CRISIL Research Ier Report Somany Dec2012

MAKING MAR

K

ETSFUNCTIONBETTER

YEARS

Apollo Hospitals Enterprise Ltd

CRISIL IERIndependentEquityResearch

Enhancing investment decisions

Detailed Report

Somany Ceramics Ltd

Detailed Report


Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade Assessment

CRISIL Valuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP) 4/5 Superior fundamentals 4/5 Upside (10-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-10% from CMP) 2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP) 1/5 Poor fundamentals 1/5 Strong downside (

MAKING MAR

KETSFUNCTIONBETTER

YEARS Somany Ceramics Ltd

Value-added products to drive future growth

Fundamental Grade 4/5 (Superior fundamentals)

Valuation Grade 5/5 (CMP has strong upside)

Industry Building Products

1

Somany Ceramics Ltd (Somany) is evolving as one of the leading players in the tiles industry. Its market share in the organised industry increased to 13% in FY12 from 8% in FY08. An established brand and an extensive pan-India distribution network place Somany favourably to reap the benefit of shift in consumer preference for branded products. Focus on value-added products and expansion through an asset light model is expected to drive future growth. We retain the fundamental grade of 4/5, indicating superior fundamentals. However, slowdown in the real estate industry and rising operating costs could impact future prospects.

Evolving as one of the leading players in the industry Somany is evolving as the one of the leading players in the industry after Kajaria Ceramics backed by its focus on brand building, growing distribution network, launch of innovative products and expansion through an asset light model. It has been able to maintain growth and remain profitable in the past one year when majority of its peers reported moderate growth and decline in profitability.

Tiles industry has robust growth prospects; shift in consumer preference augurs well CRISIL Research expects the tiles industry to grow at a CAGR of 13-14% over the next two years. Usage of tiles has increased manifold in the past few years. Customers are shifting to digital tiles which look similar to Italian marble and wooden floorings but cost less. Also, there is a shift in preference for high end tiles to replace mosaic tiles. Shift in consumer preference for branded products augurs well for Somany.

Increase in share of value-added products to aid margin expansion Key value-added products such as digital, Veilcraft (VC) and Duragres contribution to total revenues increased to 28% in Q2FY13 from 17% in Q1FY12. Due to the rise in demand, the contribution is expected to increase to 32% in FY14, which should aid margin expansion.

Focus on asset light model to reduce capex, enhance return ratios Somanys focus on the asset light model instead of greenfield expansion is expected to lower capital requirements and reduce lead time in getting access to the capacity. This is expected to reduce stress on balance sheet and enhance return ratios. Apart from low capex, Somany has reduced its working capital cycle to 37 days in FY12 from 54 days in FY11 due to faster inventory turnaround, reduction in receivable cycle and better credit period. As a result, net debt-to-equity declined to 1.2x in FY12 from 1.6x in FY11.

Revenues to increase at a three-year CAGR of 16%, RoCE to increase Revenues are expected to increase at a three-year CAGR of 16% to 13.7 bn in FY15 driven by 13% growth in volumes and 3% growth in realisations. PBT margin is expected to improve by 150 bps to 5.6% in FY15 driven by increase in contribution from value-added products. RoCE is expected to improve to 24% in FY15 from 19.6% in FY12.

Valuations current market price has strong upside We continue to use the discounted cash flow (DCF) method to value Somany. We have rolled forward our projections to FY15 and revised our fair value to 120 per share from 80. At the current market price, this translates to a valuation grade of 5/5.

KEY FORECAST

( mn) FY11 FY12 FY13E FY14E FY15EOperating income 7,171 8,779 10,502 12,032 13,744EBITDA 680 747 930 1,096 1,273Adj PAT 229 252 320 406 505Adj EPS- 6.6 7.3 9.3 11.8 14.6EPS growth (%) 17.1 9.9 27.0 26.8 24.5Dividend yield (%) 0.7 0.8 1.0 1.3 1.6RoCE (%) 19.5 19.6 21.8 22.5 24.0RoE (%) 24.6 21.9 22.9 23.6 23.9PE (x) 14.3 13.0 10.2 8.1 6.5P/BV (x) 3.2 2.6 2.1 1.7 1.4EV/EBITDA (x) 7.3 6.4 5.7 4.8 4.1

NM: Not meaningful; CMP: Current market price

Source: Company, CRISIL Research estimate

CFV MATRIX

KEY STOCK STATISTICS NIFTY / SENSEX 5856/19255

NSE / BSE ticker SOMANYCERA/

SOMANYFace value ( per share) 2Shares outstanding (mn) 34.5Market cap ( mn)/(US$ mn) 3,277/60Enterprise value ( mn)/(US$ mn) 5,292/9652-week range () (H/L) 106/29Beta 0.7 Free float (%) 36.7%Avg daily volumes (30-days) 41,851Avg daily value (30-days) ( mn) 3.9

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKET

Returns

1-m 3-m 6-m 12-mSomany 7% 68% 118% 198%NIFTY 4% 3% 14% 24%

ANALYTICAL CONTACT Mohit Modi (Director) [email protected] Ravi Dodhia [email protected] Hiral Thanawala [email protected] Bhaskar Bukrediwala [email protected]

Client servicing desk +91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fund

amen

tal G

rade

Poor Fundamentals

ExcellentFundamentals

Stro

ngDo

wns

ide

Stro

ngU

psid

e63.31% 63.31% 63.31% 63.31%

0.04% 0.11% 0.21% 0.23%0.6% 0.6% 0.6% 0.6%

36.1% 36.0% 35.9% 35.9%

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

100%

Dec-11 Mar-12 Jun-12 Sep-12Promoter FII DII Others

December 26, 2012

Fair Value 120 CMP 95

CRISIL IERIndependent Equity Research

2

Table 1: Somany - Business environment

Parameter Manufacturing in-house Manufacturing outsourced

(Low-end, medium-end, large format and imported tiles)

Low-end, medium-end and value-added (VC, Duragres and digitally printed tiles)

Revenue contribution (FY12) 55.2% 44.8%

Revenue contribution (FY15) 47.4% 52.6%

Product offering Offerings across all price segments. Diverse floor and wall tiles in the range of 200 1,500 per sq mt

The company outsources the production of medium and low-end tiles to manufacturers in Morbi (Gujarat) and imports high-end products from Italy, Spain, China, etc. Leveraging its distribution network, these tiles are sold under the Somany brand. Recent offerings include value added products such as glazed vitrified tiles (large format) and double charge in polished vitrified tiles

Geographic presence Domestic: Pan-India presence; 70% of revenues come from the northern and southern markets, followed by western and eastern markets

Exports contribute only 1.3% to the top line; exports mainly to UAE, Kuwait, Saudi Arabia

Market position Evolving as one of the leading players in the industry

Tiles industry is highly fragmented with unorganised players having a market share of ~55%. In the organised market, Somany has 13% share (up from 8% in FY08). It also has the second largest manufacturing capacity after Kajaria Ceramics

Somany has successfully leveraged its brand and distribution network; revenue contribution increased to 45% in FY12 from 17% in FY08

End market Residential, retail and commercial real estate, hotels, hospitals and airports

Key competitors Kajaria Ceramics, H&R Johnson (under Prism Cement), Asian Granito, Nitco Tiles, Orient Ceramics and unorganised players

Sales growth (FY09-FY12 3-yr CAGR)

13.1% 51.3%

Sales forecast (FY12-FY15 3-yr CAGR) (organic growth)

10.4% 22.6%

Demand drivers Shift in consumer preference for branded products

Increase in varied usage of tiles from being used only in kitchen and bathroom to living room, bedroom, flooring

Floor tiles are being increasingly preferred to natural stones (marble) given the difference in costs and lower maintenance. Customers are shifting to digitally printed tiles owing to aesthetic appeal (looks similar to Italian marble and wooden floorings) and lower price

High-end and value-added tiles are being sought as replacement for traditional and mosaic tiles

Margin drivers Margins are expected to be driven by sale of value added products such as VC, Duragres and digitally printed tiles due to comparatively higher profitability

Competition from unorganised players and peers could restrict realisation growth. This coupled with increase in power and fuel costs could impact margins

Key risks Rising raw material and power and fuel costs

Competition from the organised and unorganised players

Threat from import of Chinese tiles

Source: Company, CRISIL Research

MAKING MAR

KETSFUNCTIONBETTER

YEARS

3

Somany Ceramics Ltd

Grading Rationale Somany: Evolving as one of the leading players in the industry Market share in the organised industry grew to 13% in FY12 from 8% in FY08 Somany is evolving as the second best player in the industry after Kajaria Ceramics due to its

strategic focus - brand building, enhancing distribution network, launching innovative products

and expanding through an asset light model. It maintained its growth momentum and

remained profitable in the past year when most players reported moderate growth and a

decline in profitability. Launch of value-added products such as digitally printed and glazed

vitrified tiles has been well received by the market. In the past year, Somany has increased its

manufacturing capacity by 5.3 mn sq mt at a minimal outlay through acquisition of 26% stake

in Morbi-based (Gujarat) companies.

Somanys revenue and PAT growth of 28% and 60% in the past four years have outpaced the

organised industrys growth (revenue grew by 14% and PAT declined by -66%). Its market

share in the organised industry grew to 13% in FY12 from 8% in FY08. Further, the gap

between Somany and H&R Johnson (industry leader in terms of revenue) has narrowed to

14% in FY12 from 18% in FY08. However, the gap between Somany and Kajaria has

increased as Kajaria has reported phenomenal growth during the past four years.

Figure 1: Growing market share in organised* industry Figure 2: Somany is the third largest player in terms of value in the organised industry (FY12)

*Kajaria Ceramics, Somany Ceramics, Orient Ceramics, Asian Granito, Nitco Ltd, Murudeshwar Ceramics, Euro Ceramics, Regency Ceramics, Restile Ceramics, Decolight Ceramics, H&R Johnson and Bell Ceramics

Source: Company, CRISIL Research Source: Company, CRISIL Research

Tiles industry has robust growth prospects Usage of tiles in the past few years has increased significantly (1) driven by growing demand

from end-user industries such as real estate, healthcare and infrastructure, (2) increase in the

variety of usage earlier used only in the kitchen and bathroom, it is now being used for living

rooms, bedrooms, flooring, etc; and (3) a steady rise in demand for replacing traditional and

mosaic tiles with high-end and value-added tiles. Floor tiles are being preferred over natural

3.3 4.5 5.4 7.2 8.8

39.0 43.4 44.4 58.1 65.2

8%

10%

12% 12%13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY08 FY09 FY10 FY11 FY12

( bn)

Somany Sales Industry Sales Market Share (RHS)

Kajaria , 20%

H&R Johnson,

27%

Somany, 13%

Nitco , 13%

Asian Granito, 10%

0%

5%

10%

15%

20%

25%

30%

FY08 FY09 FY10 FY11 FY12Kajaria Ceramics H&R Johnson Somany

Nitco Asian Granito

Usage of tiles has increased

significantly in past few years

Evolving as the second best

player in the industry after

Kajaria Ceramics


4

stones (marble) given the difference in costs and low maintenance. The ceramic tiles industry

(organised and unorganised) has grown at a five year CAGR of 18% to 170 bn in FY12 in

value terms and at a 12% CAGR to 625 mn sq mt in volume terms. CRISIL Research expects

the industry to grow at a CAGR of 13-14% over the next two years. Figure 3: Strong growth in tiles industry in past five years

Source: Company, CRISIL Research Growing demand from end-user industries Demand for housing in major Indian cities is expected to be 2.1 mn units over the next five

years. Of the total demand, more than 50% is expected in the mid-income housing segment.

Also, 78 mn sq ft of retail space is planned across 10 major cities in the next two years.

Besides, significant capacity additions are expected in the healthcare, hospitality and

infrastructure segments. We expect growth in the end-user industry to drive the demand for

tiles in the coming years. Widening scope of usage augurs well; replacement demand picking up Owing to the availability of different concepts, designs and sizes, the scope of usage of tiles

has increased in the past few years. E.g. wall tiles were previously used only in kitchens and

bathrooms; but now these are also being used in living rooms and bedrooms. Our analysis

suggests tiles consumption per home has increased to ~200 sq mt in FY12 from 100 sq mt in

FY07. Replacement demand is also picking up as people replace traditional or mosaic tiles

with high-end and value-added tiles. Demand from the replacement market, which is a mere

12% in India (compared to 40% in countries such as China, Italy and Spain), is also expected

to drive growth in the tiles industry. Tiles is a cost-effective substitution to natural stones Vitrified tiles have emerged as a cost-effective and convenient flooring solution over natural

stones. While natural stones are still preferred for premium homes (owned by high income

individuals), there is a visible shift to usage of vitrified tiles in mid-income housing

constructions. The aesthetic appeal and the price-friendliness of digitally printed tiles (looks

similar to Italian marble and wooden floorings) are also increasing their usage. Compared to

7689 94

120140

170

0

20

40

60

80

100

120

140

160

180

FY07 FY08 FY09 FY10 FY11 FY12

( mn)

Tiles

Tiles consumption per home

increased to 200 sq mt in FY12

from 100 sq mt in FY07

MAKING MAR

KETSFUNCTIONBETTER

YEARS

5

Somany Ceramics Ltd

an average cost of 300-350 per sq ft for an Italian marble and 300-400 per sq ft for wooden

flooring, digitally printed tiles are available for 120-150 per sq ft yet look almost as good as

the original. Figure 4: Tiles industry grew faster than marble industry Figure 5: Marble industry grew 8% in past five years

Source: Company, CRISIL Research Source: Company, CRISIL Research Shift in consumer preference works in favour of branded players In the past few years, the tiles industry has witnessed a shift to the organised players from the

unorganised sector (particularly those based in Morbi). Unorganised players are finding it

difficult to compete with organised players due to the latters well established brand name and

wider distribution network. Besides, increase in power and fuel, raw material and interest

costs in the past few years is having an effect on the already thin margins of the unorganised

players.

Due to shift in consumer preference towards branded and value-added products, the

unorganised players are entering into JVs with the organised players. Over the past few

years, organised players such as Somany, Kajaria, H&R Johnson and Nitco Tiles have

acquired stakes in small Morbi-based players. Therefore, branded players have outpaced

industry growth in the past few years and are poised to ride on the expected robust growth in

the industry.

76 8994

120140

170

0

20

40

60

80

100

120

140

160

180


( mn)

Tiles

6777 73 78

8699

0

20

40

60

80

100

120


( mn)

Marble

Branded players have outpaced

industry growth in the past few

years


6

Figure 6: Branded players outperformed industry in FY11-12. Figure 7: ... and a similar trend was seen in H1FY13

*Kajaria Ceramics, Somany Ceramics, Orient Ceramics, Asian Granito, Nitco Ltd, Murudeshwar Ceramics, Euro Ceramics, Regency Ceramics, Restile Ceramics, Decolight Ceramics, H&R Johnson and Bell Ceramics.

Source: Company, CRISIL Research Source: Company, CRISIL Research Acquisitions by organised players to consolidate their position

Company Date Acquisition Capacity & Products Stake (%) Cost of Acquisition ( mn) Somany Ceramics

Oct,2011 Vintage Tiles Pvt Ltd 2.55 mn sqm p.a of polished vitrified tiles 26% 50.0 June,2012 Commander Vitrified Pvt

Ltd 2.65 mn sqm p.a of polished vitrified tiles and glazed vitrified tiles

26% 32.5

Kajaria Ceramics

Feb,2011 Soriso Ceramics 4.6 mn sqm p.a. of ceramic tiles 51% 56.5 Feb, 2012 Jaxx Vitrified 3.1 mn sqm p.a. of polished vitrified tiles 51% 62.5 Apr, 2012 Vennar Ceramics 2.3 mn sqm p.a of digitally printed high

end wall tiles 51% 136.5

H&R Johnson Nov, 2011 Small Tiles Pvt Ltd 2.3 mn sqm p.a. of glazed floor tiles 50% NA Nitco Ltd Mar. 2012 New Vardhman Vitrified 8.7 mn sqm p.a. of vitrified tiles 51% NA


Brand building exercise has started to show results Our market check revealed that customers are becoming increasingly brand conscious and

opting for superior products. Somany, with its quality products and focus on value-added tiles,

has a strong brand recall among customers. The company outsources a part of its tiles

manufacturing and sells them under its brand name revenue contribution increased to

44.8% in FY12 from 17% in FY08. One of the Somanys best selling product - VC Shield -

which was developed and patented four years ago became a 1 bn brand in FY12. Also,

digitally printed tiles - launched in Q2FY12 - currently contribute 14% to consolidated

revenues; all these reflect the company is able to leverage the brand built over the past few

years. The branding exercise carried over the past few years has started giving returns and is

expected to keep the momentum going in the future.

30%

32%

26%

58%

24%

31%

38%

22%

15%

18%

17%

12%

0% 20% 40% 60% 80%

Kajaria

Somany

Asian Granito

Nitco

H&R Johnson

Industry Growth*

FY12 FY11

26% 18% 21% 5% 6%

8%

0%

5%

10%

15%

20%

25%

30%

Kajaria Somany Asian Granito Nitco H&R Johnson

H1FY13 Industry Growth*

Customers are becoming brand

conscious

MAKING MAR

KETSFUNCTIONBETTER

YEARS

7

Somany Ceramics Ltd

Figure 8: SGA expenses across players


Strengthened distribution network; devised dealer strategy with focused approach A strong distribution network - which helps companies widen their reach and increase

penetration at remote locations - is essential in the tiles industry. Somany has an extensive

pan-India distribution network - it made a net addition of 156 dealers in FY12 - consisting of

1,490 dealers, 7,000+ sub-dealers, a retail chain network of 127 showrooms and 20 depots.

Of the current dealer network, 25% dealers contribute 53% to revenues. Somany has drawn

up a dealer network system to enhance its product penetration. It will sell the entire product

range to category one dealers who provide maximum business to the company. Dealers who

are able to sell a few specific varieties of tiles will receive only those products (and will not be

burdened with other stocks). This will help the company to better manage its receivables.

Business tie-ups with a few marble dealers are expected to increase the reach of Somanys

products. Table 2: Demarcated dealer network with focused approach

Type of Dealers Particulars Category 1 Will stock all kinds of tiles digital, value added and large format, GVT, non-value added

Category 2 Stock vitrified tiles

Category 3 Stock ceramics tiles

Category 4 Marble, granite dealers to stock Somany tiles


Key takeaways from interaction with Somany dealers in Jaipur and Mumbai Customers have become brand conscious apart from a particular design and size, they

demand branded products. Somany has strong brand recall after Kajaria

Somany was not concentrating on vitrified tiles earlier. However, with increasing

demand, it has launched new varieties of vitrified tiles in the past one year. Demand for

digital tiles and glazed vitrified tiles is on the rise and is expected to drive future growth

5.5%

3.0%

8.0%

4.7%4.0%

8.7%

6.0%

4.2%

9.0%

4.5% 4.4%

7.2%

3.8% 4.0%

6.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Kajaria Somany Asian Granito


Added 156 dealers in FY12


8

There is huge demand for digital tiles due to availability of a wide range of designs, size

and colors. Customers view these tiles as a durable and cost-effective substitution for

natural stones and wooden flooring. Retail price of digital tiles with looks similar to

natural stones is 120-150 per sq ft compared to cost of high-end marble of 300-400

per sq ft. Similarly, price for wooden flooring tiles is 100-120 per sq ft compared to

wooden flooring which costs 300-500 per sq ft

Earlier, Somany had the right product mix but lacked branding exercise. In the past one

year, the company has improved the display of all variant tiles at dealer locations which

has resulted in better brand visibility

Dealers enjoy cash discount of 3% if payments are made within two days and a discount

of 2% if made in a week. We believe this strategy is likely to reduce debtor days

Inventory risk remains with the dealers. Therefore, dealers do not stock inventory beyond

15-20 days

Though demand for India-made branded products is on the rise, there is increased

competition from imported tiles

Value added products have kicked-in with increase in contribution to top-line Demand for value-added products and large format tiles are on the rise. Overall, the ceramic

tiles industry witnessed 18% growth in the past five years. The value-added tiles grew at a

robust 25% given the shift in consumer preference and higher disposable income. Over the

past few years, Somany has focused on enhancing production and marketing more of its

value-added products, and vitrified tiles with new designs, size and style. The companys

strategy has paid off with contribution from high-end and medium-end products increasing to

55% in FY12 from 34% in FY11. The share of key value added products such as digital tiles,

VC and Duragres increased to 29% in Q2FY13 from 17% in Q1FY12. Somanys overall

realisation also increased to 324 per sq mt in Q2FY13 from 220 per sq mt in FY09. Given

the strong brand recall and wider distribution, we expect the growth momentum to continue

and contribution from medium and high-end tiles to increase to 65% in FY13 and 70% in

FY14. Figure 9: Healthy volume growth in key value-added products Figure 10: Digital tiles reported strong revenue growth


0.6 0.7 0.8 1.1 0.9 1.0 1.2 1.6 1.4 1.9

18% 18% 19%21%

24% 23%28%

30%

39%43%

0%

10%

20%

30%

40%

50%

0.0

0.4

0.8

1.2

1.6

2.0

Q1F

Y11

Q2F

Y11

Q3F

Y11

Q4F

Y11

Q1F

Y12

Q2F

Y12

Q3F

Y12

Q4F

Y12

Q1F

Y13

Q2F

Y13

(mn sq mt)

Volumes % of manufacturing volumes (RHS)

35 88 169 271 376

2%

4%

6%

14% 15%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

350

400

Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13

( mn)

Value Contribution (RHS)

Share of key value added

products increased to 29% in

Q2FY13 from 17% in Q1FY12

MAKING MAR

KETSFUNCTIONBETTER

YEARS

9

Somany Ceramics Ltd

Figure 11: Value-added products drive overall realisation


Value added products to aid margin expansion Increase in contribution from value-added products such as digital, vitrified and large tiles will

lead to rise in margin due to better realisations. We expect EBITDA margins to increase 80

bps in the next three years to 9.3% by FY15. Since the company is following an asset-light

model (which has lower capital requirements) for expansion, interest and depreciation costs

are likely to be lower. Accordingly, PBT margins are expected to increase by 150 bps over the

next three years. Figure 12: Margins to increase during FY12-15


220232

255284

307324

0

50

100

150

200

250

300

350

FY09 FY10 FY11 FY12 Q1FY13 Q2FY13

(/sq mt)

Overall Realisation

10.7%

9.5%

8.5% 8.9%9.1% 9.3%

3.8%3.3%

2.9% 3.0%3.4% 3.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FY10 FY11 FY12 FY13E FY14E FY15E

EBITDA margin PAT margin


10

Focus on asset-light model to reduce capex, lower lead time Somany is focusing to add capacities on an asset-light model instead of going for greenfield

expansion. This strategy not only has lower capital requirements but also helps to reduce lead

time in getting access to the capacity. In the past one year, Somany acquired 26% stake in

Morbi-based Vintage Tiles Pvt Ltd (VTPL) and Commander Vitrfied Pvt. Ltd (CVPL) at a

capital outlay of 190 mn (including debt). With these acquisitions, Somany got acess to 5.3

mn sq mt of capacity at a much lower capital cost; greenfield expansion for similar capacities

require 1,200 mn. These acquisitions have also lowered lead time by at least one year.

Products manufactured at these plants will be marketed under the Somany brand leveraging

its pan-India distribution network. Going forward, Somany plans to expand through the asset-

light route instead of greenfield expansion. This is expected to reduce stress on balance sheet

and enhance returns ratios. Figure 13: Capacity additions through asset-light model in past one year

*CVPL was acquired in June 2012


Low capex, well managed working capital lead to decline in debt Apart from lower capex, Somany has managed its working capital quite well in the past few

years. Owing to faster inventory turnaround, reduction in receivable cycle and better credit

period, Somany has reduced its working capital cycle to 37 days in FY12 from 54 days in

FY11 and 78 days in FY08. Inventory days were reduced significantly by 37 days to 52 days

over the past four years due to superior product-profile (which has a faster turnaround).

Debtor days have also reduced by 11 days to 55 days during the same period on account of

faster collections through cash discounts. Owing to lower capex and better working capital

management, debt levels declined to 1.7 bn in FY12 from 1.8 bn in FY11. Its net debt-to-

equity improved to 1.2x from 1.6x during the same period.

16.7 16.719.2 19.2 19.2

2.7 2.7

2.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY09 FY10 FY11 FY12 FY13E*

(mn sqm)

Installed capacity Vintage Tiles Commander Vitrified

Inorganic growth through acquisitions

Faster inventory turnaround

and reduction in receivable

cycle led to improvement in

working capital cycle

Focusing on an asset-light

model instead of greenfield

expansion

MAKING MAR

KETSFUNCTIONBETTER

YEARS

11

Somany Ceramics Ltd

Figure 14: Improvement in working capital cycle Figure 15: Dip in inventory and debtors days


Going forward, we expect working capital days to remain at 50 days for the next three years.

Also, asset turnover ratio is expected to increase to 2.8x in FY15 from 2.4x in FY12. Owing to

expected increase in margins, well managed working capital cycle and improvement in asset

turnover, we expect RoCE to increase to 24% in FY15 from 19.6% in FY12. Figure 16: RoCE to improve


Somanys financial performance better than peers during FY08-12 Somanys financial performance during FY08-12 was better than that of most players in the

ceramic tiles industry.

Revenue growth of 28% was above peers average of 13%. However, PAT growth was

far better at 60% vs. an average of 8% for peers.

Somany has median RoE of 22% vs. peers average of 10%

82 78

62 56 54

37

0

10

20

30

40

50

60

70

80

90


(Days)

71 67 63 65 6255

129

88

61 64 65

52

0

20

40

60

80

100

120

140


(Days)

Debtors days Inventory Days

20.2%

19.5% 19.6%

21.8%

22.5%

24.0%

18%

19%

20%

21%

22%

23%

24%

25%


RoCE

Somany posted better financial

performance during FY08-12


12

Figure 17: Somany has second-largest capacity Table 3: Dealer network comparable to peers

Company Showrooms Dealers Sub dealers

Somany 127 1,490 7,000

Kajaria 70 800 6,000

Asian Granito 20 1,400 4,000

Nitco 78 1,100 5,500

Orient Bell Ltd 40 2,184 8,000

Source: Company, CRISIL Research Source: Company, CRISIL Research Figure 18: Revenue and PAT growth superior to peers... Figure 19: ... while PAT margin is below

Source: Company, CRISIL Research Source: Company, CRISIL Research Figure 20: Median RoE and... Figure 21: ... RoCE highest in the industry


24.3

38.3

16.28.1 8.5

14

0

5

10

15

20

25

30

35

40

45

Somany Kajaria Asian Granito

Nitco Euro Muru-deshwar

(mn sq mt)

Installed capacity (FY12)

28% 27% 32% 7%-6% -7%

60%52%

-9% -15%

2%

-41%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-10%-5%0%5%

10%15%20%25%30%35%

Som

any

Kaj

aria

Asia

n G

rani

to

Nitc

o

Eur

o

Mur

udes

hwar

Revenue CAGR FY08-12 PAT CAGR FY08-12

9.8% 15.7% 11.6% 10.9% 19.9% 27.2%

2.4%

3.9%

5.6%

3.7%

-1.3%

2.3%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%So

man

y

Kaj

aria

Asia

n G

rani

to

Nitc

o

Euro

Mur

udes

hwar

EBITDA margin FY08-12 PAT margin FY08-12

21.9%

20.4%

11.4%

4.9%

1.4%

1.1%

0% 5% 10% 15% 20% 25%

Somany

Kajaria

Asian Granito

Nitco

Euro

Murudeshwar

Median RoE (FY08-12)

14.7%

14.6%

11.2%

6.2%

11.1%

5.8%

0% 5% 10% 15% 20%

Somany

Kajaria

Asian Granito

Nitco

Euro

Murudeshwar

Median RoCE (FY08-12)

MAKING MAR

KETSFUNCTIONBETTER

YEARS

13

Somany Ceramics Ltd

Key risks Slowdown in the economy, real estate industry Growth in the tiles industry is dependent on the overall economy in general and the real estate

industry in particular. During the economic slowdown in FY09, the tiles industry registered a

marginal growth of 5% compared to the five-year average of 18%. Also, the real estate

industry is witnessing slowdown in a few pockets, though tier II/III cities remain strong.

Although the slowdown in the real estate industry has so far not majorly impacted the tiles

industry, sustained slowdown could hamper future growth prospects

Inability to pass on the rise in power and fuel costs Power and fuel costs increased significantly in the past few years but Somany was partially

successful in passing on the rise in costs through value-added products. More-than-expected

rise in power and fuel costs would pose a downside risk to our financial estimates.

Competition from organised players Somany has been able to outpace industry growth over the past few years. However, intense

competition from organised players might impact volumes and margins if the demand

momentum decreases.

Lifting of anti-dumping duty - threat from Chinese products During FY06-08, there was a huge influx of Chinese tiles in the Indian market, which impacted

Indian players volumes and margins. However, the anti-dumping duty of 137 per sq mt on

Chinese tiles in FY09 provided some respite. The anti-dumping duty will be reviewed in

December 2014; if lifted, Chinese products could be a potential threat to the industry.

Inability to pass on the rise in

power and fuel costs might

impact the margins


14

Financial Outlook Value-added products to drive revenue growth at three-year CAGR of 16% Revenues are expected to increase at a three-year CAGR of 16% to 13.7 bn by FY15 driven

by 13% growth in volumes and 3% growth in realisations. We expect the growth to be driven

by the sale of value-added products such as digitally printed tiles, Duragres and VC tiles; their

contribution to top-line is expected to increase from 18% in FY12 to 33% in FY15. Figure 22: Revenues to increase at a CAGR of 16% by FY15 Figure 23: Value-added products contribution to rise


EBITDA, PBT margin to improve We expect EBITDA margin to increase to 9.3% in FY15 from 8.5% in FY12. Despite cost

pressures, margins are expected to improve due to increase in contribution from value-added

products which have high realisations. Contribution from outsourced manufacturing to

consolidated top-line is expected to increase to 53% in FY15 from 45% in FY12. As the capital

requirement for these products is lower, we expect interest and depreciation cost to decline as

a percentage of sales. Accordingly, we expect PBT margin to improve to 5.6% in FY15 from

4.1% in FY12.

5,416 7,171 8,779 10,502 12,032 13,744

21.1

32.4

22.419.6

14.6 14.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


( mn)

Revenue y-o-y growth (RHS)

52.4%44.6%

37.1%24.1% 17.8% 14.6%

14.1%14.2%

18.1%27.9%

31.6% 32.9%

33.5%41.2% 44.8% 48.0% 50.6% 52.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY10 FY11 FY12 FY13E FY14E FY15EBasic/value-added products VC, Duragres and Digital Trading

PBT margin to improve 150 bps

to 5.6% in FY15

Revenues to increase at a

three-year CAGR of 16% to

13.7 bn in FY15

MAKING MAR

KETSFUNCTIONBETTER

YEARS

15

Somany Ceramics Ltd

Figure 24: EBITDA margin to improve in FY15 Figure 25: PBT margin to improve 150 bps by FY15


PAT to witness higher growth than revenues, EPS to increase from 7.3 in FY12 to 14.6 in FY15 PAT is expected to grow at a three-year CAGR of 26% to 505 mn in FY15, driven by

revenues and increase in PBT margin. We expect EPS to increase to 14.6 in FY15 from 7.3

in FY12. Figure 26: PAT and PAT margin Figure 27: EPS and EPS growth


RoCE, RoE and asset turnover to increase RoCE is expected to grow to 24% in FY15 from 19.6% in FY12 driven by growth in asset

turnover ratio. Due to the asset light model, we expect asset turnover ratio to increase to 2.8x

in FY15 from 2.4x in FY12. RoE is expected to increase from 21.9% in FY12 to 23.9% in

FY15 driven by growth in profitability.

582 680 747 930 1,096 1,273

10.7%

9.5%8.5% 8.9%

9.1% 9.3%

0%

2%

4%

6%

8%

10%

12%

100

300

500

700

900

1,100

1,300

1,500


( mn)

EBITDA EBITDA margin (RHS)

299 334 363 485 613 765

5.5%

4.7%4.1%

4.6%5.1%

5.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

100

200

300

400

500

600

700

800

900


( mn)

PBT PBT margin (RHS)

196 229 252 320 406 505

3.8%

3.3%

2.9%3.0%

3.4%3.7%

0%

1%

2%

3%

4%

0

100

200

300

400

500

600


()

PAT PAT margins (RHS)

5.7 6.6 7.3 9.3 11.8 14.6

121%

17%10%

27% 27% 24%

-25%

0%

25%

50%

75%

100%

125%

150%

0

2

4

6

8

10

12

14

16


()

EPS EPS growth (RHS)

RoCE to improve from 19.6% in

FY12 to 24% in FY15


16

Figure 28: RoCE to increase Figure 29: Asset turnover ratio to increase


26.5%24.6%

21.9% 22.9%23.6% 23.9%

20.2% 19.5% 19.6%21.8% 22.5%

24.0%

0%

5%

10%

15%

20%

25%

30%

0%

5%

10%

15%

20%

25%

30%


RoE RoCE (RHS)

1.9

2.2 2.4

2.6 2.7

2.8

1.0

1.5

2.0

2.5

3.0


(x)

Asset turnover ratio

MAKING MAR

KETSFUNCTIONBETTER

YEARS

17

Somany Ceramics Ltd

Management Overview CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Strong and experienced management Somany has an experienced management led by Mr Shreekant Somany, chairman and

managing director, and Mr Abhishek Somany, joint managing director. Mr Shreekant Somany

has more than 20 years of experience in the ceramic and sanitaryware industry, and heads

the companys production work. His son, Mr Abhishek Somany, BBA from Richmond

University, UK, heads marketing, finance and strategy.

Management strategy of going slow on greenfield expansion is paying off Management has deferred the capex of 1,100 mn in FY11 for the greenfield expansion of

5 mn sq mt. Instead, it has adopted an asset light strategy and acquired 26% stake in Vintage

Tiles Pvt Ltd and Commander Vitrified Pvt Ltd. This has helped reduce balance sheet stress

without constraining growth. Its return ratios have increased marginally in FY12 and are

expected to increase further in the next two years.

Second line of management is fairly strong Though most of the activities are currently handled by Mr Abhishek Somany, based on our

interactions with various business heads - production, marketing - we believe that Somany

has a strong second line of management who have ~15 years of experience in their

respective domains.

Somanys promoters have more

than 20 years of experience in

the ceramic industry


18

Corporate Governance CRISILs fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses the

shareholding structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a companys corporate governance.

Corporate governance at Somany reflects good practices supported by a strong and fairly

independent board, with good and relevant experience, and board processes and structures

broadly conforming to minimum standards.

Board composition Somanys board consists of nine members, of whom seven are independent directors, which

exceeds stipulated SEBI guidelines. Given the background of the directors, we believe the

board is experienced and fairly diversified.

Boards processes The company has various committees audit, remuneration and investor grievance - in place

to support corporate governance practices. The company's disclosures are sufficient to

analyse various business aspects of the company. CRISIL Research assesses from its

interactions with independent directors of the company that the quality of agenda papers and

the level of discussions at the board meetings are good.

We understand that the independent directors are well aware of the companys business and

are fairly engaged in all the major decisions, The audit committee is chaired by an

independent director, Mr R. K. Daga, who is ex-president of Federation of Small & Medium

Industries and ex-chairman of Indian Institute of Materials Management. The board also

includes well-known names like Mr Y. K. Alagh, chairman of Institute of Rural Management,

Anand and former minister of power, and Mr Salil Singhal, chairman and managing director of

PI Industries Ltd and Chairman Emeritus of Pesticides Association of India

Good disclosure levels The companys quality of disclosure is good judged by the level of information and details

furnished in the annual report, websites and other publicly available data. Somany is also

forthcoming in sharing relevant and important information. Recently, Somany has been

honoured with a gold award from LACP, US, for communication excellence through annual

report.

Board consists of nine

members, of whom seven

are independent

MAKING MAR

KETSFUNCTIONBETTER

YEARS

19

Somany Ceramics Ltd

Valuation Grade: 5/5 We continue to use the discounted cash flow (DCF) method to value Somany. We have rolled

forward our projections to FY15 and raise our fair value to 120 per share from 80. At this

fair value, the implied P/E multiples are 10.2x FY14 and 8.2x FY15 EPS estimates. Given the

current market price, the valuation grade is 5/5.

Key DCF assumptions We have considered the discounted value of the firms estimated free cash flow from

FY15 to FY20

We have assumed cost of equity of 17.4%, after factoring in the risk premium for the

small size of the company

We have assumed a terminal growth rate of 4% beyond the explicit forecast period until

FY21 WACC computation

FY15-21 Terminal value Cost of equity 17.4% 17.4% Cost of debt (post tax) 7.7% 7.7% WACC 12.6% 13.5% Terminal growth rate 4.0%

Source: CRISIL Research estimates Sensitivity analysis to terminal WACC and terminal growth rate Terminal growth rate

Term

inal

WA

CC

2.0% 3.0% 4.0% 5.0% 6.0%

11.5% 131 148 169 197 234

12.5% 113 126 142 162 188

13.5% 98 108 120 136 155

14.5% 85 94 103 115 130

15.5% 75 82 90 99 110

Source: CRISIL Research estimates Sensitivity analysis to terminal EBITDA margin

Terminal EBITDA margin Fair value ()

7.7% 90

8.7% 103

9.7% 120

10.7% 142

11.7% 169

Source: CRISIL Research estimates

We raise our fair value to 120

per share from 80


20

One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research P/E premium/discount to NIFTY P/E movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

Fair value movement since initiation


0

20

40

60

80

100

120

Apr-0

9

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

()

Somany 1x 3x 5x 7x 9x

0

1,000

2,000

3,000

4,000

5,000

6,000

Apr-0

9

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

( mn)

EV 2x 3x 4x 5x

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Apr

-09

Jul-0

9

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Premium/Discount to NIFTY Median premium/discount to NIFTY

0

2

4

6

8

10

12

Apr-0

9

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev

0

100

200

300

400

500

600

700

800

0

20

40

60

80

100

120

140

Dec

-10

Feb-

11

Apr-1

1

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Jun-

12

Aug

-12

Oct

-12

Dec

-12

('000)()

Total Traded Quantity(RHS) CRISIL Fair Value Somany

MAKING MAR

KETSFUNCTIONBETTER

YEARS

21

Somany Ceramics Ltd

Peer comparison

M. Cap EPS () Price/earnings (x) Price/book (x) EV/EBITDA (x) RoE (%)

( mn) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14ESomany Ceramics 3,277 7.3 9.3 11.8 13.0 10.2 8.1 2.6 2.1 1.7 6.4 5.7 4.8 21.9 22.9 23.6Orient Ceramics 1,379 12.8 N.A N.A 7.9 N.A N.A 0.6 N.A N.A 6.3 N.A N.A 9.3 N.A N.AKajaria Ceramics 17,252 11.0 14.7 19.5 21.3 16.0 12.1 6.1 4.8 3.7 8.7 8.0 6.7 32.1 32.4 32.9Asian Granito 1,062 8.7 N.A N.A 5.5 N.A N.A 0.5 N.A N.A 3.9 N.A N.A 9.3 N.A N.ANitco Ltd 774 -17.0 N.A N.A N.A N.A N.A 0.2 N.A N.A 7.2 N.A N.A -10.9 N.A N.A

Source: CRISIL Research estimates, industry

Somany is trading at a 33% discount to industry leader Kajaria based on FY14 P/E. We

believe current discount is justified given Kajarias strong brand strength and better return

ratios. CRISIL IER reports released on Somany Ceramics Ltd

Date Nature of report Fundamental

grade Fair value Valuation

grade CMP

(on the date of report)

06-Dec-10 Initiating coverage 4/5 79 5/5 60

28-Jan-11 Q3FY11 result update 4/5 84 5/5 40

06-Jun-11 Q4FY11 result update 4/5 84 5/5 43

22-Jul-11 Q1FY12 result update 4/5 84 5/5 45

04-Nov-11 Q2FY12 result update 4/5 72 5/5 43

01-Feb-12 Q3FY12 result update 4/5 68 5/5 40

07-Mar-12 Detailed report 4/5 68 5/5 35

01-Jun-12 Q4FY12 result update 4/5 80 5/5 43

23-Jul-12 Q1FY13 result update 4/5 80 5/5 44

22-Oct-12 Q2FY13 result update 4/5 80 4/5 71

26-Dec-12 Detailed report 4/5 120 5/5 95


22

Company Overview Somany, incorporated in 1968, as Somany Pilkingtons, in collaboration with UK-based

Pilkingtons Tiles, is among the leading and branded tiles manufacturing company in India.

The company is a part of the HL Somany group and is present both in the ceramic and the

vitrified segments. The company has two manufacturing plants, located at Kadi (Gujarat) and

Kassar (Haryana), with a total manufacturing capacity of 19.2 mn sq.mt. In FY2011-13, the

company acquired 26% stake in each of Vintage Tiles Pvt Ltd and Commander Vitrified Pvt

Ltd to produce low-end products and outsource some manufacturing of tiles. Through this

acquisition, the company got access to additional manufacturing capacity of 5.2 mn sq mt.

The company is present across varied price points - from low-cost tiles that cost 200 per

sq.mt. to top-end tiles that cost 2,500 per sq.mt. It offers tiles in 77 sizes, the largest handout

by any tile manufacturer in the Indian tiles industry. It has introduced new products such as

Durages, digital and VeilCraft tiles. It has a pan-India distribution network and earns 70% of

revenues from the northern and southern markets. Key milestones

1968 Incorporated as Somany Pilkingtons Ltd, in collaboration with the UK-based Pilkingtons Tiles

1971 Production started in November

1996 R&D facility received government recognition

1999 Kadi unit was accredited ISO 14001 for environment-friendly manufacturing

2002-04 Natural gas supply to Kassar (Haryana) plant was suspended that affected production and profitability

2007 Changed name to Somany Ceramics Ltd

2009 Only company in Indian ceramic tile industry to get a patent for its product VC Shield (Indias highest abrasion resistant tiles)

2010 Brownfield expansion with capacities of 2.45 mn sq.mt. in Haryana

2010 Stock split from 10 to 2

2010 Purchased 15-acre land near its existing unit for greenfield expansion

2011 Acquired 26% stake in Vintage Tiles having manufacturing capacity of 2.65 mn sq.mt.

2012 Acquired 26% stake in Commander Vitrified Pvt Ltd having manufacturing capacity of 2.55 mn sq.mt.

2012 Ventured into the sanitaryware segment and chrome-plated bathroom fittings under brand name Aquaware

2012 Installed two digital printing machines one at Kadi (Gujarat) and the other at Kassar (Haryana) plants to produce higher value added tiles. Received the Indian Power Brands Award for the second consecutive year


MAKING MAR

KETSFUNCTIONBETTER

YEARS

23

Somany Ceramics Ltd

Region-wise sales contribution in FY08 Region-wise sales contribution in FY12


North33%

South39%

East9%

West15%

Central2%

Export2%

North36%

South33%

East15%

West11%

Central3%

Export2%


24

Annexure: Financials

Source: CRISIL Research

Income statement Balance Sheet( mn) FY11 FY12 FY13E FY14E FY15E ( mn) FY11 FY12 FY13E FY14E FY15EOperating income 7,171 8,779 10,502 12,032 13,744 LiabilitiesEBITDA 680 747 930 1,096 1,273 Equity share capital 69 69 69 69 69 EBITDA margin 9.5% 8.5% 8.9% 9.1% 9.3% Reserves 970 1,190 1,470 1,825 2,267 Depreciation 175 183 214 234 264 Minorities - - - - - EBIT 505 563 716 862 1,008 Net worth 1,039 1,259 1,539 1,894 2,336 Interest 171 207 243 258 253 Convertible debt - - - - - Operating PBT 334 357 473 604 755 Other debt 1,785 1,666 2,116 2,116 2,066 Other income 0 6 11 9 10 Total debt 1,785 1,666 2,116 2,116 2,066 Exceptional inc/(exp) 9 (1) - - - Deferred tax liability (net) 257 254 254 254 254 PBT 344 362 485 613 765 Total liabilities 3,081 3,178 3,908 4,263 4,655 Tax provision 105 111 165 207 260 AssetsMinority interest - - - - - Net f ixed assets 1,730 1,904 2,097 2,217 2,502 PAT (Reported) 239 251 320 406 505 Capital WIP 51 45 45 45 45 Less: Exceptionals 9 (1) - - - Total fixed assets 1,780 1,948 2,141 2,262 2,547 Adjusted PAT 229 252 320 406 505 Investments 63 117 117 117 117

Current assetsRatios Inventory 988 1,006 1,323 1,516 1,732

FY11 FY12 FY13E FY14E FY15E Sundry debtors 1,293 1,400 1,784 2,044 2,259 Growth Loans and advances 580 658 737 811 892 Operating income (%) 32.4 22.4 19.6 14.6 14.2 Cash & bank balance 99 151 94 136 105 EBITDA (%) 16.8 9.9 24.5 17.8 16.1 Marketable securities 6 6 6 6 6 Adj PAT (%) 17.1 9.9 27.0 26.8 24.5 Total current assets 2,967 3,221 3,945 4,513 4,995 Adj EPS (%) 17.1 9.9 27.0 26.8 24.5 Total current liabilities 1,737 2,115 2,303 2,637 3,011

Net current assets 1,231 1,105 1,642 1,876 1,984 Profitability Intangibles/Misc. expenditure 7 8 8 8 8 EBITDA margin (%) 9.5 8.5 8.9 9.1 9.3 Total assets 3,081 3,178 3,908 4,263 4,655 Adj PAT Margin (%) 3.2 2.9 3.0 3.4 3.7 RoE (%) 24.6 21.9 22.9 23.6 23.9 Cash flowRoCE (%) 19.5 19.6 21.8 22.5 24.0 ( mn) FY11 FY12 FY13E FY14E FY15ERoIC (%) 16.5 17.5 18.8 18.7 19.4 Pre-tax profit 334 363 485 613 765

Total tax paid (80) (114) (165) (207) (260) Valuations Depreciation 175 183 214 234 264 Price-earnings (x) 14.3 13.0 10.2 8.1 6.5 Working capital changes (249) 177 (593) (192) (138) Price-book (x) 3.2 2.6 2.1 1.7 1.4 Net cash from operations 180 609 (60) 448 632 EV/EBITDA (x) 7.3 6.4 5.7 4.8 4.1 Cash from investmentsEV/Sales (x) 0.7 0.5 0.5 0.4 0.4 Capital expenditure (415) (352) (407) (355) (549) Dividend payout ratio (%) 10.1 11.0 10.4 10.4 10.4 Investments and others (59) (55) - - - Dividend yield (%) 0.7 0.8 1.0 1.3 1.6 Net cash from investments (474) (406) (407) (355) (549)

Cash from financingB/S ratios Equity raised/(repaid) - - - - - Inventory days 65 52 57 57 57 Debt raised/(repaid) 259 (120) 450 - (50) Creditors days 79 75 70 70 70 Dividend (incl. tax) (28) (32) (40) (51) (63) Debtor days 62 55 59 59 57 Others (incl extraordinaries) 10 0 0 (0) (0) Working capital days 54 37 51 50 47 Net cash from financing 241 (151) 410 (51) (113) Gross asset turnover (x) 2.2 2.4 2.6 2.7 2.8 Change in cash position (52) 51 (56) 42 (31) Net asset turnover (x) 4.7 4.8 5.3 5.6 5.8 Closing cash 99 151 94 136 105 Sales/operating assets (x) 4.3 4.7 5.1 5.5 5.7 Current ratio (x) 1.7 1.5 1.7 1.7 1.7 Quarterly financialsDebt-equity (x) 1.7 1.3 1.4 1.1 0.9 ( mn) Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13Net debt/equity (x) 1.6 1.2 1.3 1.0 0.8 Net Sales 2,077 2,175 2,763 1,904 2,578 Interest coverage 3.0 2.7 2.9 3.3 4.0 Change (q-o-q) -13% 5% 27% -31% 35%

EBITDA 177 175 233 177 212 Per share Change (q-o-q) -13% -1% 34% -24% 20%

FY11 FY12 FY13E FY14E FY15E EBITDA margin 8.5% 8.0% 8.4% 9.3% 8.2%Adj EPS () 6.6 7.3 9.3 11.8 14.6 PAT 57 47 85 53 80 CEPS 11.7 12.6 15.5 18.6 22.3 Adj PAT 57 47 86 53 80 Book value 30.1 36.5 44.6 54.9 67.7 Change (q-o-q) -28% -18% 82% -39% 52%Dividend () 0.7 0.8 1.0 1.2 1.5 Adj PAT margin 2.8% 2.2% 3.1% 2.8% 3.1%Actual o/s shares (mn) 34.5 34.5 34.5 34.5 34.5 Adj EPS 1.7 1.4 2.5 1.5 2.3

MAKING MAR

KETSFUNCTIONBETTER

YEARS

25

Somany Ceramics Ltd

Focus Charts Growing market share in organised industry Digital tiles reported strong revenue growth

Source: Company, CRISIL Research Source: Company, CRISIL Research Capacity additions through asset-light model Highest RoE in the industry

*CVPL was acquired in June 2012

Source: Company, CRISIL Research Source: Company, CRISIL Research RoE, RoCE to increase Shareholding pattern over the quarters


3.3 4.5 5.4 7.2 8.8

39.0 43.4 44.4 58.1 65.2

8%

10%

12% 12%13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0


( bn)

Somany Sales Industry Sales Market Share (RHS)

35 88 169 271 376

2%

4%

6%

14% 15%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

350

400

Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13

( mn)

Value Contribution (RHS)

16.7 16.719.2 19.2 19.2

2.7 2.72.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY09 FY10 FY11 FY12 FY13E*

(mn sqm)

Installed capacity Vintage Tiles Commander Vitrified

Inorganic growth through acquisitions

21.9%

20.4%

11.4%

4.9%

1.4%

1.1%

0% 5% 10% 15% 20% 25%

Somany

Kajaria

Asian Granito

Nitco

Euro

Murudeshwar

Median RoE (FY08-12)

26.5%24.6%

21.9% 22.9%23.6% 23.9%

20.2% 19.5% 19.6%21.8% 22.5%

24.0%

0%

5%

10%

15%

20%

25%

30%

0%

5%

10%

15%

20%

25%

30%


RoE RoCE (RHS)

63.31% 63.31% 63.31% 63.31%

0.04% 0.11% 0.21% 0.23%0.6% 0.6% 0.6% 0.6%

36.1% 36.0% 35.9% 35.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-11 Mar-12 Jun-12 Sep-12Promoter FII DII Others


This page is intentionally left blank

MAKING MAR

KETSFUNCTIONBETTER

YEARS

This page is intentionally left blank


CRISIL Research Team

President

Mukesh Agarwal CRISIL Research +91 22 3342 3035 [email protected]

Analytical Contacts

Prasad Koparkar Senior Director, Industry & Customised Research +91 22 3342 3137 [email protected]

Binaifer Jehani Director, Customised Research +91 22 3342 4091 [email protected]

Manoj Mohta Director, Customised Research +91 22 3342 3554 [email protected]

Sudhir Nair Director, Customised Research +91 22 3342 3526 [email protected]

Mohit Modi Director, Equity Research +91 22 4254 2860 [email protected]

Jiju Vidyadharan Director, Funds & Fixed Income Research +91 22 3342 8091 [email protected]

Ajay D'Souza Director, Industry Research +91 22 3342 3567 [email protected]

Ajay Srinivasan Director, Industry Research +91 22 3342 3530 [email protected]

Rahul Prithiani Director, Industry Research +91 22 3342 3574 [email protected]

Business Development

Siddharth Arora Director, Customised Research +91 22 3342 4133 [email protected]

Sagar Sawarkar Associate Director, Equity Research +91 22 3342 8012 [email protected]

Deepak Mittal Associate Director, Funds & Fixed Income Research +91 22 3342 8031 [email protected]

Prosenjit Ghosh Associate Director, Industry & Customised Research +91 22 3342 8008 [email protected]

Business Development Equity Research Ahmedabad / Mumbai Vishal Shah Regional Manager, Business Development Email : [email protected] I Phone : +91 9820598908 Bengaluru / Mumbai Shweta Adukia Regional Manager, Business Development Email : [email protected] I Phone : +91 9987855771 Chennai / Hyderabad Sagar Sawarkar Associate Director, Equity Research Email : [email protected] I Phone : +91 9821638322

Delhi Arjun Gopalkrishnan Regional Manager, Business Development Email : [email protected] I Phone : +91 9833364422 Kolkata Priyanka Murarka Regional Manager, Business Development Email : [email protected] I Phone : +91 9903060685

MAKING MAR

KETSFUNCTIONBETTER

YEARS

Our Capabilities Making Markets Function Better

Economy and Industry Research

Largest team of economy and industry research analysts in India Coverage on 70 industries and 139 sub-sectors; provide growth forecasts, profitability analysis, emerging trends,

expected investments, industry structure and regulatory frameworks

90 per cent of Indias commercial banks use our industry research for credit decisions Special coverage on key growth sectors including real estate, infrastructure, logistics, and financial services Inputs to Indias leading corporates in market sizing, demand forecasting, and project feasibility Published the first India-focused report on Ultra High Net-worth Individuals All opinions and forecasts reviewed by a highly qualified panel with over 200 years of cumulative experience

Funds and Fixed Income Research

Largest and most comprehensive database on Indias debt market, covering more than 14,000 securities Largest provider of fixed income valuations in India Value more than 33 trillion (USD 650 billion) of Indian debt securities, comprising 85 per cent of outstanding

securities

Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain 12 standard indices and over 80 customised indices

Ranking of Indian mutual fund schemes covering 71 per cent of average assets under management and 4.7 trillion (USD 94 billion) by value

Retained by Indias Employees Provident Fund Organisation, the worlds largest retirement scheme covering over 50 million individuals, for selecting fund managers and monitoring their performance

Equity and Company Research

Largest independent equity research house in India, focusing on small and mid-cap companies; coverage exceeds 100 companies

Released company reports on all 1,401 companies listed and traded on the National Stock Exchange; a global first for any stock exchange

First research house to release exchange-commissioned equity research reports in India Assigned the first IPO grade in India

Our Office

Ahmedabad 706, Venus Atlantis Nr. Reliance Petrol Pump Prahladnagar, Ahmedabad, India Phone: +91 79 4024 4500 Fax: +91 79 2755 9863

Hyderabad 3rd Floor, Uma Chambers Plot No. 9&10, Nagarjuna Hills, (Near Punjagutta Cross Road) Hyderabad - 500 482, India Phone: +91 40 2335 8103/05 Fax: +91 40 2335 7507

Bengaluru W-101, Sunrise Chambers, 22, Ulsoor Road, Bengaluru - 560 042, India Phone:+91 80 2558 0899

+91 80 2559 4802 Fax: +91 80 2559 4801

Kolkata Horizon, Block 'B', 4th Floor 57 Chowringhee Road Kolkata - 700 071, India Phone: +91 33 2289 1949/50 Fax: +91 33 2283 0597

Chennai Thapar House, 43/44, Montieth Road, Egmore, Chennai - 600 008, India Phone:+91 44 2854 6205/06

+91 44 2854 6093 Fax: +91 44 2854 7531

Pune 1187/17, Ghole Road, Shivaji Nagar, Pune - 411 005, India Phone: +91 20 2553 9064/67 Fax: +91 20 4018 1930

Gurgaon Plot No. 46 Sector 44 Opp. PF Office Gurgaon - 122 003, India Phone: + 91 124 6722 000

CRISIL Ltd is a Standard & Poor's company

CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai 400076. India Phone: +91 22 3342 3000 | Fax: +91 22 3342 8088 www.crisil.com

Documents

CRISIL Research Ier Report Somany Dec2012