE: 20.3%/17.8%
D/E: 2.0x in FY10 to 0.8x in FY14

v/s

During FY14-17E, Somanys earnings

are expected to grow at 44% vs. 29% in
case of Kajaria. Furthermore, Somanys
return profile and leverage level are
expected to converge to that of Kajaria
and hence we believe historic discount
would come down to ~25%, going
ahead.

35.00

Discount to come down to ~25%

30.00

Average discount of 29% from April 11 to till date

25.00

(x)

20.00

15.00

10.00

5.00

Somany 1 year forward P/E

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

0.00

Kajaria 1 year forward P/E

With Somanys renewed focus on

growth via asset light model
translating into strong earnings
growth & almost at par return ratio
like Kajaria, we anticipate valuation
discount to come down to ~25%

70.0
60.0
50.0

(%)

40.0
30.0
20.0
10.0

Discount to Kajaria

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Aug-14

Jun-14

Apr-14

Feb-14

Dec-13

Oct-13

Aug-13

Apr-13

Jun-13

Feb-13

Dec-12

Oct-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Aug-11

Jun-11

-10.0

Apr-11

0.0

Avg Discount

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 22

Exhibit 44: One year forward P/E chart of Somany

600

550

Target Price 426

500

Price (|)

450

400

350

300

250

200

150

100

50

Price

5x

10x

15x

20x

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

25x

Source: Company, [Link] Research

Sensitivity Analysis
We have built in natural gas price of 14.1 $/Mmbtu and exchange rate
conversion of | 61 |/$ for our FY17E. Our sensitivity analysis indicates
with every one dollar change in natural gas prices keeping | to $
conversion constant would impact FY17E EPS by 20% and with every one
rupee change in | to $ conversion keeping natural gas price constant
would impact FY17E EPS by 5%.
Exhibit 45: FY17E EPS sensitivity to natural gas price, exchange rate
Natural Gas Price ($/Mmbtu)

Exchange
rate (|/$)

22.4
63.0
62.0
61.0
60.0
59.0

16.1
11.1
12.3
13.5
14.6
15.8

15.1
15.7
16.8
17.9
19.1
20.2

14.1
20.4
21.4
22.4
23.5
24.5

13.1
25.0
25.9
26.9
27.9
28.8

12.1
29.6
30.5
31.4
32.3
33.2

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 23

Tables
Exhibit 46: Profit & loss account (Consolidated)
(| Crore)
Gross Sales
Excise Duty
Net Sales
Other Operating Income
Other Income
Total Revenue
Raw Material Expense
Purchase of Traded Goods
(Increase)/Decrease in Inventories
Power & Fuel
Employee benefit expenses
Other Expenses
Total Operating Expenditure
EBITDA
Interest
Depreciation
PBT
Total Tax
PAT before MI
Minority Interest
PAT after MI
Profit from Associates
PAT
EPS

FY13
1,112.8
62.8
1,049.9
3.9
2.6
1,056.5

FY14
1,328.3
70.3
1,258.0
4.9
3.1
1,266.0

FY15E
1,601.4
71.7
1,529.7
12.8
8.1
1,550.6

FY16E
2,107.2
108.7
1,998.6
13.5
8.5
2,020.5

FY17E
2,426.2
121.6
2,304.6
14.8
9.3
2,328.7

164.6
472.4
(16.0)
131.1
74.6
141.5
968.1

173.2
581.3
26.7
165.4
83.2
151.8
1,181.5

180.3
872.8
(83.5)
185.6
98.0
192.2
1,445.5

126.8
1,150.6
229.6
127.8
250.9
1,885.8

146.4
1,328.6
247.5
147.7
289.1
2,159.3

85.7
20.0
20.5
47.8
15.2
32.6
32.6
(0.6)
32.0

81.4
18.5
22.4
43.6
17.0
26.6
(0.7)
27.2
1.7
28.9

97.0
15.9
22.7
66.5
23.4
43.1
(0.5)
43.6
2.0
45.7

126.3
15.4
26.1
93.2
32.6
60.6
(0.4)
60.9
2.4
63.4

160.1
13.2
27.2
129.0
45.1
83.9
(0.3)
84.2
2.9
87.1

9.3

7.4

11.8

16.3

22.4

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 24

Exhibit 47: Balance sheet (Consolidated)

(| Crore)
Equity Capital
Reserve and Surplus
Total Shareholders funds
Secured Loan
Unsecured Loan
Total Debt
Deferred Tax Liability
Minority Interest
Other Non Current Liabilities
Liability side total
Total Gross Block
Net Block
Total CWIP
Total Fixed Assets

FY13
6.9
146.1
153.0
162.4
162.4
26.2
14.2
358.2
405.4
199.9
9.4
209.2

FY14
7.8
215.7
223.4
170.1
0.6
170.7
28.4
4.4
17.8
447.8
449.3
240.5
2.9
243.5

FY15E
7.8
251.5
259.3
159.4
0.6
160.0
28.4
4.0
17.8
472.5
500.8
269.4
2.9
272.3

FY16E
7.8
301.2
309.0
139.4
0.6
140.0
28.4
3.6
17.8
501.9
522.5
264.9
2.9
267.8

FY17E
7.8
369.6
377.4
119.4
0.6
120.0
28.4
3.3
17.8
549.9
544.4
259.5
2.9
262.5

Other Investments

8.7

17.7

17.7

27.7

37.7

Inventory
Debtors
Loans and Advances
Other Current Assets
Cash
Total Current Assets

120.5
174.7
77.2
0.8
25.8
399.0

90.6
214.9
90.8
2.1
34.6
432.9

109.0
251.5
109.0
4.2
23.0
496.6

142.4
323.1
142.4
5.5
36.7
650.0

164.2
366.2
164.2
6.3
71.0
771.8

Creditors
Provisions
Other Current Liabilities
Total Current Liabilities

161.2
58.7
42.8
262.7

178.3
74.7
46.2
299.2

217.9
94.6
54.5
367.0

284.7
123.5
71.2
479.4

328.3
142.5
82.1
552.9

Net Current Assets

136.2

133.8

129.6

170.5

219.0

Assets side total

358.3

447.9

472.5

501.9

550.0

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 25

Exhibit 48: Cash flow statement (Consolidated)

(Year-end March)
Profit after Tax
Depreciation
Interest Paid
Cash Flow before WC changes

FY13
32.0
20.5
20.7
72.5

FY14
28.9
22.4
20.0
69.9

FY15E
45.7
22.7
18.5
84.2

FY16E
63.4
26.1
15.9
104.9

FY17E
87.1
27.2
15.4
127.5

Net Increase in Current Assets

Net Increase in Current Liabilities
Net CF from Operating Activities

(70.8)
67.7
69.5
(35.3)
(4.2)
(0.3)
1.5
(36.9)
(4.1)
(3.2)
(20.7)
(29.0)
3.6
22.1
25.8

(25.2)
36.4
81.1
(56.6)
(3.5)
0.8
(103.7)
0.9
7.7
0.6
(4.8)
(20.0)
31.3
8.8
25.8
34.6

(75.2)
67.8
76.8
(51.5)
(9.0)
2.2
4.4
3.6
(52.0)
(10.7)
(6.8)
(18.5)
(36.4)
(11.6)
34.6
23.0

(139.7)
112.5
77.7
(21.7)
(0.5)
(14.9)
(20.0)
(9.8)
(15.9)
(49.0)
13.7
23.0
36.7

(87.6)
73.4
113.3
(21.8)
(10.0)
(0.4)
(27.1)
(20.0)
(13.6)
(15.4)
(52.0)
34.3
36.7
71.0

(Purchase)/Sale of Fixed Assets

(Increase)/Decrease in Investments
Increase/ (Decrease) in DTL
Increase/ (Decrease) in MI
Increase/ (Decrease) in Non current liabilities
Net CF from Investing Activities
Inc / (Dec) in Equity Capital
Inc / (Dec) in Secured Loan
Inc / (Dec) in Unsecured Loan
Dividend and Dividend Tax
Interest Paid
Net CF from Financing Activities
Net Cash flow
Opening Cash/ Cash Equivalent
Closing Cash/ Cash Equivalent

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

Page 26

Exhibit 49: Ratio analysis

(Year-end March)
Per Share Data
EPS
Cash EPS
BV
Operating profit per share

FY13

FY14

FY15E

FY16E

FY17E

9.3
15.2
44.3
24.9

7.4
13.2
57.5
21.0

11.8
17.6
66.7
25.0

16.3
23.0
79.5
32.5

22.4
29.4
97.1
41.2

8.1
3.0

6.4
2.3

6.3
3.0

6.3
3.2

6.9
3.8

Return Ratios
RoE
RoCE
RoIC

20.9
20.7
20.2

12.9
14.8
15.8

17.6
17.6
18.1

20.5
22.1
22.6

23.1
26.5
28.8

Valuation Ratios
EV / EBITDA
P/E
EV / Net Sales
Sales / Equity
Market Cap / Sales
Price to Book Value

18.0
39.0
1.5
6.9
1.3
8.2

18.5
48.6
1.2
5.6
1.1
6.3

15.5
30.8
1.0
5.9
0.9
5.4

11.8
22.2
0.7
6.5
0.7
4.6

9.0
16.1
0.6
6.1
0.6
3.7

Turnover Ratios
Asset turnover
Debtors Turnover Ratio
Creditors Turnover Ratio

3.0
6.0
6.5

3.1
5.9
7.1

3.3
6.1
7.0

4.1
6.2
7.0

4.4
6.3
7.0

Solvency Ratios
Debt / Equity
Current Ratio
Quick Ratio

1.1
1.5
1.1

0.8
1.4
1.1

0.6
1.4
1.1

0.5
1.4
1.1

0.3
1.4
1.1

Operating Ratios
EBITDA / Total Operating Income
PAT / Total Operating Income

Source: Company, [Link] Research

ICICI Securities Ltd | Retail Equity Research

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RATING RATIONALE

[Link] endeavours to provide objective opinions and recommendations. [Link] assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

[Link]@[Link]

[Link] Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@[Link]

ICICI Securities Ltd | Retail Equity Research

Page 28

Disclaimer
ANALYST CERTIFICATION

We , Deepak Purswani, MBA (Finance), CFA; Nikunj Gala, MBA (Capital Markets) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this
research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a
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