Ambit Building Materials Thematic 01 Dec 2015

BUILDING
MATERIALS
December 2015
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Analysts:
Achint Bhagat, CFA
achintbhagat@ambitcapital.com
Tel: +91 22 3043 3178
Nitin Bhasin
nitinbhasin@ambitcapital.com
Tel: +91 22 3043 3241
Girisha Saraf
girishasaraf@ambitcapital.com
Tel: +91 22 3043 3211
Building materials
CONTENTS
Building materials ..........................................................3
Structural resets caused the slowdown .5
Its uncertain but certainly not over 6
Learnings from the decade gone by 10
Its (not) all the same .13
Who is treading towards greatness?19
Valuations - More than meets the eye 25
Pipes ..28
Tiles 34
Wood panel products (ply and laminates) .41
Sanitaryware 46
COMPANIES
Supreme Industries (BUY) - True to its name 51
Century Plyboards (BUY) - Warming up for the marathon .59
Kajaria Ceramics (NOT RATED) - Good quality but expensive.. 65
Astral Poly Technik (NOT RATED) - Flow and Fix guard69
Somany Ceramics (NOT RATED) - Sailing through tough times 75
December 01, 2015
Ambit Capital Pvt. Ltd.
Page 2
Building Materials
POSITIVE
THEMATIC
01 December 2015
Time to build for tomorrow
Key Recommendations
Building materials demand recovery may be uncertain but the

impending low inflation/interest rate regime keeps our recovery hopes
alive (akin to 1996-99). In our view, the narrative should be longevity
of growth, rather than when will demand recover? Pipes is set to
become an even larger category as new applications will increase the
addressable market; only three established leaders/innovators have
the ability (capacity, reach and reputation) to harness the opportunity.
Tiles and ply are large categories with limited credible competition but
little scope for product innovation constricts competitive advantages of
present leaders. We turn BUYers on Supreme Industries and retain BUY
on Century Plyboards. We highlight Astral as the other unique franchise
operating across two fast growing/evolving categories. Kajaria is an
exemplary but relatively expensive franchise.
Supreme Industries
Target Price: `785
BUY
Upside 21%
Century Plyboards
Target Price: `230
BUY
Upside: 20%
Current slowdown akin to FY96-99

Liquidity challenges of the channel, decline in real estate construction, weak
consumer sentiment and the resultant deceleration in growth of building
materials in FY16 is very similar to FY96-98 (Asian Paints annual reports). Low
inflation/interest rate regime and access to credit, could again be the saviors
over next 12-18 months similar to FY99. Amid this severe slowdown, we still
hear cities outside top-20 remaining stable, indicating much larger opportunity
Leaders have no other choice but to build
Whilst the opportunity is large in most new-age building material categories,
only a few companies are building a champion franchise. Building sustainable
long-term franchises will require relentless product innovation (often disruptive),
superior channel servicing (efficient last mile transportation), intermediary
education and clear communication with channel/consumers. Asian Paints and
Pidilite have been doing this for last two decades whilst most others have
recently focused on the same; Supreme, Astral, Kajaria started 10 years back
Think innovation/disruption for longevity of advantages
Rather than size of the present market, the growth potential and opportunity to
build sustainable competitive advantages around innovation leads to pipes
scoring over other categories; laminates/engineered wood and adhesives also
display similar traits. Whilst competitive intensity from unorganised players is
receding in tiles, limited avenues to further reduce capital intensity or innovate
make tiles next best. Ply is most exposed to product disruption while
sanitaryware/faucets could see competition from all over (tiles, global brands).
All are rich; which one to BUY?
Valuation measures based on near-term earnings are of limited use, as most
building material categories/companies are still evolving. Accounting quality,
capital allocation and corporate governance are the first-level filters, followed
by sustainability of growth/advantages and re-investment opportunities. Whilst
we find ply not the best category, Century Plys (BUY) cost and reach/brand
leadership drive our BUY implying 21x FY17E EPS. We turn BUYers on Supreme
given abundant scope/capacities to innovate and reinvest, akin to last decade
Positioning of building material categories on Porters Five Forces
Competitive
intensity
Pipes (plumbing)
Barriers
Threat of Bargaining power:
Bargaining
to entry substitution
with Supplier
power: with Buyer
Moderate
High
Low
Moderate
High
Low
High
Moderate
High
Moderate
Tiles
Moderate
Moderate
Low
High
Moderate
Plyboard
Moderate
Low
High
Moderate
Low
High
Moderate
Low
Low
Low
Laminates
Sanitaryware
Analyst Details
Achint Bhagat, CFA
Tel: +91 22 3043 3178
Nitin Bhasin
Tel: +91 22 3043 3241
Girisha Saraf
Tel: +91 22 3043 3211
Source: Company, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Building Materials
Exhibit 1: Decision making framework to invest in building material companies
Home building materials
Well-known facts
Decelerating growth
Real-estate slow-down
OPTION 1
OPTION 2
Delve a bit depeer

Genuine housing shortfall/demand
Lower interest rates is a tailwind (see
FY96-99)
Top brands have low exposure to realestate
Do Nothing
How to choose my category?

Scalable oppurtunity
Scope for innovation
Strategic assets (Reach, reputation)
Top quality franchises/management
Order of preference
Pipes, Laminates, Tiles, Ply,
Sanitaryware
BUY IDEAS
Supreme, Century Ply
Other strong franchises

Somany, Kajaria, Greenply,
Greenlam
Source: Ambit Capital research
December 01, 2015
Page 4
Building Materials
Structural resets caused the slowdown

For the first time in the last decade, the growth of building materials has been lower
than the nominal GDP growth in India (in 1HFY16). Slowdown in housing
construction and weak consumer sentiment (and rural stress) only partially explains
the slowdown in building materials. The reset/structural change that has changed the
business setting has been the severe clamp-down by the NDA Government on black
money, which has not only impacted end-user demand but has also constricted
channel liquidity.
The director of one of the largest building material company in India highlighted:
Generic reasons such as rural stress and real estate slowdown only partially explains
the slowdown. It is the first time that we are seeing a slowdown like this and there is
something more to it; we have not been able to exactly figure out what.
The severe clamp-down on black

money and low channel liquidity
have been the major reasons for
the slowdown
Exhibit 2: Revenue growth of building material companies was lower than nominal
GDP growth of India in 1HFY16
35%
30%
25%
20%
15%
10%
5%
FY15
FY14
FY13
1HFY16
Revenue growth (HBM)
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
0%
Nominal GDP growth
Source: Company, Ambit Capital research. Note: This chart depicts the performance of 12 building material
companies across categories, barring cement
Mid-single-digit revenue growth (on a low base) vindicates the challenges faced by
the industry, and our discussions with the managements/channel partners suggest
that the demand slowdown could extend for another 2-3 quarters at least.
Exhibit 3: Growth rates of the building material companies have fallen off the cliff
20.0%
16.0%
12.0%
8.0%
4.0%
YoY revenue growth
2QFY16
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
0.0%
Median growth rate
Source: Company, Ambit Capital research. Sum of 15 building material companies
The thread which connects the entire theme is that black money had little reinvestment opportunity and hitherto it found application in real estate,
consumption growth or unorganised financing. The sharp and sudden clampdown surprised not only the companies but also the channel partners and led to the
biggest slowdown in the last decade. Ambits thematic on the topic
(Modi hits the 'reset' button and Real Estate: The unwind and its side effects) explain in
detail the above-mentioned resets.
December 01, 2015
Page 5
Building Materials
Its uncertain but certainly not over

Slowdown in sales is clear from the weak numbers posted by the incumbents (as
explained above), but the uncertainty (and the favourite investor question) is when
will demand recover? The managements of a few building material companies
expect demand recovery in 2HFY16 on the hope of a recovery in housing
construction. However, our detailed channel checks across India suggest that it could
take at least 3-4 quarters for demand to recover. Also, channel inventory remains
high (and liquidity low), which will take a few quarters to unwind.
Demand recovery could take 3-4

quarters to take shape
Could FY15-18 be akin to FY96-99?

Whilst it is difficult to time the recovery, we think that the current phase is akin to
1996-99, wherein the demand for building materials (paints) declined sharply but
recovered after a couple of years, as low interest rate (and inflation) regime
alongside a decline in housing prices spurred housing demand and demand for
building materials. Interestingly, after FY96, 1HFY16 is the only period, wherein
Asian Paints revenue growth was in single digits.
After FY96, 1HFY16 is the only

period, wherein Asian Paints
revenue growth was in single digits
In the section below, we compare the current period to the management commentary
of Asian Paints and Berger Paints in FY96-99.
#1: Problems faced by the channel

Unorganised financers are starved for liquidity: Distributors flushed with black
money used to act as the intermediary between the unorganised manufacturers and
dealers. They would pay the unorganised manufacturers on time and provide
extended credit to the smaller dealers for a higher margin/spread (in effect acting as
financers). This mechanism is failing given that the government has implemented
strict control on black money since transactions over `20,000 will require PAN card,
hence bringing the distributor under the tax net.
Challenges faced by the channel: From our checks, we understand that the black
money clamp-down reduced liquidity, and the sudden and swift implementation did
not give the channel the requisite time to adapt in the new setting. In an already
weak demand environment, rising liquidity constraints have led to stuffed channel
inventory and stretched working capital cycles.
Exhibit 4: Asian Paints commentary in FY97 - Similar to the challenges faced by the
channel now
The paints market was sluggish during the year. The poor availability of credit and its
high cost adversely affected dealer offtake. Protests by the trading community against
new levies and legislations in different parts of the company also affected sales.
Low channel liquidity and stress of

the real estate vendor is akin to the
96-98 period
#2: Real estate slowdown

Sharp decline in land deals, stagnating land prices: One of the major sources
of wealth generation in India in the last decade was an unprecedented increase in
land prices and rising land deals with increase in urban agglomerations. The
resultant wealth effect of inflation in land prices led to a sharp spike in housing
construction (individual home builders) and aspirational consumption in tier II/III
markets. However, land deals have declined and land prices have stagnated, which is
resulting in unwinding of the wealth effect, in turn impacting consumption
Decline in new launches: Whilst the decline in real estate launches in major
markets is well understood (see the exhibit below), we hear that small-ticket housing
has also dropped materially, as the smaller/unorganised builders could borrow large
sums of black money at 3-4%, which has now nearly stopped.
December 01, 2015
Page 6
Building Materials
Exhibit 5: Sharp decline in new launches in key urban markets
45
40
35
30
25
20
15
10
5
0
41
Kolkata
31
22
27
24
20
16
13
NCR
Pune
22
3 2 4
Mumbai
1QFY12
1QFY13
1QFY14
1QFY15
Source: Media articles, Ambit Capital research
Exhibit 6: Asian Paints commentary in FY98 - Crash in real estate prices and builder
facing liquidity issues
The crash in the real estate prices and the acute liquidity problem faced by the builders,
discouraged new investments in the construction industry. The market for consumer
durables was stagnant and in line with this trend, the paints market remained sluggish
and the growth for paints is estimated at around eight per cent.
#3: Factors that could drive the demand recovery in

the short-to-medium term
A low inflation and interest rate regime: With a low inflation and interest rate
regime and with real interest rates turning positive, demand for aspirational
consumption should improve as household savings increase. Note in the exhibit
below that interest rates have dropped sharply in CY15 (thanks to a lower inflation
regime), which could drive demand for housing and aspirational consumption.
Improvement in credit availability and lower interest rates historically boded well for
housing and aspirational consumption, evident from Asian Paints commentary in its
FY99 annual report.
Low inflation regime could drive

the demand for building materials
as seen in FY99
Exhibit 7: Asian Paints commentary in FY99 - Rebound in growth rates
Credit was easy, interest rates softened and the inflation year on year basis was as low
as 3%. In the given encouraging market conditions, the demand for paints was good
and is estimated to have grown between 14 to 15%.
Exhibit 8: Lending
CY96-99
rates
and
inflation
declined
in
Exhibit 9: which is visible again in CY15 as well
14.0
14
10.70
12
13.5
12
10.50
10
10.30
10.10
9.90
9.70
9.50
10
13.0
12.5
12.0
11.5
11.0
CY96
CY97
Lending rate
Source: RBI, Ambit Capital research
December 01, 2015
CY98
CY99
CY12
CPI (RHS)
CY13
Lending rate
CY14
CY15
CPI (RHS)
Source: RBI, Ambit Capital research
Page 7
Building Materials
Financial inclusion: PMJDY is the flagship programme of the National Democratic
Alliance (NDA) Government which has been supervised by Prime Minister Narendra
Modi. Launched on 28 August 2014, the number of accounts opened under the Measures administered by the NDA
scheme has already crossed 190mn (original target was 150mn), thereby making it Government, such as PMJDY, will
one of the most successful financial inclusion drives in the world. As a result, almost improve credit availability in villages
90% of total households in India now have at least one bank account. Lower housing
interest rates and availability of credit in smaller towns/villages could drive housing
demand and resultantly spur growth in consumption of building materials in the
credit-starved smaller towns/villages.
Fast-track execution of under-implementation real estate projects: We hear
that several real estate developers have fast-tracked execution of underimplementation projects to free up stuck capital and to earn milestone linked
payments. The clamp-down on black money has led to lower land transactions and a
sharp decline in new launches and hence cash-strapped developers are finishing
projects to accrue cash to meet their interest and debt commitments.
Pay commission led increased salaries: The Seventh Central Pay Commission
has recommended a 24% increase in remuneration for government employees. These
recommendations will benefit 4.7mn serving employees and 5.2mn pensioners (i.e.
~2% of Indias workforce). Unlike the previous Sixth Pay Commission, there will be
no major arrears this time, and hence high-ticket durables spending will be lower,
but mid-low-ticket spending could witness a spurt given higher disposable income.
#4: Factors that bode well for the long term

Despite the strong growth in the last decade, branded building materials penetration
remains very low; for example only 11% of the overall households in India have
mosaic or tile flooring and less than 10% of houses have wooden furniture
penetration. We believe that the future growth drivers could be:
Decline in real estate prices: A sharp increase in real estate inventory and the
governments move to tighten the strings on real estate developers through taxing
unsold units on annual letting out value, irrespective of whether the property is
rented out or not, should lead to a decline in prices of real estate (refer to Ambits
detailed thematic on this). This will increase affordability and lead to transfer of
residential units from investors to end users. Decline in housing prices and lower
interest rates would lower the mortgage payments to monthly income and increase
the spending capability on interiors.
Exhibit 10: Real estate prices have dropped in multiple cities in India
18%
17%
17%
16%
16%
12%
12%
10%
9%
9%
7%
8%
5%
4%
3%
Navrangpura,
Ahmedabad
Hazratganj, Lukhnow
Nipania, Indore
Bachupally, Hyderabad
Mulshi, Pune
Jayanagar, Bengaluru
Dwarka, Delhi
NoidaGreater Noida
Mahalaxmi, Mumbai
Mambalam, Chennai
Girgaon, Mumbai
Chennai ECR
0%
Greater Noida
Fall in real estate prices

(YoY change, in %)
24%
Source: PropTiger, magic bricks and 99 acres, Ambit Capital research. Note: The YoY fall in prices is from April 2014 to April 2015.
December 01, 2015
Page 8
Building Materials
Low cost/affordable housing: The Cabinet has approved the Smart Cities Mission
and the Atal Mission for Rejuvenation and Urban Transformation of 500 cities
(AMRUT) with outlays of `480 billion and `.500 billion respectively. However, these
initiatives such as Housing for All by 2022 and Smart Cities are yet to take any
meaningful shape, and face challenges such as absence of an effective policy and
inadequate reach of micro financers. However, if these initiatives are implemented at
a later period, it could drive a significant increase in demand for building materials.
A low inflation phase will erode pricing power increasing affordability:
Several companies have not passed on RM savings in the bleak demand
environment; as the companies pass on the savings and limit price hikes, the
affordability of building materials should increase in the long term.
GST implementation: The unorganised sector in India has hitherto avoided paying
indirect taxes on inputs and outputs and hence has had cost advantages of around
13-30% relative to its organised counterpart. If GST is able to capture the
unorganised sector in the tax net, then this competitive advantage for this sector will
be eroded. As a result, in the Goods sectors in which unorganised accounts for the
majority of the market share (e.g. light electricals, paints, pipes and plyboards), the
organised players stand to be benefit regardless of the rate at which GST is
introduced. We expect GST to be passed in the Nov-Dec 2015 parliament session.
Reduced cost advantage for unorganised goods manufacturers
GST is likely to increase market share gain of the organised segment, as the
unorganised segment stands to lose under the new world of GST. This will happen,
as:
GST will bring scale economies in distribution logistics and help players with
greater financial strength.
The unorganised sector will become less competitive under the GST, as input
taxes will be available for set off and the price differential between organised and
unorganised will decrease (see the exhibit below).
GST will wipe out the

competitiveness of the unorganised
players
Exhibit 11: Product pricing divergence between organised/unorganised

Home
building
segments
Light
Electricals
Paints
Market Organised
size
share
*Price
Organised
difference
market
(organised vs
size
unorganised)
Price difference explained by

Production
Labour
**Taxes
costs
payments
A&P/
others
(` bn)
(%)
(` bn)
(%)
379
67%
254
30%
9%
8%
6%
7%
314
65%
204
13%
1%
3%
1%
8%
Tiles
230
40%
84
25%
8%
6%
5%
6%
Pipes
160
65%
78
25%
12%
10%
0%
3%
Plyboards
160
30%
45
30%
7%
15%
4%
4%
35
60%
14
20%
4%
9%
3%
4%
Sanitaryware
Source: Ambit Capital research, management meetings, Note: * As a percentage of market prices of organised
players, ** Most important component of the price difference is excise duties
December 01, 2015
Page 9
Building Materials
Learnings from the decade gone by

The last decade exemplifies the large opportunity in building materials in India. Most
categories grew significantly higher than the nominal GDP growth (see the exhibit
below). Whilst the growth in housing units, higher urbanisation and rising
aspirational consumption (especially in mid-ticket categories) drove the growth for the
industry, the organised players grew much faster than the industry, due to
investments in brand, distribution and processes.
Most home building categories

grew significantly higher than
nominal GDP growth rate
As shown in the exhibit below, we gross the revenues of the major companies across
categories, which account for >50% of the overall revenues of the sector.
Exhibit 12: Home building materials exhibited strong growth in the last decade
Size of the industry (` mn)
Sectors
CAGR
Sector multiplier to nominal GDP
FY05
FY10
FY15
FY05-10
FY10-15
FY05-15
FY05-10
FY10-15
FY05-15
Paints
45,958
98,198
225,796
16%
18%
17%
1.1
1.1
1.1
Pipes
11,710
40,704
91,800
28%
18%
23%
1.9
1.2
1.5
Tiles
21,918
46,201
95,196
16%
16%
16%
1.1
1.1
1.1
Plyboards
5,348
20,735
47,640
31%
18%
24%
2.1
1.3
1.6
48,009
89,342
167,475
13%
13%
13%
0.9
0.9
0.9
Adhesives
6,518
17,415
40,231
22%
18%
20%
1.4
1.3
1.3
Sanitaryware
3,016
10,078
26,420
27%
21%
24%
1.8
1.5
1.6
142,477
322,674
694,559
18%
17%
17%
1.2
1.1
1.2
Light electricals
Total Size (` mn)
The key observations from the above analysis are:

#1: Multiplier to nominal GDP is high initially but recedes as organised
players market share increases
Note that in most of the underpenetrated and high unorganised share categories the
multiplier to the nominal GDP was much higher over FY05-10 than FY10-15, with
improving penetration in tier II/III/IV towns and market share gains from the smaller
players. The growth inches closer to the nominal GDP growth after the organised
share expands.
Exhibit 13: Rising market share of the organised brands
70%
Organised share
60%
50%
50%
40%
65%
60%
40%
35%
30%
35%
30%
20%
20%
10%
0%
Tile
Ply
FY10
Sanitaryware
Pipes
FY15
December 01, 2015
Page 10
Building Materials
#2: Leaders grow significantly higher than the industry/peers growth rate
Note that the leading players across categories have grown significantly higher than
the industry growth rate and also the growth of its peer-set. Note in the exhibits
below that the top-2 players have grown significantly higher than industry growth
consistently across categories.
What explains the outperformance of the top 2-3 players?
The building material companies started at broadly the same base but the
competition was left digging in their heels by the leaders, since: (a) leaders invested
in differentiated products and developed products across the price spectrum; for
example: Asian Paints launched the tractor emulsion to grow in the smaller markets;
(b) once they gained scale their ability to invest in branding, distribution (last mile
transportation) and intermediary education was much higher than peers, which
further helped them accelerate their market share; and (c) their ability to attract and
retain talent and build a process ecosystem was also materially higher than peers,
post scale expansion.
Exhibit 14: Asian Paints and
higher than peers
Berger grew significantly
Exhibit 15: so did Supreme, Astral and Ashirvad
Anpt+Brgr
Others*
Supreme + Astral + Ashirvad
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
1,800
1,600
1,400
1,200
1,000
800
600
400
200
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
1,600
1,400
1,200
1,000
800
600
400
200
-
In most categories, the top-2-3

players grew much faster than
peers
Others
Source: Company, Ambit Capital research. Note: Others includes three paints
companies
Source: Company, Ambit Capital research. Note: Others includes six other pipe
companies
Exhibit 16: Kajaria and Somany
Exhibit 17: and Century and Greenply
900
800
700
600
500
400
300
200
100
-
1,400
1,200
1,000
800
600
400
200
Kajaria+Somany
Others
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
Century+ Green
Source: Company, Ambit Capital research. Note: Others includes eight tile
companies
December 01, 2015
FY05
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
Others
Source: Company, Ambit Capital research. Note: Others includes six other ply
companies
Page 11
Building Materials
Shifting composition of the overall pie
The pie charts below show that: (a) the share of organised paints and tiles has
remained broadly similar in the overall organised home building material market
over the last decade; (b) the share of pipes, plyboards and sanitaryware has
increased, whilst the share of light electricals dropped materially.
Paints maintained its share as repainting cycles shortened and companies

launched cheaper priced products to increase penetration; another way to look at
it would be that the companies have taken price hikes and also added new
products such as chemicals;
Pipes share expanded led by launch of new products such as CPVC and
column pipes which increased the applications and the addressable market. Also
the shift from both unorganised to organised and GI to plastic pipes accelerated;
Tiles share remained flat despite strong growth of the top-2 players, since the
smaller players (based in Morbi) maintained their market share whilst established
players such as Nitco and RAK lost ground;
Plyboards share increase was mainly on account of market share gains from
the unorganised players, as excise duty for the larger players was cut sharply;
moreover, there was also an increase in the sales of aspirational product such as
laminates which is a high value product with relatively lesser share of
unorganised players; and
Sanitarywares share increased with rising penetration of sanitation in the

country in residential and non-residential buildings. However, lack of data for
companies other than Cera and HSIL limits a clear analysis.
Exhibit 18: Whilst paints retained its share

Adhesives,
5%
Plyboards,
4%
Exhibit 19: light electricals share dropped

Plyboards,
6%
Adhesives,
6%
Sanitaryware
, 2%
Sanitaryware
, 4%
Tiles, 15%
Paints, 32%
Pipes, 8%
Tiles, 14%
Light
Electricals,
34%
Pipes, 13%
December 01, 2015
Light
Electricals,
24%
FY15
FY05
Paints, 32%
Page 12
Building Materials
Its (not) all the same

We believe that each category has different characteristics and hence they are not
directly comparable. We ascertain the positioning of the categories based on Porters
Five Forces and find that Pipes is relatively the best category amongst the new age
home building brands. We find similar characteristics of rising new application areas
in laminates and adhesives, which could be the other two rising categories. Tiles
stands out as the second best category.
Pipes: Pipes is a large addressable market (`160bn), wherein the top-3 brands are
led by fanatic promoters, who are the innovators, whilst others are largely me-too
brands. Given with the sharp drop in the price of PVC resin and improved distribution
in smaller towns, the shift from GI pipes to plastic pipes has accelerated. Pipes is
evolving from a basic utility product to application-based water management
systems, as the housing pattern in India is changing, which leaves room for
innovators to strengthen their franchise. Pipe use in organised housing is becoming
more water/sewage management from transportation, increasing the per housing
unit installation intensity by 4-8x in many cases.
Pipes stands out as the best

category amongst the new-age
building material categories
Laminates/Veneer: This is a `70bn market, wherein the top-4 companies

(Greenlam, Merino, Royal Touche and Century Ply) account for 40% market share,
and the smaller players do not have the scale to innovate or improve distribution,
given a high number of SKUs. The key competitive advantage of a leading brand is
distribution and SKU management. Moreover, we see that players such as Greenlam
and Merino are expanding into newer products such wooden flooring, post form
laminates.
Tiles: This is a large category, wherein the top-5 brands have sales higher than
`10bn, but most others are much smaller in size and leading brands (Kajaria and
Somany) have much superior balance sheet strength and are adding scale through
partnering with smaller `1bn-2bn companies, alongside building strong management
teams. The application of tiles has increased from bathroom tiles to floor and wall
tiles and the addressable market is rising with growth in commercial spaces.
Plyboards: This is a `16bn market wherein the top-2 players are significantly ahead
of peers, in terms of scale and control on critical raw material inputs (face veneer).
The unorganised share is the maximum in ply which means that the market share
gain potential of the leaders is much higher than other category, if structural changes
such as GST materialise.
Sanitaryware: The risk of rising competitive intensity is the highest in this
category, since it is a relatively small market, wherein unorganised share is low and
several other manufacturers have entered both in the affordable and premium
category. As per HSILs management, volumes are more in the affordable or lowvalue categories and even the global brands have launched affordable categories
increasing competitive intensity; related category leaders (from tiles) are also
expanding into this category.
Exhibit 20: Positioning of building material categories on Porters Five Forces
Competitive
intensity
Barriers
to entry
Threat of
substitution
Bargaining power:
with Supplier
Bargaining power:
with Buyer
Moderate
High
Low
Moderate
High
Low
High
Moderate
High
Moderate
Tiles
Moderate
Moderate
Low
High
Moderate
Plyboard
Moderate
Low
High
Moderate
Low
High
Moderate
Low
Low
Low
Pipes (plumbing)
Laminates
Sanitaryware
December 01, 2015
Page 13
Building Materials
(I) Competitive intensity

We ascertain competitive intensity based on the size of opportunity, unorganised
share (beneficiary of structural changes such as GST), cross category competition
(entry of players from other categories) and threat of imports.
#1 - Size of the opportunity: In our view, a large category which is fragmented,
but the smaller players do not have any major competitive advantage leaves room for
the brand leaders/innovators to gain significant scale leadership. Tiles is the largest
industry in terms of market size, followed by pipes (including agriculture) and
plyboard. Laminates and sanitaryware are relatively small markets (`7bn and `4bn,
respectively). Sanitaryware is largely an organised sector and is facing increased
competition from global players, other building material categories such as tiles and
previously dormant players such as Parryware, which means that the size of the
opportunity of the incumbents is the least in sanitaryware.
#2 - Unorganised share: Unorganised market share has dropped across categories
in building materials, as the organised players gained scale and invested in branding
and logistics. The unorganised share remains high in categories such as plywood and
laminates, given the challenges faced by the unorganised players such as stretched
cash conversion cycles and regulatory resets such as GST; the market share shift in
favour of the organised manufacturers will accelerate in the coming years.
Sanitaryware is facing rising

competition from global players
and tile manufacturers
Exhibit 21: Tiles is the largest market followed by plyboards

25
80%
70%
20
15
60%
50%
40%
40%
40%
10
30%
20%
5
0
0%
Tiles
Ply
Pipes
Size (Rs bn)
Laminates
Sanitaryware
Unorganised share (RHS)
#3 - Cross category risk: The key reason for the cross category competition is
channel fungibility, as the companies already have the distribution network/ brand
and with little capital intensity they can establish a presence in other categories. We
believe that the cross category risk is the highest in Sanitaryware given the entry of
multiple tile manufacturers in the affordable segment and global players in the
premium segment. The key risk in tiles is the entry of larger categories such as paints
in using Morbi as the outsourcing hub. Whilst certain players such as HSIL and
Skipper are expanding in CPVC pipes, we do not see it as a major risk to growth of
the established players, as the existing players are (especially the leaders) significantly
ahead of brand and product portfolio and have an unmatched focus on innovation.
We do not see risks from other categories in ply/laminates, since the channel is not
fungible. Lastly, note that pipe manufacturers (such as Astral) are entering into
adhesives through acquisitions of smaller players; we find the adhesives and pipes
channel overlapping for ~40-50% at the retail level but in the institutional client base
the clients are common.
Cross category risk is low in pipes,

since setting up the distribution is a
challenge and leaders are way
ahead in innovation and product
launches
Exhibit 22: Channel fungibility mapping

Category
Tiles
Plyboards
Pipes
Laminates
Sanitaryware
Tiles
Ply
Pipes
Laminates
Sanitaryware/
Faucets
December 01, 2015
Page 14
Building Materials
#4 - Import threat: Chinese imports garnered 10% market share in Indian tiles
industry in the last two years; however, the recent implementation of the antidumping duty will significantly reduce competition. Import is not a major threat in
laminates, given the difficulty in SKU management and after-sales service. Imports in
Sanitaryware are restricted to the super-premium spectrum which drives less than 5%
of overall sales of Indian manufacturers. Imports in ply and pipes are limited given
their low value, high volume characteristics.
(II) Barriers to Entry

We believe that the key barriers to industry in building material categories are capital
intensity, strength of brand/distribution and capability of innovation and product
differentiation. The classic question that investors should ask whilst determining this is
- Can another Asian Paints be created if an aspirant has access to capital
and talent?
#1 - Branding and distribution: Most companies have spent aggressively in the
last decade to build their brands, and despite the slowdown in recent quarters, they
continue to invest in branding. Tiles and laminates have relatively higher customer
connect, given multiple designs/sizes and hence companies incur higher expenditure
in direct advertisement to the end-consumers. Intermediaries (carpenters, plumbers)
have a high influence on plyboard and pipes and hence the advertisement/publicity
expenditure in these categories is largely to influence the intermediaries through
mason meets, seminars, etc. However, few brands have undertaken direct
advertisement in these categories (Century and Green in Plyboards and Astral in
pipes) with reasonable success.
Brand recall is the highest in sanitaryware, followed by laminates. Brand plays an
important role in tiles in tier III/IV markets, but no so much in the urban markets. In
pipes and ply, branding is largely below the line, through influencing the
intermediary, although Astral has been able to build its CPVC brand through
television advertisements and celebrity brand ambassadors.
Distribution is a major barrier to entry in most building materials given their lowvalue high-volume traits, but is more so in products with multiple SKUs such as
laminates.
Brand recall is the highest in

sanitaryware followed by laminates
Exhibit 23: Most of the companies spent significant sums on branding

FY05-10
5%
NA
30%
-5%
64%
24%
9%
16%
19%
Astral
Century
Cera
Finolex
Green(ply+lam)
HSIL
Kajaria
Somany
Supreme
CAGR
FY10-15
52%
13%
9%
20%
14%
40%
24%
27%
47%
FY05-15
26%
NA
19%
7%
37%
32%
16%
22%
32%
FY15-10
2.1%
5.8%
9.3%
1.0%
3.9%
2.1%
3.8%
2.1%
0.7%
% of sales
FY10-15
1.9%
4.7%
5.0%
0.8%
3.4%
2.5%
2.9%
1.9%
2.1%
FY05-15
2.0%
5.0%
5.6%
0.9%
3.4%
2.4%
3.1%
2.0%
1.8%
Exhibit 24: Levels of influence of the channel spectrum
Sub-Segment
B2B
B2I
Cement
Paints
Electricals
Pipes
Tiles
Adhesives
Plyboards
Sanitaryware
B2C
December 01, 2015
Page 15
Building Materials
#2 - Innovation and product differentiation: In seemingly commoditised
businesses, a few companies have managed to differentiate themselves through
continuous innovation and product launches ahead of competition in the past.
In tiles, most organised manufacturers have a large design inventory and most
of them manufacture all sizes/formats, which leaves little room for an incumbent
to innovate. Whilst a manufacturer may have a temporary early mover advantage
in a specific category, in a relatively short period it is replicated by competition.
Plumbing pipes: Whilst basic CPVC/PVC pipes are largely commoditised and
manufactured by most companies, players such as Astral and Ashirvad
continuously launch premium and differentiated products through global
technological tie-ups, which are finding acceptance in India. This is a key
competitive advantage that is not easily replicable by competition; Supreme led
the way and now Astral and Ashirvad are doing better than Supreme.
Surface products (laminates) have significant scope of innovation through
changing formats (exterior grade laminates, doors etc) and new products such as
the new wooden flooring range launched by Greenlam.
Sanitaryware has little room for further innovation as most of the products are
standard and available across brands; designs have a limited shelf life with
competition catching up gradually.
Innovation capability is the highest

in pipes, since multiple globally
accepted products are yet to be
launched in India
Alternative materials are

increasingly replaced by easy to
install sustainable plastic solutions
Wavin Annual Report
In our view, pipes and laminates are the two categories wherein companies have
built their franchise through innovation and differentiated product launches.
#3 - Capital intensity and manufacturing complexity: Capital intensity has
historically been high in tiles, but it has reduced in recent years, owing to the JV
model manufacturers partnering with the Morbi-based players, which is a key risk
since larger players such as Asian Paints could enter this category. Capital intensity is
moderate in laminates but low in pipes and plyboards.
Exhibit 25: Capital intensity is the least in plyboards
Capital intensity is high in pipe and

tiles
Average GB turnover FY09-15

4.0
3.0
2.0
1.0
Plyboards
Laminates
Sanitaryware
Pipes
Tiles
(III) Threat of substitutes

But one thing about business is that if you're not willing to attack your own business
model, you can't expect other people not to attack it.... You have to be willing to disrupt
yourself because others are going to disrupt you.
- John Mackey, Whole Foods
The threat of a disruptive product launch is the highest in plyboards, wherein
products such as MDF, particle boards and wood particle composites can eat into the
market for plywood. These new-age products require training the intermediaries such
as carpenters (since it requires new machine tools), which will happen over a period
of time. The threat for plastic pipes is now only the new kind of polymers and systems
unlike the earlier sales of basic plastic pipes; CPVC pipes which are very successful in
India are getting replaced by PEX pipes in the US and these will enter India too. This
does not create risk for the incumbents such as Supreme and Astral, as they have
been handling multiple polymers for a long time.
December 01, 2015
Page 16
Building Materials
A media article (http://goo.gl/oX59X4) summarises the changing trends in the
plastics industry Theres no place like home to illustrate how plastic products have
pushed the envelope when it comes to changes in the building industry over the last
quarter century. Plastics have grown to dominate the residential markets for plumbing
fixtures. In the built world, plastics continue to displace copper, wood, aluminum and
other materials, including older polymers, sometimes as the cheaper alternative and
sometimes as the premium product.
Wood paint (Duco) and pre-laminated board are a substitute to laminate sheets. The
substitute for tiles is other flooring materials such as marbles, wooden flooring, slurry
and granite, which are natural deposits and are much more expensive than ply.
Moreover, as the installation technologies improve, the threat could become real
albeit marginal. Sanitaryware does not have a substitute.
(IV) Bargaining power with suppliers

Bargaining power of the companies suppliers in most categories is low-medium, as
the suppliers are global entities, much larger in scale than the incumbents. For
example, there are few manufacturers for CPVC resin and domestic pipe
manufacturers are largely price takers. Note that the creditor days of sanitaryware
are lower than most other categories, which suggests lower bargaining power.
Exhibit 26: Bargaining power with suppliers across categories
Category
Suppliers
Bargaining power with the supplier of the company

Large gas distributors supply gas to the tile companies based on contracts and hence
bargaining power of the companies is low. However, incumbents have a high bargaining
Tiles
Gas distributors, ceramic miners
power with the ceramic miners.
Sanitaryware
Gas distributors, ceramic miners
Similar to tiles, the bargaining power with the gas distributors is low
Bargaining power with PVC/CPVC plastic resin suppliers is low but a few companies such
as Astral have entered into partnerships with large global players, which positions them
Pipes
Plastic resin manufacturers
better.
Indian timber plantations, South East Asian Bargaining power of the companies with timber suppliers is low given the lobby of the
Plyboard
plantations of face timber/veneer and
timber manufacturers. Also, bargaining power with international timber traders (for face
chemicals manufacturer
veneer) is declining timber reserves and strict regulations globally
The laminate companies purchase paper and chemicals from multiple manufacturers which
Laminates
Paper and chemical manufacturers
are smaller in size than them, which increases their bargaining power
Exhibit 27: Creditor days of sanitaryware is the lowest, indicating weaker bargaining
power
Category
Creditor Days
FY12
FY13
FY14
FY15
Pipes
33
35
31
30
Sanitaryware
29
31
27
25
Tiles
48
45
39
44
Panel products
NA
43
44
43
(V) Bargaining power with buyers

Since most of the categories have fairly large unorganised competition, the
bargaining power of the manufactures is low which limits realisation growth to 3-4%
at best. Moreover, in categories wherein institutional sales are meaningful, pricing
power is further limited. Bargaining power in specific categories is higher where there
is scope for innovation and product differentiation, such as pipes. Designs and
established brands alongside unmatched reach can also establish pricing power/
bargaining power; the leading tiles/ply brands are able to exploit these in some
regions/ periods.
Bargaining power of buyers is the

least in pipes, which is evident
from low debtor days
Bargaining power with the channel is a function of brand and distribution

architecture. Note that debtor days of pipes are the least, indicating high bargaining
power with the channel (most players follow cash and carry or short payment cycles).
Bargaining power is medium in tiles but low in sanitaryware followed by wood pane
products (especially ply).
December 01, 2015
Page 17
Building Materials
Exhibit 28: Debtor days of sanitaryware is the highest
Category
Debtor Days
FY12
FY13
FY14
FY15
22
19
19
21
Sanitaryware
50
61
72
71
Tiles
40
40
41
41
Panel products
NA
45
56
58
Pipes
December 01, 2015
Page 18
Building Materials
Who is treading towards greatness?

In our view, the real-estate/housing recovery is uncertain, and hence timing the
recovery is futile. Instead, we urge investors to understand the strategies of
companies that are strengthening their franchise and gaining market share (in large
but fragmented categories) which will support sustainable earnings and profitability
growth. At the recent building material exhibition in Mumbai, we were impressed by
Kajaria and Somany in tiles, Astral and Ashirvad in pipes and Greenlam in panel
products, wherein the focus was on product distinction/ innovation, reach expansion
and importantly, building a strong mid-level management to strengthen their
organisations. Investors should focus on how these companies are trying to improve
upon capital employed turnover and cash conversion rather than margin expansion,
which could be difficult for most categories given input deflation and rising
competitive intensity/customer down-trading. Most of the categories have sufficient
room for an innovator and a leading brand with a well-built architecture to grow
sustainably not for the next 1-2 years but for the next decade.
Our discussion with industry experts with over 20 years of marketing experience of
building materials suggests that the key differentiating factors of a champion
franchise and a mid-rung franchise are: (a) ability to cater to all types of
customers which requires product range and pricing from premium to
affordable category, (b) distribution infrastructure to ensure fast last-mile
connectivity; (c) ability to launch disruptive and innovative products ahead of
competition; and (d) clear communication reaching/impacting the user/
intermediary.
The key greatness determinant of a

champion franchise vs a mid-rung
franchise is: (a) product range
across price, (b) distribution
architecture, (c) innovative
launches, and (d) communication
with the consumer and
intermediary
What determines greatness?

The greatness framework (see Exhibit 29 below) essentially hinges on using publicly
available historical data to assess which firms have, over a sustained period of time
(FY09-14), been able to relentlessly and consistently:
Invest capital;
Turn investment into sales;

Turn sales into profit;
Turn profit into balance sheet strength;
Turn all of that into free cash flow; and
Invest free cash flows again.
As per our greatness analysis, Astral appears the best on the greatness parameters
mentioned below, followed by Supreme, Greenply and Kajaria. Finolex Industries and
HSIL score lower than peers due to weak sales growth, flat earnings and no major
improvement in profitability ratios over a period of time.
Exhibit 29: The Greatness scores on the building materials companies
Company
Astral
Supreme
Investment
Sales
Improve
Pricing
discipline
EPS and CFO

increase
BS
Discipline
Ratios
improve
Total Score-using
Adj PAT
17%
17%
17%
8%
17%
17%
17%
8%
17%
92%
17%
17%
8%
83%
Greenply
8%
8%
17%
17%
8%
17%
75%
Kajaria
8%
17%
17%
8%
8%
17%
75%
17%
17%
0%
17%
0%
17%
67%
Somany
8%
17%
0%
17%
17%
8%
67%
Finolex Ind
0%
8%
17%
0%
17%
8%
50%
17%
8%
0%
0%
8%
0%
33%
Cera
HSIL
Source: Capitaline, Ambit Capital research. Note: We exclude Century Ply from this since the historical numbers include cement, which hampers comparability
December 01, 2015
Page 19
Building Materials
Exhibit 30: The greatness framework
a. Investment (gross
block)
b.Conversion
of
investment to sales
(asset turnover, sales)
c.Pricing discipline (PBIT

margin)
e.Cash
(CFO)
d.
Balance
sheet
discipline (D/E, cash
ratio)
generation
Exhibit 31: Factors used for quantifying greatness

1
Head
Investments
Conversion to sales
Pricing discipline
Balance sheet
discipline
Criteria
Above median gross block increase (FY12-14 over FY09-11)*

Above median gross block increase to standard deviation
Improvement in asset turnover (FY12-14 over FY09-11)*
Positive improvement in asset turnover adjusted for standard deviation
Above median sales increase (FY12-14 over FY09-11)*
Above median sales increase to standard deviation
Above median PBIT margin increase (FY12-14 over FY09-11)*
Above median PBIT margin increase to standard deviation
Below median debt-equity decline (FY12-14 over FY09-11)*

Below median debt-equity decline to standard deviation
Above median cash ratio increase (FY12-14 over FY09-11)*
Above median cash ratio increase to standard deviation
Cash generation and

PAT improvement
Above median CFO increase (FY12-14 over FY09-11)*

Above median CFO increase to standard deviation
Above median adj. PAT increase (FY12-14 over FY09-11)*
Above median adj. PAT increase to standard deviation
Return ratio
improvement
Improvement in RoE (FY12-14 over FY09-11)*

Positive improvement in RoE adjusted for standard deviation
Improvement in RoCE (FY12-14 over FY09-11)*
Positive improvement in RoCE adjusted for standard deviation
Source: Ambit Capital research. Note: * Rather than comparing one annual endpoint to another annual endpoint
(say, FY09 to FY14), we prefer to average the data out over FY09- 11 and compare that to the averaged data
from FY12-14. This gives a more consistent picture of performance (as opposed to simply comparing FY09 to
FY14).
December 01, 2015
For each of the parameters

discussed in Exhibit 29 above,
we look at both the absolute
improvement as well as the
consistency in improvement
over the last six years.
Further, we assign a score of
17% to each of the parameters
discussed above such that the
company that does well across
all the parameters receives a
score of 100% whilst the
company that does not fare well
across all the parameters
receives a score of 0%.
Thus, a score of 17% on
investments would mean that
the company does well on both
absolute investment in gross
block as well as the consistency
with which it has invested in its
gross block.
Page 20
Building Materials
Financial comparison across categories

(1) Revenue growth and EBITDA margin
Most of the building companies have grown in mid-teens or higher, barring Finolex
Industries. The companies that posted superlative growth (20% revenue CAGR over
FY11-15) are Astral, Somany, Kajaria and Cera.
EBITDA margin for most of the companies are in mid-teens, barring Somany
ceramics, since the company follows as asset-light model and a large proportion of its
sales is trading (low margin but high asset turns).
Astral, Kajaria, Somany and Cera

grew faster than peers
Exhibit 32: Revenue growth and margin comparison

Revenue growth
Company
EBITDA margin
FY12
FY13
FY14
FY15
CAGR
FY11-15
Pipes
15%
13%
18%
8%
14%
14%
16%
16%
13%
15%
Astral
42%
41%
31%
32%
37%
15%
14%
15%
12%
14%
Finolex
FY12
FY13
FY14
FY15
AVG
FY11-15
6%
2%
15%
0%
6%
12%
18%
18%
9%
14%
Supreme
18%
16%
17%
7%
15%
16%
16%
15%
16%
16%
Sanitaryware
33%
26%
12%
11%
20%
18%
15%
14%
16%
16%
HSIL
34%
20%
5%
7%
16%
17%
15%
14%
17%
16%
Cera
32%
52%
35%
24%
35%
18%
17%
15%
15%
16%
Tiles
31%
20%
18%
21%
22%
13%
13%
12%
13%
13%
Kajaria
38%
21%
16%
19%
23%
16%
16%
16%
17%
16%
Somany
22%
20%
20%
22%
21%
9%
8%
7%
7%
8%
Wooden Panel
25%
17%
11%
13%
16%
11%
12%
12%
14%
12%
Century
12%
12%
15%
15%
13%
11%
10%
12%
17%
13%
Green (ply+lam)
35%
20%
8%
12%
18%
11%
13%
12%
12%
12%
(2) Profitability analysis

Note in the table below that pre-tax RoCE of most of the companies has improved
over the last few years. Supreme, Astral, Cera and Century plyboards stand out with
20%+ average pre-tax RoCE over FY12-15
Exhibit 33: Profitability analysis
Company
EBIT Margin
CE turnover
FY12
FY13
FY14
Pipes
11.5%
12.4%
12.4%
9.9%
Astral
12.4%
12.0%
12.5%
8.1%
11.1%
12.3%
Supreme
13.8%
Sanitaryware
HSIL
Finolex
FY15 FY12-15
Pre-tax RoCE
FY12
FY13
FY14
FY15 FY12-15
FY12
FY13
FY14
FY15 FY12-15
11%
2.0
2.0
2.2
2.2
2.1
23%
25%
28%
22%
24%
9.4%
11%
2.5
2.7
2.7
5.6%
9%
1.4
1.3
1.6
2.2
2.5
31%
33%
34%
21%
29%
1.7
1.5
11%
15%
20%
10%
14%
13.4%
12.4% 12.5%
13%
2.8
2.8
2.8
2.7
2.8
38%
38%
34%
34%
36%
13.5%
11.8%
9.3% 11.4%
11%
1.1
12.9%
10.9%
7.9% 10.6%
10%
1.0
1.0
1.1
1.1
1.1
15%
12%
10%
13%
12%
0.9
0.9
0.9
0.9
13%
10%
7%
10%
10%
Cera
16.1%
15.1%
13.3% 13.1%
14%
1.9
2.3
2.6
2.4
2.3
31%
35%
35%
31%
32%
Tiles
10.3%
10.3%
9.7% 10.4%
10%
2.7
2.9
2.9
2.9
2.8
27%
29%
28%
30%
29%
Kajaria
12.8%
12.9%
13.1% 13.7%
13%
2.5
2.6
2.5
2.5
2.5
31%
33%
33%
34%
33%
Somany
6.5%
6.4%
5.7%
6%
3.1
3.5
3.6
3.7
3.4
20%
22%
17%
21%
20%
Wooden Panel
9.6%
9.9% 10.0% 11.5%
10%
2.0
1.9
1.7
1.8
1.9
20%
19%
17%
21%
19%
Century
12.6%
8.1% 10.5% 14.4%
Green
7.8% 10.9%
9.8%
9.7%
(ply+lam)
12%
2.5
1.9
1.7
1.9
2.0
31%
16%
18%
27%
23%
10%
1.7
1.8
1.8
1.8
1.8
13%
20%
17%
17%
17%
December 01, 2015
4.9%
Page 21
Building Materials
(III) Cash conversion cycle
The cash conversion cycle of sanitaryware is the highest amongst building material
companies, followed by wood panel products. HSILs and Centurys cash conversion is
significantly higher than their peers Cera and Greenply. The cash conversion cycle of Cash conversion cycle is the
pipes and tiles is largely comparable (except Finolex Industries is higher due to higher highest in sanitaryware followed by
ply
inventory days of its PVC resin business).
Exhibit 34: Cash conversion cycle
Category
Creditor Days
Debtor Days
Inventory Days
Cash conversion cycle
FY12
FY13
FY14
FY15
FY12
FY13
FY14
FY15
FY12
FY13
FY14
FY15
FY12
FY13
FY14
FY15
33
35
31
30
22
19
19
21
52
53
56
55
40
37
43
47
Astral
89
75
60
57
56
46
42
48
67
61
58
59
34
32
41
49
Finolex
32
26
22
23
15
62
68
72
78
45
49
56
62
Pipes
Supreme
24
30
29
25
20
20
20
20
41
42
44
41
38
32
36
37
Sanitaryware
24
27
27
25
50
61
72
71
68
72
76
75
94
107
120
121
HSIL
26
29
31
27
51
65
79
77
66
74
83
84
91
110
132
134
Cera
18
17
18
19
47
47
52
59
79
68
54
51
108
98
88
91
Tiles
46
43
39
38
40
40
41
41
45
43
37
35
39
41
39
38
Kajaria
48
40
32
33
30
30
31
31
47
47
41
41
29
37
40
39
Somany
43
47
49
45
56
54
56
56
41
38
30
27
54
45
38
37
Wooden Panel
22
31
41
41
31
45
56
58
36
50
67
67
45
64
82
84
Century
NA
26
22
16
NA
56
53
56
NA
71
72
75
NA
100
103
115
Green (ply+lam)
36
41
53
56
51
55
59
59
58
58
64
62
72
71
70
65
(4) Accounting score

The table below ranks the various building material companies on accounting score
based on Ambits forensic screener. Supreme ranks the best due to high cash
conversion, high FCF generation and no instances of cash pilferage. HSIL ranks the
last due to its relatively poor cash conversion, high outstanding debtors, low FCF and
cash yield and volatile other income.
Exhibit 35: Supreme ranks the best on our accounting checks
Accounting checks
Company name
Cont CWIP:
CFO
Liab-% Gross
EBITDA
of NW Block
Supreme
Industries
Somany Ceramics
CAGR in
PFD-% of
Change
Non-oper
auditor's
Cash
Debtors
in depr
exps-% of
remn/CAGR in
yield more than
rate
total revs
consol revs
six months
91%
3%
0.01
25
(0.43)
2%
4.4%
13%
Cum. FCF/ Vol. in Nonmedian

operating
revs
income
Change in
reserves
(ex-Secprem)/(PAT
ex-dividend)
0.20
15
1.00
97%
13%
0.01
15
(0.17)
2%
4.9%
23%
0.07
12
1.00
Astral Poly Technik
64%
1%
0.05
34
(0.59)
2%
7.5%
41%
(0.02)
38
1.00
Finolex Industries
84%
36%
0.03
28
0.04
1%
8.2%
12%
0.41
19
1.00
Cera Sanitaryware
85%
4%
0.02
12
(0.50)
4%
5.5%
0%
0.16
27
1.00
Kajaria Ceramics
Greenply
Industries
HSIL
85%
5%
0.00
41
(0.01)
2%
1.5%
3%
0.04
1.00
53%
61%
0.02
43
0.59
3% 15.0%
1%
(0.15)
1.00
71%
9%
0.03
49
(0.06)
58%
(0.45)
32
1.00
3%
1.8%
Source: AceEquity, Ambit Capital research
December 01, 2015
Page 22
Building Materials
Exhibit 36: Intermediary education and new launches (over last three years)
Intermediary education initiatives
Product launches
Pipes
Detailed technical manuals and

Astral
In the PVC segment: Astral Wire Guard and Astral AquaSafe

In the CPVC segment: Astral BlazeMaster Fire Sprinkler systems
Special products: FirstPlast channel drains used for indoor and outdoor
training videos on YouTube

Plumber awareness and training
seminars to educate plumbers on the
company's product and train them for
installation
bathroom fittings
Adhesives and Sealants: Resinova and Seal IT (acquisitions)

Introduced Silent Pipe System, Bath fittings, Solvents, several varieties of
Set up a Knowledge Centre in
Supreme
Gadegaon to train the piping fraternity

i.e. plumbers, plumbing contractors,
architects, engineers, consultants etc
Structured a training programme for
the plumbers for installation of plumbing
products into various segments
Tied-up with International Association of
Plumbing and Mechanical Officials
(IAPMO) and training imparted at the
knowledge centre is in line with
Uniform Plumbing Code (UPC).
Ashirvad
Factory visits in collaboration with the
Builders Association of India
Pipe fittings, Premium range of furniture, overhead storage tanks and

cost effective solutions in the Protective Packaging Division, CPVC Fire
Sprinkler system
Composite LPG cylinder launched
Insulation vertical: introduced higher ID chiller pipe insulation
material
4 layers insulated water tanks in 500ltr and 1000ltr capacity
In Q3FY16, plans to launch chrome plated bathroom fittings, along
with various unplated varieties
Plans to add more than 100 varieties of Plastics Pipe Fittings for various
applications
In Cross Laminated film products: launching six colour printed film on
9 feet width Roll (around Jan/Feb 2016)
Launching new varieties of Special type of Pallets and Crates along
with installation of a 3000 ton Injection Moulding Machine during
Q4FY16
Introduced Pan Connectors, Grease and solid interceptors, Air
Admittance Valves, Fire Collars, Chambers and Manholes
In early 2015, a full range of underground drainage pipes and
fittings was introduced with the support of REDI (Italy)
Introduced two acoustic SWR product lines, developed in collaboration
with the product development teams in France
Cooperation with Aliaxis Latin America has led to the launch of a range
of concealed valves in the hot & cold water supply segment
Collaborated with specialists from FIP in Italy to develop a full range of
ball and butterfly valves in uPVC as well as cPVC.
Tiles
Exhaustive training sessions for

dealers and masons
Kajaria
Routine training, lab and factory visits,

along with demonstrations of key
manufacturing processes
Hold frequent mason meets
Somany Tile Master, a 3-day program

Somany
to train semi-skilled masons
Two schools of training, one at each,

the Kassar and the Kadi plants
Introduced The Beast, 1200x2400mm tiles

Launched the new digital 40x80cm tiles
Introduced The Slim, light weight-8mm slim tiles
New product line, Kerovit faucets, providing complete bathroom
solution
Launched Grande, 800x1200 mm Polished Vitrified Tiles
Introduced Woods, decorative wooden-texture floor tiling
Introduced digital printers to manufacture digital tiles
Introduced large format Glazed Vitrified Tiles for the first time in
India (sizes of 800x800 mm and 600x1200
mm) in FY13
Launched Glosstra, digital wall tiles
Launched friction resistant tiles under the brand name Slip Shield', a
patent for which has already been applied for
Introduced large format Glazed Vitrified Tiles of 800x1200 size in FY14
Launched of 800x1200 mm Polished Vitrified Tiles with ultra-charge
Nationwide roadshow (covering 50

RAK Ceramics
cities), providing a platform to meet

prospective dealers, distributors,
architects, engineers, developers
and the end consumers in Tier II and Tier

III cities
December 01, 2015
Nanopix Crystal Lapato Slabs, pearl finish digital tiles

RAK Styler, vitrified wall tile hilighter concepts
RockSurface, toughest 16mm thickness tiles
Introducing RAK Slim, tiles with only 4.8mm thickness
Page 23
Building Materials
Intermediary education initiatives
Product launches
Sanitaryware
Set up the Roca learning center at its
Parryware
HSIL
Cera
Bhiwadi plant to enhance the skill set

amongst the plumbers and the trade
The training program is designed to ensure
that the workman and the plumber fraternity
have the ability to deliver a complete
bathroom installation and maintenance
service
Invested in training designers and
plumbers in partnership with the Indian
Plumbing Skill Council (IPSC) and NAAC
Committed to improve the skills of plumbing
contractors and plumbers with installation
guide of high-end products such as LED
showers, wellness products and bath tubs
Plumber education program: Every
month, several plumber meets are organised
in different towns, where small groups of
plumbers are given hands-on training by
Ceras technical experts
Brand re-launch in July 2015, with a product range comprise of

Sanitaryware, Bathroom Vanity/Furniture, Faucets, Fittings, Kitchen
Sinks, Electronic Toilets, Plastic Cisterns, Plastic seat covers and
Wellness Products
The new refreshed brand identity offers high-quality and
aesthetically appealing bathroom solutions for the mass
segment
New brand launch - Amore, 'bathroom as a spa' theme

Launched Hindware tiles, HD digital
Enhaced portfolio of Hindware Kitchen Appliances
Introducing premium range of faucets
Launched new contemporary faucet series - Gayle

Forayed into the stylish wall and floor tile arena
Launched a new one piece EWC with twin innovation - rimless
with nano glaze
Plywood
Knowledge sharing sessions with dealers

Attempts to make MDF a part of All India
Greenply
Centre for Technical Education (AICTE)

curriculum for the benefit of interior
designers and architects
Green Edge: Launched sales training
workshops for ASM to ensure uniformity of
selling skills and enhance effectiveness
Green Mantra: Organisational and product
orientation programmes at the
manufacturing units
Erudition: A knowledge transmission
platform to act as a linking point amid
knowledge seekers and transmitters
KAT Boot Camp: Knowledge sharing on
product refreshes, along with outbound
experience with holistic management and
learning
Entry into laminated flooring solutions under the brand Green

Floormax
Diversification into the economical MDF segment by launching

Ecolite and Ultralite
Plans to foray into UV Coated boards

Launched a wide range of pre-laminated MDF (easier to install
and time saving)
Introduced innovative high-end veneer engineered flooring
Starke: new generation green and durable engineered

material; can replace conventional building material
Zykron: Zykron Fibre Cement Boards and Sidings are highly durable
Centuryply
Regular carpenter meets and training

programmes to educate the intermediary
as they are made from Fibre Cement Composite; they are easy to
install and have a great finish
Novatech: a termite, borer and weather resistant product
Introduced Wood and Plastic Composite (WPC), a new product in
the plywood segment
December 01, 2015
Page 24
Building Materials
Valuations Evolving, hence perceived

expensive
The two exhibits below indicate the relative positioning of several home building
categories. Whilst ascertaining the valuation multiples for the building material
categories/companies, we believe it is prudent to ascertain the size of the opportunity
and the ability to increase the capital employed turnover alongside
maintaining/improving margins (function of scalability and pricing power). Whilst the
multiples of most companies have re-rated in the last 1-2 years, the sustainability of
the rich multiples hinges on the aforementioned parameters. Considering that we
find pipes to be the best category in these new age home building material
and the high score on greatness framework and accounting screens, we
believe Astral and Supreme should be trading at relatively the highest
multiples.
Tiles: The opportunity is large and the multiples of the leaders can sustain as they
further enhance scale at low capital intensity but the inherent risk here is the entry of
another major player such as Asian Paints and limited chances for further
improvement in capital employed turnover.
We find pipes the best category

which means that multiples should
be higher vs other categories
Pipes: Multiples have room for further expansion from hereon unless innovative
launches increase and the size of the addressable market or penetration of plastic
pipes increases materially. Astral has a much higher scope to grow at a faster pace
given the entry into a product category (adhesives) which also has similar
characteristics of rising applications, high innovation potential, strong intermediary
dependence and high cash conversion. Average multiple for the sector is lower than
other sectors given that Supremes other than pipes business deserve lower multiples
and investors are underestimating the competitive advantages of this category given
lesser relevance for final customer.
Ply and lam: Multiples of plyboards and laminates have room for further expansion,
given that the leaders face little credible competition and has a large unorganized
market is susceptible to regulatory changes and liquidity issues
Exhibit 37: Most categories have a long way to go
Exhibit 38: however, comparable profitability to several

other sectors would drive a rerating as scale increases
60%
3.0
Paints
Paints
40%
CE Turnover
Share in IHBM*
50%
Electricals
30%
20%
Tiles
10%
Plyboards
0%
20%
40%
2.5
60%
80%
100%
2.0
1.5
Sanitaryw
are
Tiles
1.0
5.0%
Organised share
Pipes
15.0%
25.0%
35.0%
EBIT margin
Source: Company, Ambit Capital research. Note: Size of the bubbles denotes
sales CAGR for five years. *IHBM - internal home building materials
December 01, 2015
Adhesives
Electricals
Pipes Adhesives
Plyboard
Source: Company, Ambit Capital research. Note: Size of the bubbles denotes
RoE
Page 25
Building Materials
Scale increase + RoE elevation = Sustainable multiple

expansion
History suggests that multiples of a home building category expand as scale increases
alongside RoE improvement. Hence, although a few categories look expensive based
on their historical multiples, a further re-rating is possible as categories gain in scale.
As explained above, the organised tile industry has ample room to grow, as industry
growth rates pick up alongside likelihood of market share improvement.
Exhibit 39: With rising scale, the P/E re-rated for paints
`bn/%
Exhibit 40: tile majors

`bn/%
Paints (Asian and Berger)
200
38.6
38
34
30
26
22
18
14
10
160
120
80
21.0
40
16.1
14.6
FY00
FY05
Revenue (LHS)
FY10
RoCE (LHS)
Tiles (Kajaria and

Somany)
40
30
25
25
20
20
15
15
10
10
10.0
9.0
6.7
FY15
30
27.0
35
FY00
FY05
FY10
Revenue (LHS)
RoCE (LHS)
One-yr fwd P/E
5
FY15
One-yr fwd P/E
Source: Company, Ambit Capital research, Bloomberg
Exhibit 41: light electricals
Exhibit 42: ..and also plastic pipe companies; these seems

to be trading at the lowest amongst all
`bn/%
120
`bn/%
Electricals (Havells and
Bajaj Electricals)
100
26
80
30
55
25
45
Pipes (Supreme and Astral)
22.0
35
60
18
20
14
20
FY05
Revenue (LHS)
FY10
RoCE (LHS)
13
15
15
10
9.4
FY05
FY15
Revenue (LHS)
One-yr fwd P/E
December 01, 2015
15.3
25
18
40
23
8
FY10
RoCE (LHS)
FY14
One-yr fwd P/E
Page 26
Building Materials
Relative Valuation
Exhibit 43: Home Building materials - Relative valuation sheet
Mcap
Companies
EV/EBITDA (x)
Rating US$ mn FY16E
PAINTS
FY17E
P/E (x)
FY16E
P/B (x)
FY17E
FY16E
RoE (x)
FY17E
FY16E
CAGR (FY15-17E)
FY17E
Sales
EBITDA
EPS
14,360
26.5
22.1
43.6
35.5
12.2
10.2
29.7
30.5
13.9
21.1
27.5
Asian Paints
SELL
12,032
28.2
23.8
44.5
37.0
14.1
11.8
33.9
34.0
13.8
21.0
24.1
Berger Paints
SELL
2,329
24.7
20.4
42.8
34.0
10.3
8.6
25.6
26.9
14.0
21.2
30.8
3,790
14.1
11.5
25.0
19.2
4.9
4.3
19.8
22.8
8.0
17.5
21.7
31.4
ELECTRICALS
Havells India
BUY
2,779
19.9
16.5
35.2
27.6
8.9
7.6
26.5
29.2
6.3
19.3
Bajaj Electricals
SELL
350
10.1
7.6
20.0
13.8
2.9
2.5
14.8
19.3
7.4
15.7
NA
Finolex Cables
BUY
614
12.2
10.5
19.7
16.3
3.0
2.6
18.2
19.8
10.5
17.5
12.0
V-Guard
BUY
420
17.3
14.1
28.7
22.3
6.1
5.1
22.4
24.1
13.9
21.8
32.4
4,280
26.0
23.1
40.7
33.9
9.2
8.0
26.4
24.9
6.7
6.1
9.5
4,280
26.0
23.1
40.7
33.9
9.2
8.0
26.4
24.9
6.7
6.1
9.5
1,955
17.1
12.7
31.7
22.6
6.3
5.3
22.0
25.7
21.5
28.6
35.8
ADHESIVES
Pidilite Industries
SELL
PIPES
Astral Poly
NR
752
20.5
15.5
37.9
26.5
6.8
5.7
18.9
22.7
27.3
40.1
54.4
Supreme Industries
BUY
1,203
13.7
9.9
25.6
18.6
5.8
4.9
25.1
28.7
15.8
17.2
17.3
Berry plastics (USA)
NR
4,382
6.8
6.6
16.2
14.2
(143.2)
23.4
NA
90.9
18.3
25.6
89.2
Mexchem (Mexico)
NR
5,375
7.7
6.6
329.2
254.3
28.2
26.4
8.3
9.9
9.9
21.1
74.9
China Lesso (China)
NR
2,496
5.1
4.4
8.8
7.4
2.0
1.7
20.4
21.2
23.7
27.6
29.8
Polypipe (UK)
NR
1,014
8.9
8.2
1,409.4
1,239.0
250.6
225.5
17.3
17.6
19.2
37.6
98.1
Wienerberger AG
NR
2,071
6.7
6.1
25.1
17.5
1.1
1.0
4.5
6.3
6.9
111.1
NA
924
12.6
10.2
19.9
15.5
NA
NA
29.9
29.0
11.6
15.2
18.3
PLYBOARDS
Century Plyboard
BUY
597
14.9
11.8
22.4
17.0
7.6
5.8
37.4
35.9
15.4
21.1
24.8
Green Ply
NR
327
10.3
8.6
17.4
13.9
3.6
3.0
22.4
22.2
7.9
9.4
11.8
TILES AND SANITARY WARE
26,419
10.4
9.1
17.8
14.9
3.6
3.1
19.5
20.3
11.2
15.4
18.1
Kajaria Ceramics
NR
1,101
17.0
14.1
32.2
25.9
7.9
6.3
26.7
26.8
16.4
23.1
24.8
Somany Ceramics
NR
202
11.4
9.0
21.8
16.3
4.3
3.6
21.3
23.7
17.5
23.2
33.1
RAK (UAE)
NR
759
8.0
7.6
9.1
8.6
1.0
0.9
10.3
10.6
8.0
15.8
8.2
Mohawk (USA)
NR
14,215
10.7
9.9
16.2
14.7
2.8
2.4
16.0
14.8
10.5
24.8
33.7
Saudi Ceramic (UAE)
NR
717
7.1
6.9
7.9
7.9
1.4
1.3
17.8
16.7
8.1
6.7
4.8
Dynasty (Thailand)
NR
712
12.3
11.2
17.4
15.1
8.5
8.1
49.0
52.5
5.3
9.2
17.1
Al-Anwar (UAE)
NR
251
7.5
6.9
10.9
10.9
2.2
2.0
19.7
19.8
11.8
8.8
(5.1)
Nichiha (Japan)
NR
SANITARY WARE
512
5.4
5.1
11.1
10.0
1.1
1.0
9.3
9.8
4.2
10.9
12.9
7,269
10.3
8.7
20.8
17.1
3.1
2.7
14.6
15.6
10.5
14.0
20.9
Cera Sanitaryware
NR
365
16.8
13.2
30.0
23.3
5.7
4.7
20.6
22.1
20.7
22.1
22.3
HSIL
Villeroy and Boch
(Germany)
Toto (Japan)
NR
316
8.2
7.0
18.3
14.1
1.6
1.5
9.3
11.0
10.5
10.9
26.0
NR
399
5.2
4.8
12.4
11.0
2.2
2.0
17.1
17.4
4.9
8.6
14.8
NR
6,189
11.1
9.9
22.4
20.0
2.8
2.5
11.5
11.7
6.0
14.5
20.5
Source: Bloomberg, Company, Ambit Capital research
Exhibit 44: Century Ply and Supreme Industries appear attractive relative to most companies
40
Attractive
Century
RoE FY17 (%)
35
Asian
Kajaria
30
Havells
Supreme
Berger
25
Green
20
Somany
Vguard
Cera
Pidilite
Akzo
Bajaj
15
Expensive
HSIL
10
10
15
Astral
20
25
FY17 PE
30
35
40
Source: Bloomberg, Company, Ambit Capital research. Note: Size of the bubble denotes EPS CAGR over FY15-17
December 01, 2015
Page 27
Building Materials
Pipes
An evolving market, large enough for fanatics
The plastic pipes market over the next decade will evolve from pipes-cumfittings to piping systems to solutions for building services for diverse
applications, which are currently not even apparent today; high-quality
players in the developed world are continuously innovating products and
applications are evolving. Against this backdrop, we believe there is enough
opportunity for the three quality and leading players (Supreme, Astral and
Ashirvad) that have built their organisations/brand on innovation, quality
and connect with users/ intermediaries. Lack of entry barriers, fragmentation
and high competitive intensity should not worry long-term investors, as
Supremes and Astrals competitive advantages are built around distinct
products and we see little disruption risks to pipes albeit chemical
compounds may change. We expect Supreme to evolve into an engineered
plastics company (such as Berry Plastic and George Fischer) and Astral into a
home building brand. We turn BUYers on Supreme and believe that the large
cylinder opportunity will supplement mid-teen growth for extant portfolio.
Rising replacement demand drove volume growth in 2Q
Plastic pipes sales have remained weak for the last 4-5 quarters; however, our recent
channel checks suggest that replacement demand (shift from GI pipes to plastic
pipes), led by a sharp price reduction of PVC pipes, has increased, which has partially
offset the demand adversity from new construction. Moreover, in larger cities, some
real estate developers have fast-tracked completion of under-construction projects to
improve their cash flows, and hence, pipe demand has grown reasonably well.
As a result, Supreme and Astral posted >20% volume growth in 2QFY16 as against
10% in 1QFY16. EBIT margins dropped in recent quarters due to volatility in raw
material (PVC and CPVC resin) prices, leading to inventory write-downs.
Exhibit 45: Volume growth improved in 2QFY16, led by
replacement demand
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
2QFY16
Source: Company, Ambit Capital research; above includes Astral and

Supreme
2QFY16
Volume growth (RHS)
1QFY16
0%
4QFY15
1QFY16
4QFY15
3QFY15
2QFY15
4%
3QFY15
Revenue growth
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
0.0%
8%
2QFY15
5.0%
12%
1QFY15
10.0%
4QFY14
15.0%
16%
3QFY14
20.0%
20%
2QFY14
25.0%
1QFY14
30.0%
Exhibit 46: but EBIT margin dropped due to volatility in

RM prices
Source: Company, Ambit Capital research; above includes Astral and

Supreme
Plastic pipesA fast-growing `225bn market with 40-50% contribution from

agriculture
Over the last decade, organised plastic pipes players have expanded at a CAGR of
23%, one of the fastest amongst the home building materials industry. We believe
volume growth was marginally lower than the revenue growth, as rising input prices,
evolving applications (especially plumbing) and rising share of organised players
would have helped realisation increase. Amid this fast growth, there has been high
fragmentation with hundreds of players (unbranded /non-descript brands)
manufacturing PVC/CPVC pipes; Supremes management indicated that the market
size is `225bn (including agriculture pipes) and our analysis suggest around 50% of
the market is with well-known brands. Further, our quick analysis suggests that
December 01, 2015
Page 28
Building Materials
around 40% of the market is agriculture (rigid PVC pipes), wherein there is a higher
instance of unorganised brands and little product distinction. Market participants
indicate more than 200 players manufacturing PVC pipes and around 80-100 players
manufacturing CPVC pipes.
Plumbing pipes industryRelatively less fragmented,
entrants but a very fast growing and an evolving market
witnessing
new
We believe within the plastic pipes industry, the plumbing industry is growing faster
than the overall market (key players grew at ~28% over FY05-15) given the rising
use of PVC/CPVC pipes in institutional real estate construction, renovation of the
older houses and adoption for new applications wherein erstwhile
materials/unorganised players were non-existent. Builders and consultants indicate
that the plumbing systems are no more just water/sewage transportation and are
becoming more water/sewage management systems and the intensity of pipe
usage is presently 4-8X the intensity earlier; adoption of better sanitation practices in
smaller cities further increase usage of plastic pipes in smaller cities.
Whilst new entrants like Precision, HSIL and Skipper are entering the PVC/CPVC pipes
manufacturing, note that these players have a long way to go before they can create
an impact in the market given the small product portfolio. The impact will be lesser in
the future also, as leading Indian players portfolios and readings of global pipe
majors commentaries suggest that the plastic pipes product portfolio/use is changing.
For example, where CPVC is a very fast growing product in India, this product has
stagnated in USA and already cross-linked polyethylene (PEX) pipe has replaced
CPVC pipes and now account for two-third of the overall hot-cold water applications;
further, we hear of new applications such as fire protection, HVAC, compressed air
and process fluid handling evolving, which will drive the opportunity size/quality.
Moreover, apart from the residential building plumbing applications, we believe that
the leading Indian plastic pipes companies will see opportunity emerging from
hospitals, industrial application and even government infrastructure (GRE/GRP pipes
to replace iron/concrete pipes).
Cross-linked polyethylene (PEX)

pipe has replaced CPVC pipes and
now account for two-third of the
overall hot-cold water applications
The three leaders are fanaticsSupreme, Ashirvad and Astral; now

expanding portfolios and manufacturing architecture
One of the senior employees of the leading pipes manufacturers remarked that the
three leading companies are run by hardworking, focused and fanatic promoters
who are deeply involved in quality control, product innovation and intermediary
programmes (unlike many other smaller/larger players). Where clearly Supreme set
the stage for the industry with widening product portfolio (especially for
fittings/systems), Astral and Ashirvad followed with distinct pipes products, CPVC and
column pipes, respectively; later Supreme followed the two in these respective
products. During our recent visit to their stalls at an exhibition, we noticed Ashirvad
because of its parentage (Aliaxis) having a materially distinct portfolio, followed by
Astral and Ashirvad. No doubt Supreme claims that it has a 6500+ product portfolio
and 20 systems. Intermediaries and consultants highlight exciting new launches by
Astral and Ashirvad; we find Ashirvad to be gaining over the two on innovation and
has not only launched products (see exhibit) from Aliaxis global portfolio but also
opened Ashirvad Technology and Experience Centre in Bengaluru.
Alongside portfolio expansion, we also notice that the three players are expanding
manufacturing footprint by adding more manufacturing locations; this will not only
increase competition within these three but also in high likelihood push out a lot of
smaller and unorganised players. Supreme plans to increase pipe manufacturing
from 5 locations to 7-8 locations by adding plants in North India (Rajasthan), North
East India (Assam) and gradually South India. Likewise, Astral is also planning to
increase manufacturing locations from present three by setting up a plant in
Rajasthan and then gradually East India. Similarly, Ashirvad is expanding its
manufacturing footprint to North India.
December 01, 2015
Page 29
Building Materials
Exhibit 47: Astral and Ashirvad have grown revenues
faster than Supreme in plastic pipes
Company
FY10
FY11
FY12
FY13
FY14
CAGR
FY10-14
Exhibit 48: RoCE of Supreme, Astral and Ashirvad is broadly

similar
35%
30%
25%
Supreme
20.0% 21.8% 24.7% 28.6% 21.8%
23.4%
20%
15%
10%
Astral
50.2% 41.6% 41.0% 41.7% 30.7%
40.9%
5%
0%
FY10
Ashirvad
63.5% 46.0% 22.7% 51.5% 25.5%
FY11
FY12
FY13
FY14
41.0%
Supreme
Source: Company, Ambit Capital research, AceEquity
Astral
Ashirvad
Source: Company, AceEquity, Ambit Capital research
However leaders are taking different directions!

Whilst we note that these three leading pipe companies are further fortifying their
plastic piping business, these companies are also taking different long-term
directions. Where we see Supreme becoming an engineering plastic company (capital
allocation to cross laminated films, composite cylinders), we see Astral emerging into
a larger home building (chemical based) material brand; its foray into
construction/industrial adhesives and construction chemicals through Resinova and
Seal It acquisitions gives it an opportunity to participate in another opportunity which
is akin to pipesincreasing application, increasing adoption in construction practices.
Ashirvad on the other hand, given its global parentage, will likely remain in piping
and related business (pumps) but could expand into industrial and infrastructure
applications.
Exhibit 49: The top-3 companies taking divergent paths
FY13
Astral
(becoming a
multi-product
home building
brand)
Supreme
(growing into
newer polymers,
raw materials for
servicing multiindustry clients;
an emerging
engineered
plastics
company)
Ashirvad
(as part of the
Aliaxis, Ashirvad
will become a
pipes supplier to
multiple
industries and
possibly start
selling treatment
solutions and
pumps)
FY14
In the PVC segment:
Astral column pipes

In the CPVC segment:
Astral Bendable
Special products:
FirstPlast channel drains

used for indoor and
outdoor bathroom fittings
Introduced a new range

of insulation products,
including the NBR PVC
hose
In Cross Laminated film
products: the 35 GSM
was launched
FY15/16
In the PVC segment: Astral Wire

Guard and Astral AquaSafe
In the CPVC segment: Astral
BlazeMaster Fire Sprinkler systems
Special products: FirstPlast channel
drains used for indoor and outdoor
bathroom fittings
Composite LPG cylinder launched

Insulation vertical: introduced higher
ID chiller pipe insulation material
4 layers insulated water tanks in 500
ltr and 1000 ltr capacity
Adhesives and Sealants: Resinova and Seal IT

(acquisitions); entry into construction chemicals
In FY15, Supreme introduced Silent Pipe System, Bath

fittings, Solvents, several varieties of Pipe fittings,
Premium range of furniture, overhead storage tanks and
cost effective solutions in the Protective Packaging
Division, CPVC Fire Sprinkler system
In Q3FY16, the company will be launching chrome plated
bathroom fittings, along with various un-plated varieties
Plans to add more than 100 varieties of Plastics Pipe
Fittings for various applications
In Cross Laminated film products: launching six colour
printed film on 9 feet width Roll (around Jan/Feb 2016)
Launching new varieties of Special type of Pallets and
Crates along with installation of a 3000 ton Injection
Moulding Machine during Q4FY16.
Introduced Pan Connectors, Grease and solid
interceptors, Air Admittance Valves, Fire Collars,
Chambers and Manholes
Introduced two acoustic SWR product lines, developed in
collaboration with the product development teams in
France
Cooperation with Aliaxis Latin America has led to the
launch of a range of concealed valves in the hot & cold
water supply segment.
Ashirvad collaborated with specialists from FIP in Italy to
develop a full range of ball and butterfly valves in uPVC
as well as cPVC.
Ashirvad developed a co-

moulded ring/seal for
soil, waste and rain
outlet systems.
In early 2015, a full range of

underground drainage pipes and
fittings was introduced with the
support of REDI (Italy)
December 01, 2015
Page 30
Building Materials
Mapping the pipe companies on the IBAS framework
We have used the IBAS framework to rank the organised plastic piping companies.
The IBAS framework is based on four key parameters: (a) innovation, (b) brand, (c)
architecture, and (d) strategic assets. Supreme is the highest-ranked company
amongst organised players, owing to superior architecture, strong brand recall and
diversified product portfolio.
Astral and Supreme - Leaders in innovation: Astral was the first company to
introduce CPVC pipes in India and they have recently introduced new products
such as composite column pipes, blazemaster and bendable pipes. Supreme
Industries has more than 5,800 products in pipes and fittings developed through
feedback from distributors. Further, Supreme has plans to launch composite
cylinders after getting approval from PESO. In addition, the company would
launch other composite products such as pipes and pallets and fire resistant
pipes.
Brand equity: Supreme has the strongest brand in urban cities for PVC pipes.
Astral also has high brand equity for CPVC pipes in urban cities. Finolex
Industries has the highest brand equity in rural markets. Ashirvad also a strong
retail brand but mainly in South and West India.
Supreme has superior architecture: Supreme has pan-India manufacturing

reach through 22 manufacturing plants across India not only for PVC pipes but
also for other products such as protective packaging. Finolexs manufacturing
plants are mainly located in west India. Astral is expanding its reach through a
new plant at Hosur, Karnataka in south India. Ashirvad has only one plant in
South India.
Strategic asset: Astrals and Ashirvads tie-up with Lubrizol is a source of key
competitive advantage. In our opinion, Supremes unmatched pan-India
distribution reach and its patent license for cross laminated film product are its
strategic assets.
Exhibit 50: IBAS framework for organised PVC pipe players

Innovation
Brand
Rural
Architecture
Urban
Strategic Overall
asset
rank
Manufacturing Distribution
reach
reach
Supreme Industries
Astral PolyTechnik
Finolex Industries
Ashirvad Pipes
Prince
Jain Irrigation
Source: Ambit Capital research;
Note :
- Strong;
- Relatively Strong;
- Average;
- Relatively weak.
Exhibit 51: Comparison of the top-6 plyers

Capacity
(tons)
Revenue
(` mn)
CAGR
FY15
FY15
FY10-FY15
Supreme
340,000
21,140
20% Plumbing and Agri
Maharashtra (3), UP (1), WB (1), MP (2)
Astral
102,371
12,521
34% Plumbing, Agri and Industrials
Gujarat (2), HP (1), TN (1)
70,000
13,601
32% Plumbing, Agri and Industrials
Karnataka (2)
Finolex
230,000
16,938
15% Largely Agri, now getting into plumbing
Prince
90,000
6,907
14% Largely Agri, now getting into plumbing
100,000
11,628
Maharashtra (2), Gujarat (1)

Dadra (2), Uttarakhand (1), Maharashtra (1),
Tamil Nadu (1)
Maharashtra (2), Gujarat (1), TN (1)
Company
Ashirvad
Jain Irrigation
Products
2% Agri
Plants (figures in brackets indicate no. of

plants in the state)
December 01, 2015
Page 31
Building Materials
Exhibit 52: Strategic initiatives and channel checks on the top-4 brands
Pipes
Companys plans
Supreme
Astral
Finolex
Ashirvad
Our channel checks
Expanding scale: Set up two units, one at West Bengal and one at Madhya
Pradesh. 25 manufacturing units enable the company to reach its products to the
market at shortest possible time with least freight cost.
Increased channel partners from 2257 on 30th June 2014 to 2469 on 30th June
2015.
Taken measures to increase product awareness through advertising by way of
TV, Radio, Print media, outdoor i.e. bus panel hoarding, wall painting etc.
Acquired Seal IT Services (UK) and Resinova Chemie Limited during FY14;
with these acquisitions the company now supplies a full range of products in the
Adhesives, Sealants and Building Chemicals segment.
Appointed
Salman
Khan
as
the
brand
ambassador
Commenced production and sales from its South-based plant (Hosur- Tamil
Nadu) which will help expand its Southern market in India.
The company opened a depot at Cuttack and is starting two new depots at Noida
and Indore, to improve distribution.
In the non-agri, the company is focusing on leveraging its distribution strength, by
targeting the rising demand for pipes and fittings in tier two and tier three
cities
Finolex has also added a Column pipes, to its portfolio. Column pipes are
suitable for submersible pumps which are used to draw water from bore wells.
Tied up with Aliaxis, which gives the company to ability to launch new-age high
quality piping products in India
Doubled capacity in Karnataka
Leading brand with superior distribution to any other

pipe manufacturer in India.
Commands a premium in PVC plumbing pipes
The leaders of CPVC pipes, command a premium across

CPVC price range and have a superior quality product
compared to Supreme
More focussed on plumber trainings that its competitors
post the launch of its products
Largely perceived as an agri brand and is now trying to

build its retail reach
Amongst the top-5 brands, it is the lowest priced product
Premium player with high quality products. Market

leader in South India
Exhibit 53: Consensus expects a sharp uptick in Supremes

revenue in FY17
Exhibit 54: Supremes

higher than Astrals
margins
have
historically
been
60,000
50.0%
50,000
40.0%
8,000
30.0%
6,000
14%
20.0%
4,000
13%
10.0%
2,000
40,000
30,000
20,000
10,000
-
10,000
17%
16%
15%
12%
11%
10%
0.0%
FY12
FY12 FY13 FY14 FY15 FY16E FY17E

Supreme
Supreme (growth) RHS
Astral
Astral (growth) RHS
FY13
FY14
FY15 FY16E FY17E
Supreme
Astral
Supreme (margin) RHS
Astral (margin) RHS
Source: Company, Bloomberg, Ambit Capital research
Exhibit 55: The gap between Supremes and Astrals RoE is

narrowing
Exhibit 56: Supreme is trading at a 30% discount to Astral
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
-
P/E (X)
60
40
20
FY12
FY13
FY14
Supreme
FY15
Oct-15
May-15
Dec-14
Jul-14
Feb-14
Sep-13
Apr-13
Nov-12
Jun-12
Jan-12
Aug-11
Mar-11
FY17E
Astral
5-yr average (Astral)
Astral
December 01, 2015
FY16E
Oct-10
May-10
Supreme
5-yr average (Supreme)
Page 32
Building Materials
Entry of global players; is it a threat?
Similar to Indian plumbing pipes industry, global pipes industry is also fragmented
with multiple local players. However, a few of the global players have become
leaders across the developed regions on the back of continuous product innovation;
in many cases we note that Indian companies have tied up with these leading pipe
companies (Wavin) for new products (new applications). Amongst the global players,
only Georg Fischer and Aliaxis are present in India; whilst Georg Fischer has a very
nominal presence, Aliaxis acquired Ashirvad to get a strong foothold in the large
Indian market. PipeLife (who is part of Weinerberger) could enter into India as
Weinerberger has a presence in India for selling clay bricks, clay roof tiles and clay
facades.
Amongst the global pipes companies we note that Georg Fischer and Aliaxis are the
fastest growing because of acquisitions and continuous product innovations. We do
not think any of these global majors will be able to enter India and prove to be a
threat to Indian players given the vast geography and importance of wide/deep
distribution network. Similar to Aliaxis, any global entrant will have to either acquire
a leading player or partner with them; given their own reputation and focus on
innovation, we believe it is unlikely that these globals could look beyond the top-4.
Exhibit 57: Large global players who could enter India in the future
Company
Piping products
Fittings, valves, pipes, automation and

jointing technology and covers all
water cycle applications
PVC water distribution, waste outlets
Aliaxis
and taps, WC equipement,waste water
drainage, raingutters,
Wavin (part of a
Pipes and fittings providing solutions
Petrochem/Chemicals major,
for drinking water, rainwater, sewage,
Mexichem)
heating & cooling water
PipeLife (part of a building
Pipes, fittings, floor drains, traps, roof
material solutions major,
drainage systems, water heating
Weinerberger)
systems, PVC, PP & PE pipe systems
Plumbing, heating and drainage
Poly pipes
products, rainwater and sewer
systems, cable protection systems
Georg Fischer
December 01, 2015
FY14 (in
USDmn)
3-year
CAGR
5-year
CAGR
10-year
CAGR
4,008
11%
14%
7%
3,456
15%
11%
8%
UK, Europe, Asia, Middle East,

Russia
1,449
-3%
1%
2%
US, Central Europe, West &

North Europe
1,053
3%
0%
2%
520
15%
NA
NA
Countries of operation
Germany (29%), Rest of
Europe, Asia, Americas,
Switzerland, Austria
North America, Latin America,
Europe, Australasia, Asia,
Africa
UK, France, Italy, Middle East
Page 33
Building Materials
Tiles
Not as akin to paints as it seems
Five tile manufacturers in India have >`10bn revenue and the laggard
brands have a clichd strategy - scale enhancement, improving retail brand
recall and portfolio improvisation. Alongside a strong brand, what sets
Kajaria and Somany design/size/finish leadership apart are a healthy
balance sheet and a professional mid-level management to implement the
stated strategies. Process innovation, talent pool, branding and efficient
logistics management are the key competitive advantage which competitors
will find difficult to replicate. Whilst demand remains weak (especially from
organised real-estate), the levy of anti-dumping duty partially mitigates the
growth challenges faced by the domestic players. Whilst we believe that
established brands will garner market share over time, we do not think that
the supremacy of the top-2 brands will be as profound as the paints industry;
no manufacturer in tiles has a major lead in terms of scale and larger
players from other categories can establish a decent franchise at low capital
intensity if they approach the business in a right manner.
Sharp demand deceleration but larger players maintain superior growth
Tiles demand growth has decelerated significantly in the last few quarters; a few
channel participants highlighted nearly flat YoY volumes for the last two quarters.
Revenue growth of leading brands, Somany and Kajaria dropped to 11% in 2QFY16
vs 19% average for last 14 quarters. EBITDA margin of 14.5% is the highest in the last
16 quarters, led by a sharp reduction in gas prices. Both Somanys and Kajarias JV
sales increased, since the cost of manufacturing for JVs is lower than own
manufacturing (given spot LNG procurement).
tile
Exhibit 59: Margin improvement driven by savings in raw

material costs
35%
Tiles Rev growth
2QFY16
1QFY16
1QFY13
2QFY16
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
0%
4QFY15
5%
3QFY15
10%
2QFY15
15%
1QFY15
20%
4QFY14
25%
3QFY14
15.0%
14.5%
14.0%
13.5%
13.0%
12.5%
12.0%
11.5%
11.0%
10.5%
10.0%
30%
2QFY14
of
1QFY14
growth
4QFY13
revenue
3QFY13
in
2QFY13
Exhibit 58: Deceleration

manufacturers
Median growth rate- 12 qtrs
Exhibit 60: Kajaria and Somany continue to gain market share
27
26
26
28
25
25
26
28
26
26
26
28
27
25
35
34
32
31
31
32
31
30
30
30
29
28
27
27
13
16
16
17
17
17
17
18
18
18
18
19
20
20
25
24
25
24
27
27
26
24
27
26
27
25
27
28
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
Market share movement (top-7 players) %
Kajaria
Somany
Others
H&R Johnson
December 01, 2015
Page 34
Building Materials
Anti-dumping duty: A much-needed shot in the arm
Anti-dumping duty is likely to be levied shortly (US$2.5-3/msm) which will wade off
competition from the Chinese manufacturers, who are currently aggressively dumping
in India. Not only will this support volume growth for domestic players (Chinese
garnered 10% market share in India) but also support pricing growth given that the
Chinese products were priced much lower than the domestic tiles; reducing input
prices plus no pricing competition could keep margins high
Big brands maintain expenditure on branding and distribution
Kajaria and Somany have maintained expenditure on brand building and increased
dealer count by ~20-30% in 1HFY16 despite an adverse demand environment.
Kajarias increased branding expenditure by 69% and Somany by 48% in FY15. The
growth in branding expenditure of other smaller brands is much lower than
Kajaria/Somany as the former aim to protect their margin in times of weak demand.
Exhibit 61: Kajarias branding expenditure increased by
60%...
Kajaria and Somany have

maintained expenditure on brand
building and increased dealer
count by ~20-30% in 1HFY16
despite an adverse demand
environment
Exhibit 62: and Somanys by 47% in FY15

(` mn)
(` mn)
3.0%
600
350
2.0%
300
500
2.5%
400
2.0%
300
200
1.5%
100
1.8%
250
200
1.6%
150
1.4%
100
1.2%
50
1.0%
FY11
FY12
FY13
FY14
Kajaria ad spend
FY15
1.0%
FY11
% of sales (RHS)
FY12
FY13
FY14
Somany ad spend
FY15
% of sales (RHS)
Scale expansion and rising JV mix

The proportion of sales from JVs for Kajaria and Somany has risen in 1HFY16, as the
JVs benefit disproportionately from the gas price reduction, since they procure gas at
spot prices. Both the companies continue to add scale either through JVs or organic
capacity expansions to sustain the growth rate and gain market share in new
markets. Companies are setting up capacities in South India to reduce the lead time
and logistics cost to reach the end market and hence strengthen their franchise in the
region, which is a large and premium tile market of India.
Exhibit 64: and rising share of JV production
Exhibit 63: Savings in LNG prices

25.00
120%
20.00
100%
15.00
80%
10.00
60%
5.00
24%
24%
42%
36%
22%
52%
14%
48%
Own
40%
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
0.00
20%
December 01, 2015
41%
1HFY15
1HFY16
JV
27%
38%
0%
LNG spot
35%
O/S
1HFY15
Somany
1HFY16
Kajaria
Page 35
Building Materials
RasGas deal should reduce gas procurement costs
RasGas prices prevailing at US$12/mmbtu are likely to be reduced to US$7-8/mmbtu
as per media reports which will positively impact the tile manufacturers. In addition,
this will also remove the take-or-pay overhang, in case of shortfall in procurement
from the tile manufacturers.
Expansion in Sanitaryware/faucets
Tile majors forayed in sanitaryware in the last few years and have gradually built a
`500mn-1,000mn turnover, largely through outsourced manufacturing and JVs with
Morbi-based players. The products are largely in affordable mid category and these
players are currently selling at a 20% discount to the established brands. We believe
this product portfolio can easily sell in the cities outside top-10/15 as the strength of
brand recall can help Kajaria/ Somany gain entire share of the IHB bathroom.
Tiles - Can it replicate the paints industry?
Investors compare tiles to the stellar growth exhibited by the paints industry, since
both are large categories and two brands stand out from the rest. Whilst we agree
that Kajaria and Somany are indeed doing a credible job of building a strong
franchise, we are still not convinced that they will garner as much market share as
the paints company did over the last decade and a half, since:
#1 - Manufacturing is not that big an entry barrier: Paints had both
manufacturing and logistics as an entry barrier, which is not as significant in tiles
given that a large and efficient manufacturing cluster can be used by competition to
enter this segment. Rising propensity of the unorganised manufacturers to partner
with the larger brands, we believe that a key barrier to entry manufacturing will
cease to exist for unrelated home building brands such as Asian Paints. If a brand like
Asian Paints, which has a strong franchise, access to capital and a talented
management team, decides to enter into this category, then it can build a credible
brand in 3-5 years.
#2 - No player has a clear scale lead: Unlike Paints, wherein Asian and Berger
had a clear lead; in tiles apart from Kajaria and Somany, other organised
manufacturers such as H&R Johnson, Simpolo, Varmora and Asian Granito have a
fairly large scale and are expanding capacities.
#3 - Product innovation is NOT a key competitive advantage: Our checks in
the ecosystem suggests that each company has a wide array of designs/sizes and the
scope of design innovation is little and competition replicate new designs. Also,
dealers highlight that the quality of Morbi is as good as the branded manufacturers.
Whilst Somany and Kajaria have more than two-third of their sales through retail
channels, most other brands have a materially higher institutional mix and aim
towards improving their retail mix.
What differentiates Kajaria and Somany?
The exhibit below highlights that Kajaria and Somany have grown significantly ahead
of peers in the last five years.
Exhibit 65: Kajaria and Somany have growth significantly higher than other peers
25
27%
30%
28%
25%
20
21%
15
25%
22%
21%
15%
20%
15%
10
10%
6%
5%
0%
H&R
Johnson
Kajaria
Somany
Asian
RAK
Granito Ceramics
FY15 Rev (Rsbn)
Nitco
Orient
Bell
Varmora
5-yr revenue CAGR
December 01, 2015
Page 36
Building Materials
In our view, the reason for this is:
#1 - Brand leaders: Kajaria and Somany started investing in brand and distribution
much before their peers and they are clearly the brand leaders in India. Both these
companies have a significantly higher proportion of retail sales.
Note in the exhibit below that in the last five years Kajaria and Somany have spent
the highest on branding, which is clearly manifesting in superior sales growth for
these companies.
Exhibit 66: Kajaria and Somany have spent significantly on branding
2.0%
40%
35%
30%
1.5%
23%
20%
15%
10%
1.0%
-2%
0%
-10%
0.5%
Kajaria
Somany
% of sales (FY11-15)
Orient Bell
Asian Granito
CAGR FY11-15; RHS
Source: Company, Ambit Capital research;
#2 - Distribution architecture: Both Kajaria and Somany have a significantly

superior distribution architecture, with pan-India presence and better dealer service
than the unorganised players. Dealers rate Somany and Kajaria highly for prompt
delivery (48 hours in most cases), despite having over 2,000 SKUs.
#3 - Balance sheet bandwidth: Kajaria and Somany have higher RoCE than most
of its peers, strong cash flow generation (highest CFO/EBITDA in the industry), and
low debt/equity. Barring Kajaria and Somany, none of the branded manufacturers
have the financial strength (high leverage, poor cash conversion) and hence they are
facing growth challenges, in the current adverse demand environment. Moreover, the
unorganised players show aversion to partner with these players given their weak
balance sheet.
#4 - Management quality: During our recent trip to Morbi, we met multiple
industry participants and we received extremely positive feedback on Mr Ashok
Kajaria and Mr Abhishek Somany, as being way ahead of their peers; most of the
smaller brands would willingly associate with Kajaria and Somany, given their
reputation. The quality of management is also visible in exceptional capital allocation
by both the companies, which has led to industry leading RoCEs and unlevered
balance sheets.
Also, both these companies have built a strong process ecosystem, with senior vertical
heads to implement the sales, marketing and logistic strategies. Not only have these
companies managed to retain high-quality talent and helped them grow up the
ranks, but have recently been able to attract talent from other companies to
strengthen their franchise.
In building materials, ability to attract top-talent and setting strong processes is a
significant competitive advantage, which is not easily replicable by the competitors.
December 01, 2015
Page 37
Building Materials
Exhibit 67: Strategy and primary checks on the top-4 companies
Tiles
Kajaria
Company's plans
Scale expansion: 3 MSM ceramic floor tile capacity at Gailpur is
complete; commissioned a 5 MSM polished vitrified tiles facility in June
2015. Setting up a 6.50 MSM polished vitrified tile greenfield facility in
Rajasthan by Q4/FY16. To put up a 5.70 MSM polished vitrified tile
facility in Andhra Pradesh by 2016-17.
Distribution: Increasing shelf space by growing the dealer and subdealer network, primarily in Tier II and Tier III cities and towns. Opening
exclusive showrooms for all product segments like Kajaria Galaxy,
Kajaria World, Kajaria Star, Kajaria Prima and Kajaria Studio etc.
Working closer with dealers, subdealers, masons and architects towards
skill
development, thereby graduating them into Kajarias brand
ambassadors.
Brand Building: Invest in television campaigns on select national and
regional channels. Focusing on social and digital media campaigns
Lastly, Kajaria is building a strong mid-level management and has
recently hired senior personnel across vertical heads
Somany
Plan to add 4 msm of new capacity in the value-added segment.

Commissioned 4msm of PVT capacity in Oct-15, through a JV
Aggressive expansion of touch points, majorly into tier II and III cities
and investment into brand promotion. Two of the company's nascent but
promising business blocks, Exports and sanitary Ware & Bath Fittings,
are headed towards `1bn sales
Innovative branding: Improving brand recall through social media
and innovative advertisement campaigns.
H&R Johnson
Entering new segments but no focus on expansions in tiles: H&R

Johnson has announced strengthening of its strategic partnership with
Germanys Nobilia, by expanding its operations and opening its first
store in Mumbai. H&R Johnson (ill promote Nobilia in the retail and
developer space.
Hired a prominent Bollywood actress as the brand ambassador.
Our channel checks
Kajaria undoubtedly is the strongest and the most premium tile

brand in India. The company's dealer margins are amongst the
lowest and the company also works on strict credit terms.
Its early entry in vitrified tiles has helped in establishing the
company as the best GVT brand
Logistics management of the company is better than most
peers given its higher scale
The company has designated sales executives for major
dealers who help them in inventory management, commissions
etc
The JV partners highlight that the company ensures 90%
offtake and working with Kajaria is more profitable than
standalone operations
The oldest ceramic tile brand in India and commands premium

in ceramic floor tiles
Whilst the company has been a late entrant in vitrified tiles, it
has managed to build a good brand in the last few years
Credit terms are better than Kajaria but stricter than the
smaller brands
Equally as good as Kajaria in terms of product launches,
design inventory
Existing JV partners already thinking about next leg of capacity
expansions with Somany
Losing market share due to quality issues, despite being one of
the oldest ceramic brands in India
Losing market share in East India, given aggressive marketing
by the leading brands
Facing production challenges due to which cost of
manufacturing is higher
Produces lower end of the vitrified tiles
Increasing dealer incentives: In FY15, the Company broke new

ground by unveiling its new products la photographic and painting
exhibitions. It offered lucrative incentives to its dealers to enhance
visibility. The Company to enhance the visibility ensures that its dealers
are always adequately stocked with Asian Granito products.
Premiumisation strategy: Outsourcing to address the growing
demand for tiles addressing the mid-value and institutional segments,
leveraging capacity for the Company to focus exclusively on high-end
Asian Granito products.
Dealer network: In FY15 the company widened its pan-India
distribution footprint, reaching out to more than 4,000 dealers and
trade associates. The Company doubled its domestic presence, adding
1,200 dealers and sub-dealers, it established 25 exclusive showrooms
across major Indian cities and set up dedicated 2014-15.
Hired the COO of Somany Ceramics Mr Tapan Jena as the CEO of the
business
Expanding capacities in Gujarat
Disruption in brand recall, due to the rebranding exercise in

FY12
Largely in an institutional brand with significantly lower
penetration than the leading brands
Incentive structure is significantly better than Kajaria and
Somany, since it is trying to expand dealer base
Kajaria - Limited room for further multiple expansions

Kajarias stock price has increased by 54% in the last one year, despite the worst
demand growth phase in the last decade, since the company maintained industry
leading growth and posted a significant improvement in EBITDA margin. Whilst
Kajaria has displayed traits of a champion franchise evident from the strong growth
and significant improvement in RoCE in the last decade, we do not think that
Kajarias multiples have further room to grow (24x FY17E EPS), given the demand
uncertainty and no little chances of consensus earnings upgrades (25% EPS CAGR
over FY15-17E).
December 01, 2015
Page 38
Building Materials
Somany Improving franchise; trading at a 40% discount to Kajaria
Whilst industry growth decelerated in FY15 and 1HFY16, Somany posted nearly 2x
the industry volume growth, due to superior design innovation and investments in
brand/reach expansion. Alongside continued capacity expansions, the management
expects to expand PBT margin by 200bps by FY18, underpinned by higher vitrified
mix and operating leverage benefits. The stock is trading at 16x FY17 consensus EPS
(40% discount to Kajaria); multiples should be seen in light of the large opportunity
but few credible participants.
Somany has underperformed Kajaria by 45% in the last one year, despite higher
earnings growth and improving RoEs. It now trades at a 40% discount to Kajaria and
consensus expects 33% earnings CAGR and RoEs of 24% over FY15-17.
Mapping the tile majors on the IBAS framework
Kajaria and Somany fare much better than other tile companies on the IBAS
framework, than its peers, reasons being:
Innovation: Kajaria launched GVT ahead of most of its peers which gave it a lead
over peers in terms of profitability and brand perception. Similarly it partnered with
Morbi-based players as JVs, thereby reducing capital intensity ahead of most peers in
the Industry. Somany was the first Indian tile manufacturer to launch slip-shield tiles
and abrasion resistant Veilcraft and Shield (patented) technologies.
Branding: Kajaria is the tile brand leader in India, which is evident from higher
realisation than peers and the least exposure to institutional clients. The company
recently won the Super-brand award for the eighth consecutive time, and it has
been awarded Asias most-promising brand and it is also the most certified tile
company in the world. Somany Tiles is one of the oldest tile brand in India and a
premium brand in ceramic tiles. Its vitrified tile brand has improved in the last few
years, although the company has been a late entrant in this segment.
Architecture: Here we ascertain the relative positioning of companies based on
manufacturing and distribution reach. Kajaria trumps its peers due to highest capacity
share and continued expansions alongside pan-India reach through over 6000
dealers and 23 offices. Somany is the third largest tile manufacturer in India but it is
also increasing capacities steadily. Somany also has pan-India reach through multiple
distribution centers.
Strategic asset: Whilst there is no discernible strategic asset, barring the scale
brand, we believe that superior balance sheet and reputation of the promoters
positions them a few notches above competition. Both Kajaria and Somany have tax
SOPs for their own capacities, which is also a strategic asset for these companies.
Exhibit 68: Kajaria and Somany fare better than other tile manufacturers on the IBAS
framework
Company
Innovation
Brand
Architecture
Manufacturing
Distribution
Strategic Overall
asset
rank
Kajaria
Somany
Asian Granito
H&R Johnson
Nitco
Orient Bell
Source: Company, Ambit Capital research.
Note:
- Strong;
December 01, 2015
- Average;
- Relatively weak.
Page 39
Building Materials
Exhibit 69: Consensus expects Somany to grow faster than
Kajaria
35,000
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
30,000
25,000
20,000
15,000
10,000
5,000
-
Exhibit 70: Despite a significant gap in EBITDA margin
6,000
19%
5,000
17%
15%
4,000
13%
3,000
11%
2,000
9%
1,000
7%
5%
Kajaria
Somany
Kajaria
Somany
Kajaria (growth) RHS
Somany (growth) RHS
Kajaria (margin) RHS
Somany (margin) RHS
Exhibit 71: the RoE of Kajaria and Somany is likely to

converge
Exhibit 72: Somany is trading at a 40% discount to Kajaria
40
30.0
30
P/E (X)
35.0
25.0
20.0
20
10
15.0
FY12
FY13
FY14
Kajaria
FY15
Somany
December 01, 2015
FY16E
FY17E
Oct-15
Dec-14
May-15
Jul-14
Feb-14
Sep-13
Apr-13
Jun-12
Nov-12
Jan-12
Aug-11
Mar-11
May-10
5.0
Oct-10
10.0
Kajaria
Somany
5-yr average (Kajaria)
5-yr average (Somany)
Page 40
Building Materials
Wood panel products (ply and laminates)

Smaller players stuck in a rut
Unlike other building material categories, which are used at the time of
construction, timber products (plyboards and laminates) are used after the
sale of the residential units. Secondary real estate transactions have declined
sharply in the last few quarters, which has led to a sharp deceleration in
revenue growth of Century Ply and GreenPly (2-3% revenue growth in
1HFY16 vs 17-21% CAGR over FY10-15). Whilst the demand recovery might
take some time, we believe that larger players will be able to gain market
share, as the smaller players face issues such as raw material procurement
(face timber), regulatory changes (GST) and liquidity constraints (black
money squeeze). Century Plys focus on scale/reach expansion and long-term
security for face veneer position it favourably in the large-but-fragmented
plyboards market in India. We also like GreenPly given its strong
improvement in the MDF business and given that it is finding its feet in ply
again, post the resolution of the channel disruption. Greenlam is the smallest
of all the branded wood panel companies but we believe its business has
much stronger visibility given the promoters focus on innovation, rising
application, exports opportunities and very strong customer connect.
Growth rates taper, rising down-trading and margin expansion
Our channel checks suggest that plyboard demand in India has declined by 8-10% in
the last one year, whilst the top-2 players managed to maintain revenue growth in
high single digits in FY15, revenue was flat in 1HFY16. Despite an adverse demand
environment, Centurys plyboard volumes grew by 5% (as against a 2% decline for
Greenply) led by market share gains from the unorganised players in the affordable
segment. Volume for Centurys mid-end product, Sainik, grew by ~10%, whilst its
premium products volumes dropped by 6% in 1HFY16. Similarly, Greenplys midsegment product Ecotec volumes grew by 16% in 2QFY16, whereas the premium
products volumes dropped by 9%. This indicates rising downtrading as consumers
are shifting to a lower priced product given the weak demand environment.
Source: Company, Ambit Capital research (we use the sum of Century Ply and
Green Ply for our analysis)
2QFY
1QFY
4QFY
3QFY
2QFY
1QFY
4QFY
2QFY16
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
3QFY14
4QFY14
3QFY
Ply Rev growth
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
0%
-5%
2QFY
5%
1QFY
10%
4QFY
15%
3QFY
20%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2QFY
25%
Exhibit 74: EBIT margins have remained stable due to

lower RM prices
1QFY
Exhibit 73: Sharp deceleration in revenue growth in the

last few quarters
Green Ply for our analysis
Unorganised manufacturers losing steam

The aforementioned decline in plyboard sales and the clamp-down on black money
has had a magnified impact on the unorganised manufacturers that have had to
scale down owing to the working capital stress. Add to that, regulatory changes and
difficulties in evading indirect taxes, the competitiveness of the unorganised players
has dropped materially, which leaves room for incumbents to gain market share.
December 01, 2015
Page 41
Building Materials
Lower brand relevance than other categories; low scope for premiumisation
Our channel checks suggest that the relevance of branding is much lower in
plyboards, since it has no aesthetic value (unlike paints, tiles and sanitaryware) and is
covered by laminates. Hence, the companys initiatives are largely with the
intermediaries (carpenters, interior designers), who influence the buying decision of
the end-consumers. Whilst premiumisation is rising in most building material
categories, the scope for the same is low in plyboards, as furniture penetration
increases in tier II/III cities, evident from strong growth in the mid categories of
Century Ply and Greenply.
Organised competitors much smaller in scale than Century and Greenply
Apart from Century Ply and Green Ply, no other plyboard manufacturer has a major
scale advantage and the third largest player is only one-fourth their size. The scale
advantage has helped the company commit capital in raw material security and
adding product lines such as MDF.
Exhibit 75: Century and Green are way ahead of its peers in terms of scale
14,000
50%
12,000
40%
38%
10,000
8,000
20%
25%
18%
15%
6,000
15%
20%
10%
5%
4,000
30%
0%
2,000
-11%
-10%
-20%
Century Green
Mayur
Sarda
Uni
FY15 Rev (Rsbn)
UV
Kitply National
5-yr revenue CAGR
MDF finding acceptance, but will still not overshadow plyboards

The ban of face timber exports from Myanmar resulted in a sharp increase in prices of
low cost plywood, due to which MDF has started finding acceptance in retail markets
(albeit in small quantities). This is evident from a sharp increase in MDF volumes of
Greenply in FY15 and 1HFY16, with capacity utilisation increasing to 90% vs 70% in
FY14.
Exhibit 76: Century and Green are way ahead of its peers in terms of scale
sqm
200,000
95%
90%
160,000
85%
120,000
80%
80,000
75%
70%
40,000
65%
60%
FY12
FY13
FY14
Greenply MDF volume
FY15
1HFY16
Capacity Utilisation
Century continues to perform better than Greenply

Centurys 2QFY16 LTM ply revenue growth was 7.5% as against 5% for Greenply,
which is a function of Centurys aggressive expansions and Greenply facing
challenges such as channel disruption (uneven incentive structure) and quality issues.
Moreover, Centurys LTM Ply EBIT margin is 18% as against 8% of Greenply, which is
a function of lower cost of face veneer procurement from Myanmar and sales of high
margin face veneer in the market.
December 01, 2015
Page 42
Building Materials
Exhibit 77: Centurys revenues have growth higher than
Green
TTM revenue growth
30.0%
Exhibit 78: and it has posted higher EBIT margins
25%
25.0%
EBIT margin
20%
20.0%
15%
15.0%
Century
Green
Century
Green Ply for our analysis)
2QFY16
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
3QFY14
1QFY14
2QFY16
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
0%
3QFY14
0.0%
2QFY14
5%
1QFY14
5.0%
2QFY14
10%
10.0%
Green
Green Ply for our analysis
Exhibit 79: Companies strategy and channel checks

Timber Products
Century Ply
Greenply
Greenlam
Raw material security: Global face veneer linkages to ensure long

term RM availability. Targeting smaller untapped centres, launching
economic brands
MDF The company entered the MDF business through an outsourcing
model and is adding its capacity in Punjab (`2.5bn)
Distribution: Increased depots, dealer-count to accelerate growth
across regions and deliver operational and logistical cost-cutting
Increase pan-India brand visibility through proactive below the line

(BTL) and above the line (ATL) activities, achieve better
Ramp up MDF capacities: A new plant is being set up in the Chittoor
district of Andhra Pradesh, with an installed capacity to produce 1,200
cubic metres of MDF per day for an estimated investment of over `. 6bn.
The company has entered into a joint venture with a Singapore
based company to control and run the veneer manufacturing
facility in Myanmar.
Plan to increase laminate capacity (million sheets per annum) from
10.02 to 12.02, with a project cost of `. 20 crore. Further to put up a
new 1.2 lakh engineered doors capacity in FY16, with a project capital
cost of `. 270 mn
Advertising its engineered wood flooring brand - Mikasa, in tier i towns,
working with intermediaries.
Investments in increasing SKUs and quality enhancement for premium
product positioning
The company has been very aggressive in pushing the Sainik

brand in the market where its finding difficulty in positioning
its premium products
Undeniably the best quality and commands a premium over
any other ply brand in India
The relevance of branding is the least in ply but distribution is
important and Century has managed distribution extremely
well, with its spread out plants and warehouses
The company was facing channel disruption due to uneven
incentive structure. It has now made the incentive structure
even and reduced the relevance of big dealers
The company was facing quality issues (white spots) and
rising counterfeits, which has been adequately addressed by
the company
The company has focused on growing the Ecotec brand and
has started pushing it in tier II//III markets
Greenlam and Merino are the best brand and do good

logistics management, given the high number of SKUs in
laminates, logistics is a key competitive edge.
Greenlam is focusing on the 1mm laminate category, which is
a premium product
Source: Company, Ambit Capital research, Channel checks
Mapping the ply and lam manufacturers on the IBAS framework

We compare the panel product manufacturers on an IBAS framework and find
Century one step ahead of peers due to innovative launches, premium brand
positioning, well established production and distribution architecture and raw
material linkages
Innovation: Century was the first Indian company to launch borer proof plywood in
India in 1997. It has also launched new-age products such as wood plastic
composites ahead of its peers which could be a large opportunity in the future.
Similarly, Greenply was the first Indian company to expand majorly in MDF.
Greenlam has a devoted R&D team and it is the first player in India to offer a
complete range of anti-bacterial laminations and 10ft veneers. Greenlam has
recently launched wooden flooring with patented lock mechanism
Branding: Century is the most premium ply brand in India and commands a 5-8%
premium to its closest competitor. It has recently launched television commercials for
its premium and mid-segment play and also for its laminates to further strengthen its
December 01, 2015
Page 43
Building Materials
brand. Greenply is the second best ply brand in India but has the best MDF franchise.
Greenlam and Merino are the most premium laminate brands
Architecture: Century has seven plants across India (presence across regions) and
manages distribution through 36 warehouses. Greenply has four plants in India but
none in South India. Greenply has two plants (West and North India), 14,000
dealers, distributor presence and 40 sales and marketing offices (India and abroad).
Strategic asset: Raw material linkage is the key strategic asset for both Century and
Green. Century has leadership in face veneer (Myanmar and Laos), and Greenply has
a JV in Myanmar to meet its face veneer needs and is setting up plantations for core
timber. Moreover, both the companies have tax-exempt plants in North East India.
Exhibit 80: Century is positioned better than peers on the IBAS framework
Company
Innovation
Brand
Architecture
Strategic
asset
Overall
Rank
Century Ply
Greenply
Greenlam
Uniply
Sarda Ply
Note:
- Strong;
- Average;
- Relatively weak.
Greenply- finding its feet again

Greenplys channel disruptions and corporate restructuring meant that companys
plyboard growth decelerated in FY15. The company has taken measures to address
the channel disruption (even incentive structure and reducing the bargaining power
of the big dealers) and its face veneer plant in Myanmar is now operational which is
sufficient to meet its requirement for the raw material. Moreover, its MDF
division has started performing well (90%+ utilization since 3QFY15 as against 73%
in FY14) as the company launched new products (pre-laminated and UV coated
boards) and MDF competiveness rose as the cost of low-quality plywood shot up.
Greenplys management is focused on growing the MDF business with a 3x scale
expansion in next 4 years to 0.54mn CBM by FY18-end as against 0.18CBM in
FY14. The stock trades at 15x FY17 EPS.
Greenlam- capex phase behind, time to reap free cash flows

Whilst laminates is a relatively small market, the top-4 players (Greenlam, Merino,
Royale Touche and Century Ply) have a significantly superior franchise than their
competitors, in terms of scale, design innovation and distribution management. In the
recent building material exhibition in Mumbai, we were impressed by Greenlams
approach of building scale across decorative surface products which is run by
experienced vertical heads, which means that the company will be able to sustain the
stellar performance of the last five years (21% revenue CAGR over FY10-15). The
company incurred Rs2bn over the last two years to expand its laminate capacity in
Behror and to add new products such as melamine faced chipboards and engineered
wood floorings/doors and the capex need for the next 3 years is modest (Rs8001,000mn).
Rising market share in laminates, improving margin (scale benefits and lower crude
prices) and low capex needs for the next three years could lead to significant earnings
and free cash flow growth for the company. Whilst near-term multiples look
stretched on a low base, we believe that the opportunity is large enough and hence
near-term multiples do not depict the potential of sustainable future earnings
growth.
December 01, 2015
Page 44
Building Materials
Century
Century (growth) RHS
5000
18%
4000
16%
3000
12%
10%
FY15
FY11
Green*
Green* (growth) RHS
Century
Century (margin) RHS
FY17E
1000
FY16E
14%
FY14
2000
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY13
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
Exhibit 82: Centurys margin is significantly higher than

Green due to RM linkages
FY12
Exhibit 81: Consensus expects Century and Green to grow

at a similar rate
Green*
Green* (margin) RHS
Exhibit 83: Centurys RoE is likely to be significantly

higher than Green over FY15-17
Exhibit 84: Century trades at a significant premium to its

average P/E
50
40
40
One-yr fwd P/E (X)
30
30
20
20
10
10
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Jul-13
FY17E
Oct-13
Green
December 01, 2015
FY16E
Apr-13
Century
FY15
Jan-13
FY14
Oct-12
FY13
Jul-12
FY12
Apr-12
0
0
Page 45
Building Materials
Sanitaryware
Pressure all around
Sanitaryware is a relatively small building material category (`35bn) and it is
facing rising competition from tile manufacturers and renewed aggression
from the global brands. The entry of large global brands in the premium
category (and mass premium) will curtail premiumisation opportunity for the
domestic manufacturers. Moreover, the top-4 brands are equally large and
well-established and account for 60% market share, which restricts the scope
of further market share gains. Whilst the sanitation programmes
administered by the NDA Government will add to industry growth rates, the
opportunity there will not be meaningful for branded players, given the low
quality product requirement. Whilst low penetration suggests a large
opportunity, we believe that for penetration to improve meaningfully,
plumbing infrastructure in rural areas needs to improve significantly, which
is a time-consuming process. Leading brands such as HSIL do not display the
traits of a champion franchise and its capital allocation decisions in the past
have not been enthusing.
Recent entrants gaining share amid slowing industry growth rates
Similar to other categories, growth rate of the sanitary ware industry has moderated
on account of a sharp reduction in new residential construction. Moreover, entrants
from other categories such as tiles have started building a brand in sanitaryware and
have garnered market share (albeit marginal at present). Also, our checks suggest
that players like Parryware have become aggressive in India (see Link:
http://goo.gl/8ayz3K). Hence, we do not think that established brands such as Cera
and HSIL will post strong growth of yesteryears in the near term.
Global majors entering the premium spectrum
Incumbents are facing challenges from tile manufacturers and large global players in
the premium category, as players such as Kohler have become aggressive in India
and are planning to further increase capacities to sell at affordable prices. Mr David
Kohler, CEO of Kohler, in his recent interview stated: India is absolutely one of our
top three strategic markets. We are number one in the US and were number one in
China. Were not number one in India yetalthough were the number one
international brand herebut India is right up there in our three most strategic markets
globally because we think if we can lead in India over time, as well as the US and
China, thats really global leadership because of the importance that this economy and
country will play over time.
(Source: http://goo.gl/8IcpKI )
German major Duravit started its sanitaryware plant in Tarapur and is growing in
Indian at 20-25% albeit on a small base.
Receding pricing power limits margin expansion capability
Sanitaryware is the only category amongst building materials wherein EBITDA margin
has been declining (see the exhibit below). Moreover, the recent entrants have been
fairly aggressive on pricing, which means that realisation growth possibility for the
sector is limited and the companies have to increase branding/dealer incentive to
maintain market share. Hence, savings in gas prices, would largely be passed on and
hence we do not see a scope of margin expansion in this category.
December 01, 2015
Page 46
Building Materials
Exhibit 86: Margin has remained stable in recent quarters
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
4QFY14
Pipes Rev growth
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
0%
3QFY14
5%
2QFY14
10%
1QFY14
15%
4QFY13
20%
3QFY13
25%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2QFY13
30%
1QFY13
Exhibit 85: Sharp drop in revenue growth
Sanitation programmes such as Swachh Bharat Abhiyaan will not have a

major impact on organised manufacturers
The sanitation programmes launched by the NDA Government aims to add 120mn
toilets in India by 2019 which seems highly ambitious with little progress seen in the
last 12 months. We do not think that these welfare programmes will have a major
impact on the organised players since the quality of products is far inferior to the
products manufactured by them. Moreover, an increase in rural penetration of
sanitaryware requires better plumbing infrastructure which is difficult to develop in a
3-5-year time horizon. Moreover, recent news articles suggest that implementation of
the Swachh Bharat Abhiyan in rural areas has been a challenge, owing to poor water
supply.
Whilst brand is highly relevant, the customer is now spoilt for premium
choices
Sanitaryware is the only category in amongst building materials, wherein brand name
is visible on the product which increases the relevance of branding. However, there is
no major difference in the brand recall of the top 4-5 players and with global brands
such as Jaquar and Kohler expanding reach in tier III markets and product portfolio,
there is ample options for the customer to choose from. Also, since tiles
manufacturers have a strong recall in their category, they are finding acceptance in
sanitaryware as well. Even in large residential and commercial projects, the global
brands compete with the Indian brands, using their premium brand as bait and are
able to offer competitive prices given that they have indigenous manufacturing
capacity.
Cera - Premium multiples not justified: Similar to other building materials
companies, Cera saw significant multiple expansion in the last few years. Cera
currently trades at 23x FY17E EPS and consensus expects 22% earnings CAGR and
22% RoE. We do not think that the premium multiples are justified due to rising
competition in a small addressable market alongside receding pricing power.
HSIL - Unbridled aspirations and capital misallocation risks
HSILs stock price has declined by 33% since its QIP due to investor apprehensions on
the companys foray in CPVC pipes and counterfeit management caps/closures.
Whilst the company has a very strong brand in sanitaryware, it is facing competition
and none of the companys previous expansions in unrelated categories (tiles,
bathroom appliances) have been RoCE-accretive. Given that the CPVC market is
dominated by innovators such as Ashirvad, Supreme and Astral, with over a 1.5
decade experience, we do not think that it will be easy for HSIL to establish its brand.
Moreover, the company plans to expand in other categories such as high-end kitchen
fittings, kitchen designing/installation and other home building categories concern
us. Whilst the stock appears less expensive than other building material names (14x
FY17 consensus EPS), it should be seen in light of single-digit RoEs (consensus
estimates of 9% in FY17) and high risks of capital misallocation.
December 01, 2015
Page 47
Building Materials
Mapping the sanitaryware majors on the IBAS framework
We compare the two Cera and HSIL on the IBAS framework. HSIL and Cera fare
similar on innovation, HSIL has a better brand and distribution whereas Cera has
access to APM gas for two-third of its gas needs (strategic asset).
Innovation: Both the companies have launched premium designs and added
features to reduce water use but we do not note any instances of break-through
innovation which has positioned one company ahead of the other. Whilst HSIL tried
to enter into the premium and wellness bathing category (through Queo), the
company is yet to find meaningful success.
Branding: Our channel checks suggest that HSIL has a stronger brand than Cera
and commands a premium across product segments. Both the companies have
appointed Bollywood actors as brand ambassadors.
Architecture: HSIL has two plants (one in North India and one in South India), which
helps the company better manage distribution, whereas Cera has a plant only in
West India. Also, the dealer network of HSIL is more expansive
Strategic asset: Cera receives APM gas (50% cheaper than RLNG gas) which
accounts for 60% of its overall production, resulting in sustainable cos the company
cost advantages.
Exhibit 87: HSIL and Cera fare similar than on the IBAS framework
Company
Innovation
Brand
Architecture
Strategic
asset
Overall
Rank
HSIL
Cera
Source:
Note:
Company,
- Strong;
Ambit
- Average;
Capital
research.
- Relatively weak.
Exhibit 88: Top-4 players strategy and primary checks

Company
HSIL
Cera
Parryware
(Roca)
Jaquar
Companys strategy
Primary checks
Commissioned Greenfield faucet plant with an annual capacity of

2.5 million pieces at Kaharani, Rajasthan.
HSIL forayed into heating systems and home comfort appliances.
Introduce a new product category; domestic water heaters in the
market. The products will be sold under a joint brand name of
hindware atlantic.
Building a higher profile for HSIL's brands with Shah Rukh Khan and
Jacqueline Fernandez to create higher visibility across all media
platforms.
Expanding in CPVC pipes and counterfeit management caps
Cera is making aggressive efforts to leverage the high brand value and
for product optimisation, besides deeper penetration in tier 2
markets.
The company has appointed Sonam Kapoor, as the brand ambassador
in an attempt to increase the brands visibility. Television campaigns on
national and regional channels showcasing sanitaryware, faucets and
tiles. The television campaign was supplemented by print
advertisements in magazines.
The company is also strengthening CERA Care, its after-sales division
with induction of technicians for taking care of its services in all key
cities of the country.
Increasing capacities in faucets
Re-launch: unveiled new range of bathroom products to re-launch
aims market position in the bathroom products space.
Expand retail presence by increasing its dealership network in tier
II & III cities, maintaining high focus on quality, launch new
businesses & new channels by end of FY 2015 across India.
Ramping up production capacity with a planned investment of INR 150
crore in the coming years for ramping up production capacity, R&D
and new product launches
Launched entry level products with the brand ESSCO and expanding
capacities
Plans to invest `150mn annually for brand building
Amongst the top-2 sanitaryware brands in India.

Presence across the price points and a wide range of product
offering.
Facing rising competition from Jaquar and Kohler in the
premium category
Considered as a mid-level brand, the top-end products sell at a

discount to HSIL and Jaquar
Excellent dealer service, quick deliveries and rising focus on brand
building
The company has revamped top management and become

aggressive again in India
Whilst the company's brand recall had waned in the last few years,
it has started brand building and promotion activities to
reinvigorate its brand
Premium brand recall and now has products priced close to the
domestic players
Improved reach significantly and now available in tier III/IV towns
as well
December 01, 2015
Page 48
Building Materials
Exhibit 89: Consensus expects Cera to grow faster than
HSIL
Exhibit 90: Despite slightly higher EBITDA margin
30,000
60.0%
5,000
25,000
50.0%
4,000
20,000
40.0%
15,000
30.0%
10,000
20.0%
5,000
10.0%
18%
16%
3,000
14%
2,000
12%
1,000
0.0%
10%

HSIL
HSIL (growth) RHS
Cera
Cera (growth) RHS
HSIL
HSIL (margin) RHS
Cera
Cera (margin) RHS
Exhibit 91: HSILs RoE will remain half of Cera
Exhibit 92: Sanitaryware stocks trade at rich valuations

50
30.0
40
25.0
30
FY12
FY13
FY14
HSIL
FY15
FY17E
Cera
December 01, 2015
FY16E
Oct-15
Dec-14
May-15
Jul-14
Feb-14
Sep-13
Apr-13
5.0
Jun-12
0
Nov-12
10.0
Jan-12
10
May-10
15.0
Aug-11
20
Mar-11
20.0
Oct-10
P/E (X)
35.0
Cera
HSIL
5-yr average (Cera)
5-yr average (HSIL)
Page 49
Building Materials
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December 01, 2015
Page 50
Supreme Industries
BUY
CHANGE IN STANCE
SI IN EQUITY
December 01, 2015
True to its name
Building Materials
Recovery in volumes in FY16 to 16%
EBITDA margin expansion in FY16 by

40bps, led by stable resin prices
Improving CE turnover from

composite cylinder sales
Performance (%)
140
120
100
SENSEX
SI
Source: Bloomberg, Ambit Capital research
Multiples will expand as opportunity transpires to reality

Composites and engineered plastics is a large opportunity for innovators; rising
acceptance of plastics in India will support Supremes revenue/earnings
longevity. We expect 15% revenue CAGR over FY18-27 but expect the
composite business to grow multi-fold and build related capex. Our TP implies
24x FY17 EPS (20x earlier) for a company with a decade long track record of
positive free cash flow and just needing 50% of CFO to double capacities.
Key Financials (consolidated)
Y/E March (` mn)
FY14
FY15
FY16E
FY17E
FY18E
Operating Income
39,622
42,552
32,833
55,215
65,768
EBITDA
5,888
6,662
5,009
8,058
9,677
EBITDA %
14.9%
15.7%
15.3%
14.6%
14.7%
20.3
20.1
17.4
32.7
40.7
ROE (%)
26.8%
22.7%
17.1%
28.4%
31.1%
RoCE (%)
21.6%
17.8%
13.8%
23.8%
27.3%
31.6
31.9
36.7
19.6
15.7
Adjusted EPS (`)
P/E(x)
Analyst Details
Nitin Bhasin
+91 22 3043 3241
Achint Bhagat, CFA
+91 22 3043 3178
Source: Company, Ambit Capital research. FY16 is a 9 month period

Nov-15
Oct-15
Aug-15
80
Jul-15
The end of the downgrade cycle

Supremes management recently raised volume growth guidance for FY16 after
five quarters of downgrades. Capacity expansions, higher VAP mix and
improving acceptance of new launches (silent piping systems and solvents)
mitigates risks of the building materials slow-down. We estimate 16%
volume/revenue and 26% EPS CAGR along with 28-30% RoEs over FY15-18.
May-15
Engineered plastics little steps, inevitable large opportunity

Whilst Supremes composite cylinder capacity (0.5mn) is small and
underutilized, the cylinder market in India (20mn cylinder) is large enough to
accommodate Supremes capacity, once the bureaucratic hurdles are cleared. It
is investing `15bn over FY15-20 to evolve as an engineered plastics player (like
Berry plastics, Georg Fischer); its wide portfolio of raw materials handled,
products manufactured and industries serviced alongside recent investments in
composites indicate the direction the company is taking.
GREEN
GREEN
AMBER
Catalysts
Apr-15
Pipes a franchise facing competition not threat

Emergence of challengers such as Astral and Ashirvad has increased the
competitive intensity in plumbing pipes. However, this will not impact the long
term growth trajectory for Supremes pipe franchise, since: (a) plastic pipe
penetration will continue to increase from price deflation, rising applications;
(b) product innovation through technology tie-ups with global leaders and (c)
expanding manufacturing/distribution reach along with intermediary education.
Accounting:
Predictability:
Earnings Momentum:
Feb-15
Changes to this position: STABLE
`83/US$1.2
`46.6/US$0.7
`653
`785
20
Flags
Jan-15
Competitive position: STRONG
Recommendation
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Dec-14
Sustainability of plumbing pipes industry and managements focus on

engineered plastics suggests that Supremes revenue will grow in midteens for another decade as plastics penetration across applications
increases. No doubt Ashirvad and Astral are closing on Supreme in
plumbing pipes, but Supreme has enough brand recall amongst
channel/intermediaries, product innovation capabilities and capital for
sustaining growth. Management behavior remains top-notch in the face
of the rising credible competition. Recent volume growth/guidance
upgrade provides near-term comfort; composite cylinder is an
inevitable and large opportunity with little initial competition. RoCEs
might plateau (28-30%), but earnings trajectory will be higher (27% in
FY15-18 vs 7% in FY12-15). Key risks: succession, delayed utilisation of
composite cylinders and prolonged slowdown.
Supreme Industries
Change in assumptions
Exhibit 1: Changes to our assumptions
Old estimates
Key assumptions
Revenues
YoY growth (%)
Plastic Piping
Segment
New estimates
Change in estimates
FY16E
FY17E
FY18E
FY16E
FY17E
FY18E
32,833
55,215
65,768
32,833
55,215
65,768
-22%
71%
19%
-22%
71%
19%
26,186
31,553
37,902
26,186
31,553
37,902
YoY growth (%)

Packaging Products
YoY growth (%)
Industrial products
YoY growth (%)
24%
20%
20%
24%
20%
20%
9,712
11,069
12,632
9,712
11,069
12,632
6%
14%
14%
6%
14%
14%
6,967
8,413
10,062
6,967
8,413
10,062
FY16E FY17E FY18E

0.0% 0.0%
0.0% 0.0%
0.0% 0.0%
0.0% 0.0%
0.0%
What
are
we
building
in?
0.0% We are building in ~16% volume CAGR in
the plastics business over FY15-18 and
revenue contribution of `600mn and
0.0% `1,200mn from composite cylinder in FY17
and
FY18
0.0% Changes
to
our
estimates
We keep our estimates unchanged from our
previously published estimates
0.0%
8%
21%
20%
8%
21%
20%
2,862
3,183
3,507
2,862
3,183
3,507
4%
11%
10%
4%
11%
10%
Plastics EBIT
3,654
6,300
7,700
3,522
6,386
7,757
-3.6% 1.4%
Plastics EBIT margin

Plastic Piping
Segment
Packaging Products
11.0%
11.4%
11.7%
11.0%
11.6%
11.8%
-3bps 23bps
13.9%
13.6%
13.7%
13.9%
13.6%
13.7%
0bps
0bps
17.2%
17.3%
17.4%
17.2%
17.3%
17.4%
0bps
0bps
Industrial products
11.2%
11.3%
11.4%
11.2%
11.3%
11.4%
0bps
0bps
Consumer products
11.7%
11.8%
11.9%
11.7%
11.8%
11.9%
0bps
0bps
Net depreciation
1,006
1,494
1,663
1,006
1,511
1,720
0.0% 1.2%
414
445
309
407
415
288
-1.7% -6.7%
-6.9%
3,259
6,165
7,633
3,616
6,152
7,691
10.9% -0.2%
0.8%
2,200
4,162
5,152
2,441
4,152
5,191
10.9% -0.2%
0.8%
2,200
4,053
5,152
2,116
4,044
5,056
-3.8% -0.2%
-1.9%
6.6%
7.2%
7.6%
6.6%
7.4%
7.7%
-4bps 18bps
bps
17.3
31.9
40.6
16.7
31.8
39.8
-3.8% -0.2%
-1.9%
48
47
46
48
39
38
1.9
3.1
3.4
1.9
3.0
3.4
Consumer products
YoY growth (%)
Net Interest
Expense
PBT before EO
Reported PAT (excl
associate income)
Adjusted PAT (excl
real estate sales,
associate income)
Adjusted PAT
margin
EPS (`.) (plastics
business)
Avg working capital
days excl. cash &
real estate
Avg. capital
employed turnover
excl. real estate
CFO
3,958
3,378
5,951
4,333
4,360
6,312
(2,000)
(2,400)
(2,500)
(2,000)
(2,900)
(3,150)
Free Cash Flow
1,958
978
3,451
2,333
1,460
3,162
Net debt/equity
0.2
0.2
0.1
0.2
0.1
0.1
Capex
0.0% 0.0%
0.0%
0.7% What
are
we
building
in?
We build in 30-40bps margin expansion in
bps
Fy16 and FY17, since RM volatility should
bps recede incrementaly and as utilisation of
recently
added
capacities
increases
bps
Changes
to
our
estimates:
bps
We keep our estimates unchanged from our
bps previously published estimates
Marginal increase due to factoring in a
3.4%
slightly higher rate
-15.9%
15.6%
9.5% 29.1%
19.1% 49.3%
Comments
Marginal changes in PAT due to higher

depreciation
Building in lower working capital days since

the companys bargaining power with
dealers/creditors has not deteriorated
6.1%
Increase in CFO and FCF is due to lower
-8.4% working capital investment
December 01, 2015
Page 52
Supreme Industries
Near term operational estimates

The table below summarizes our near-term volume and realisation growth estimate.
We build in 16% volume growth for piping business, 12% for packaging business,
15% and 8% for industrial products and consumer durables, respectively. We build in
a moderate realisation growth of 2-3%.
Exhibit 2: Operational assumptions
` mn
Volume
Growth
FY16
FY17
FY18
FY17
FY18
Plastic Piping Systems
264,763
306,970
355,548
15.9%
15.8%
Of which : PVC pipes
249,202
289,074
335,326
16.0%
16.0%
15,561
17,895
20,221
15.0%
13.0%
Packaging products
45,279
50,774
56,964
12.1%
12.2%
Of which : Silpaulin
CPVC
19,346
22,248
25,585
15.0%
15.0%
Others
25,933
28,526
31,378
10.0%
10.0%
Industrial products
41,966
48,261
55,501
15.0%
15.0%
Consumer durables
17,234
18,612
20,101
8.0%
8.0%
FY16
FY17
FY18
FY17
FY18
Plastic Piping Systems
99
103
107
3.9%
3.7%
Of which : PVC pipes
90
94
98
4.0%
4.0%
Realisation/Kg
238
247
256
4.0%
3.5%
Packaging products
CPVC
214
218
222
1.6%
1.7%
Of which : Silpaulin
236
243
250
3.0%
3.0%
Others
199
199
199
0.0%
0.0%
Industrial products
166
174
181
5.0%
4.0%
Consumer durables
166
171
174
3.0%
2.0%
The company highlights that it will incur `15bn capex over FY16-20, to significantly
increase its capacities. We believe that the company will have sufficient internal
accruals to meet the capex needs. We estimate that the company will generate CFO
of `31bn over FY16-20, which implies that it will re-invest only 46% of its CFO to
meet its capex. Moreover, increasing capacity utilization of the composites business
alongside stable margins should lead an improvement in RoEs over FY16-20.
Exhibit 3: CFO will fund capex needs comfortably
Exhibit 4: RoE will improve with increase in CE turnover
10,000
70%
60%
8,000
50%
6,000
40%
4,000
30%
20%
2,000
10%
0%
FY16
CFO
FY17
FCF
FY18
FY19
FY20
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
FY15
Capex/CFO (RHS)
December 01, 2015
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
FY16
FY17
CE turnover
FY18
FY19
FY20
RoE (RHS)
Source: Company, Bloomberg, Ambit Capital research; Note FY16 is a ninemonth period
Page 53
Supreme Industries
Multiples will expand as opportunity transpires to reality
Post discussion with industry veterans in composites and engineered plastics, we
understand the plastics market globally is large and much more advanced than India.
Large global players such as Wavin (acquired by Mexichem), Aliaxis (recently entered
into a JV with Ashirvad), Georg Fischer (a US based plastics processing company) and
Berry Plastics, have a large inventory of innovative products that are yet to be
launched in India.
These companies have been entering into technology
collaborations to launch their products in India, and could at a later date forge JVs to
bring new technologies in India. We believe that the opportunity to benefit from
expertize of global leaders is limited to only a few Indian companies, who have the
scale, reach and reputation; Supreme clearly qualifies as one such franchise. On its
own also, Supreme has been absorbing technologies for newer applications
Hence, we change our long term revenue, EBIT and PAT estimates for Supreme (see
table below), due to which our implied FY17 P/E multiple has increased to 24x as
against 20x previously.
Exhibit 5: Changes to our long-term DCF estimates
Old
New
Old
New
FY18-22
FY18-22
FY22-27
FY22-27
13.5%
17%
10.5%
12%
EBIT
14%
17%
10%
13%
PAT
15%
18%
11%
14%
Particulars
Revenue
Exhibit 6: Direction that the company could take

Company
Films & Packaging
Georg
Fischer
Piping systems
Automotive/industrial
Fittings, valves, pipes,

automation and jointing
technology and covers all
water cycle applications
Machines, system
Lightweight cast components
solutions, and customer
for Cars, Commercial
services for
Vehicles and Industrial
manufacturing moulds,
Application
tools and parts
Machining solutions
Others
Packaging and
adhesives for
multiple functions
such as household,
healthcare and
industrial
applications
Flexible, hybrid & rigid

packaging, tapes &
adhesives, protection
solutions
Berry Plastics
Supreme
5-yr average (Astral)
5-yr average (Supreme)
December 01, 2015
30.0
25.0
20.0
FY16
Nov-15
Astral
35.0
Sep-15
Oct-15
May-15
Dec-14
Jul-14
Feb-14
Sep-13
Apr-13
Nov-12
Jun-12
Jan-12
Mar-11
Aug-11
Oct-10
May-10
downgrades
45.0
Jul-15
10
EPS
40.0
May-15
20
further
Consensus EPS
Mar-15
30
expect
Jan-15
40
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
Nov-14
P/E (X)
50
not
Sep-14
60
Exhibit 8: Do
Jul-14
Exhibit 7: Astral is trading at a premium to Supreme on

one-year forward P/E
FY17
Page 54
Supreme Industries
Risks to our BUY stance
Increase in competitive intensity from national-level peers: Supremes

competitors (Astral, Finolex Industries and Ashirvad Pipes) have learnt from
Supreme and have thereby become highly competitive through higher focus on
innovative products, higher brand promotion, widening reach and increase in
manufacturing capacities. We are already witnessing Astral and Ashirvad (Aliaxis)
gaining market share and many smaller/regional players emerging with focus on
building distribution and brand.
Inefficient capital allocation could potentially deteriorate RoCE: In our
opinion, Supremes strength over the last decade has been its efficient capital
allocation in the expansion of fast-growing products like PVC pipes and crosslaminated films. In the future, if the company was to allocate its surplus cash
generated from operations into commodity plastics then Supremes RoCE would
deteriorate eventually, reducing the momentum of its snowball effect. Moreover,
Supreme in its transition to an engineered plastics will have to commit to capital
to new businesses which may have long gestation period impacting RoCE.
Launch of a disruptive product by competitor: Launch of a disruptive product
which is easier to install and with better features than PVC and CPVC pipes by a
large competitor remains a risk, since it could eat into the addressable market of
Supreme. In USA we have already witnessed launch of PEX pipes and these are
substitutes to CPVC pipes
Launch of HDPE pipes in India: HDPE pipes are technologically superior to
PVC pipes because PVC joints are brittle as compared to HDPE joints. Currently,
HDPE pipes are 25% more expensive than PVC pipes, thereby limiting their use in
India. However, if the price advantage of PVC over HDPE were to reduce then
HDPE pipes could be used as a substitute for PVC pipes. Whilst this is a risk, we
believe Supreme, given its portfolio and technological reach, can also shift its
portfolio.
Catalysts to our BUY stance
Higher-than-industry-average volume growth due to capacity expansion

in east India: Supreme has recently added capacities in PVC pipes and
protective packaging in central and east India. The increase in capacity in these
two high-demand products can lead to higher-than-industry volume growth for
Supreme Industries once these plants reach optimum utilisation levels.
Strong balance sheet to launch new products with the help of technology
tie-ups with international players: We expect Supreme Industries to generate
strong cash flow from PVC pipes and cross laminated films in at least the next five
years. In sync with the companys strategy, Supreme could potentially tie-up with
an international player to launch a new product in the Indian market such as
Flame guard, bathroom fittings and composite cylinders.
Acceptance of composite cylinders: Whilst Supremes composite cylinder

capacity (0.5mn) is underutilized, the cylinder market in India (20mn cylinder) is
large enough to accommodate Supremes capacity, once the bureaucratic hurdles
are cleared. We have built in improving capacity utilization from FY17 onwards.
Future product modifications could increase turnover and margins:

Supreme has a strong track record of introducing product modification of the
existing product-line to meet consumer needs. For example, Supreme launched
no noise high-rise pipes in FY14 in the VAP range. The company could
consistently launch such product modifications to increase turnover and margins.
December 01, 2015
Page 55
Supreme Industries
Exhibit 9: Ambit vs consensus (FY16 is a 9 month period and the consensus data may not be comparable)
Consensus
Ambit
Divergence
Revenue (` mn)
FY2016 (9M)
30,479
32,833
7.7%
FY2017
54,533
55,215
1.2%
EBIT (` mn)
FY2016 (9M)
4,487
5,009
11.7%
FY2017
8,214
8,058
-1.9%
FY2016 (9M)
18.0
20.0
11.1%
FY2017
33.6
33.5
-0.3%
Comments
Our revenue estimates are above consensus as we expect
strong plastic pipes volume growth alongside growth in
Silpaulin and PVC pipes segments. We also considered
sales of commercial real estate asset in our revenues.
Our EBIT margins forecasts are higher than consensus in
FY16 because we assume increase in percentage of high
margin Silpaulin and CPVC pipes to overall EBITDA; our
estimates are marginally lower in FY17
EPS (adjusted) (`)

Divergence in PAT is in line with EBITDA
Exhibit 10: Supreme Industries on our forensic accounting score

Field
Score
Comments
Accounting
GREEN
In our accounting analysis of BSE-500 companies, we have classified Supreme Industries as an industrial
company. Supreme Industries emerges as the best industrial company (amongst 14 industrial companies) on
account of its higher ranking on most parameters (such as miscellaneous expenses as a percentage of
revenues, other loans & advances /net worth, asset turnover, and audit fee CAGR/revenue CAGR).
Predictability
GREEN
The company has always given a detailed description and has made timely disclosures regarding its future
strategy, expansion plans, expected business momentum and expected earnings performance in their annual
reports and during their conference calls.
Earnings momentum
AMBER
Over the last six months, consensus EPS estimates for FY15 and FY16 have been revised downward by 15%.
December 01, 2015
Page 56
Supreme Industries
Income statement
Particulars (` mn)
Operating Income
FY14
FY15
FY16E
FY17E
FY18E
39,622
42,552
32,833
55,215
65,768
% growth
16.4%
7.4%
-22.8%
68.2%
19.1%
Plastics EBITDA
5,494
5,642
4,528
7,897
9,476
Plastics EBITDA margin
14.1%
13.7%
14.1%
14.4%
14.5%
Net depreciation / amortisation
1,015
1,390
1,006
1,511
1,720
EBIT
4,873
5,272
4,003
6,547
7,958
761
580
407
415
288
32
24
19
20
21
PBT
4,143
4,717
3,616
6,152
7,691
Provision for taxation
1,400
1,600
1,175
1,999
2,500
PAT
2,483
2,443
2,116
4,044
5,056
Interest Expense/(income)
Other income
Share of associates
91
106
100
105
108
Plastics PAT
2,483
2,443
2,116
4,044
5,056
Consolidated PAT
2,573
2,549
2,216
4,149
5,164
20.3
20.1
17.4
32.7
40.7
Consolidated EPS (`)

Balance sheet
Particulars (` mn)
Total Networth
Loans
FY14
FY15
FY16E
FY17E
FY18E
10,392
12,115
13,746
15,513
17,712
3,846
3,929
2,929
2,179
1,179
Sources of funds
15,405
16,939
17,570
18,587
19,787
Net block
10,804
10,325
11,319
12,708
14,138
1,074
1,207
1,207
1,207
1,207
246
1,818
1,185
590
(5)
Sundry debtors
2,348
2,380
1,857
3,028
3,606
Inventories
4,976
4,647
4,193
6,040
7,031
Loans and advances
2,045
2,196
1,713
2,782
3,313
Total Current Assets
9,633
11,058
8,966
12,459
13,963
Current liabilities and provisions
6,362
6,649
4,919
8,784
10,520
15,405
16,939
17,570
18,587
19,787
Investments
Cash and bank balances
Application of funds
Cash Flow statement

Particulars (` mn)
FY14
FY15
FY16E
FY17E
FY18E
PBT
4,143
4,717
3,616
6,152
7,691
Depreciation
1,015
1,390
1,006
1,511
1,720
Interest expense/ (income)
761
580
407
415
288
Other income
(30)
(21)
81
85
87
Direct taxes paid
(1,237)
(1,422)
(1,175)
(1,999)
(2,500)
Change in working capital
(1,401)
765
399
(1,803)
(974)
3,252
6,009
4,333
4,360
6,312
CFO
Purchase of fixed assets
(1,445)
(1,936)
(2,000)
(2,900)
(3,150)
CFI
(1,338)
(1,859)
(1,981)
(2,880)
(3,129)
Net borrowings
CFF
Free cash flow
28
(797)
(1,200)
(750)
(1,000)
(1,875)
(2,598)
(3,281)
(2,075)
(3,778)
1,807
4,073
2,333
1,460
3,162
December 01, 2015
Page 57
Supreme Industries
Key ratios
Particulars
FY14
FY15
FY16E
FY17E
FY18E
0.3
0.2
0.1
0.1
0.1
17.2
13.2
10.1
16.5
18.1
2.8
2.6
1.9
3.0
3.4
ROCE
21.6%
17.8%
13.8%
23.8%
27.3%
ROE
26.8%
22.7%
17.1%
28.4%
31.1%
31.6
31.9
36.7
19.6
15.7
Net debt/Equity
Working capital turnover (x)
Gross block turnover (x)
P/E (x)
P/B (x)
EV/EBITDA (x)
7.8
6.7
5.9
5.2
4.6
14.4
12.5
16.6
10.3
8.5
December 01, 2015
Page 58
Century Plyboards
BUY
CPBI IN EQUITY
December 01, 2015
Warming up for the marathon
Building materials
Whilst the plyboard industrys revenues declined by ~8-10% in 1HFY16,

Century posted 6% revenue growth, 340bps margin expansion (aided
by raw material linkages) and improvement in cash conversion.
Alongside scale expansion and brand building initiatives, its focus on
cost leadership, when smaller players are losing ground, bodes well for
long-term profitability. With MDF gradually finding acceptance over
low-quality plywood, Centurys expansion (at low capital intensity `2.5bn for 600 CBM) is required even if it disrupts its own ply market.
Demand slowdown will not suppress Centurys valuations (17x FY17E
EPS), as long as the company is able to use its brand, scale and cost
architecture to gain market share, launch effective products and
reinvest surplus cash to sustain/improve RoEs (~35% over FY15-18E).
Recommendation
Multiples have room for further expansion

A large addressable market with shrinking unorganised share bodes well for
Century. Century trades at 17x FY17E EPS, a 15-35% discount to other building
materials; its multiples will expand as the opportunity translates into sustained
earnings growth/profitability; our target price implies 21x FY17E EPS. Whilst
competition may be less of a risk, product disruption and capex needs for MDF
should keep multiples under check.
Uptick in volume growth from

2HFY17 onwards as demand
recovers
Market share gain from unorganised

in FY16 and FY17 led by regulatory
re-sets
Better pricing power, with lower

industry fragmentation driving
margin expansion
Performance (%)
160
140
120
100
SENSEX
CPBI
Source: Bloomberg, Ambit Capital Research
Key financials
Year to March
FY14
FY15
FY16E
FY17E
FY18E
13,477
15,648
17,495
20,601
27,090
EBITDA (` mn)
1,766
2,488
3,018
3,493
4,720
EBITDA margin (` mn)
Net Revenues (` mn)
13.1%
15.9%
17.3%
17.0%
17.4%
Net Profits (`)
786
1,365
1,833
2,155
3,054
EPS (`)
3.5
6.1
8.2
9.7
13.7
36.1%
39.8%
40.2%
34.7%
36.5%
50.7
29.2
21.7
18.5
13.0
RoE (%)
P/E (x)
Analyst Details
Achint Bhagat, CFA
Tel: +91 22 3043 3178
Nitin Bhasin
Tel: +91 22 3043 3241

Nov-15
Oct-15
Aug-15
80
May-15
Well positioned to benefit from the demand recovery

Whilst demand recovery will take some time, Century will continue to gain
market share in the interim, as regulatory changes and liquidity challenges
wipe out the low cost advantage of unorganised players. We expect the
company to post 17%/23%/33% revenue/EBITDA/PAT CAGR and 34% RoEs
over FY15-18. Unhedged forex exposure (`1.5bn) is the risk to our estimates.
Apr-15
Strengthening its back-end to lead from the front

Century doubled its ply/lam capacities, invested in branding (`2.2bn; 3% of
sales over FY10-15) and hired senior mid-level managers for business verticals
in the last five years. Now, it is doubling its face veneer capacities to gain cost
leadership, whilst its smaller competitors continue to face challenges to procure
the raw material. Moreover, the company has forayed in MDF, with the product
finding acceptance and with the costs of equipment reducing.
AMBER
AMBER
GREEN
Catalysts
Feb-15
Credible performance in difficult times

Significant slowdown in secondary real estate transaction led to a sharp decline
in plyboard sales for the last 18 months. Century sustained industry-leading
growth through scale/product expansion and penetration in smaller markets.
Strong margin expansion (340bps), owing to raw material linkages in Myanmar
and Laos, drove 48% PAT growth in 1H. Moreover, its cash conversion cycle
improved in 1HFY16, led by lower inventory and debtor days.
Accounting:
Predictability:
Earnings Momentum:
Jan-15
Changes to this position: POSITIVE
`145/US$2.7
`177/US$3.3
`192
`230
20
Flags
Dec-14
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Jul-15
COMPANY INSIGHT
Century Plyboards
Exhibit 1: Assumptions summary
Particulars (` mn
unless mentioned)
FY16
FY17
FY18
201,057
213,997
Change (%)
FY16
FY17
239,676
2%
6%
4,320,818 4,752,900 5,608,422
20%
10%
FY18
Comments
Volumes
Plyboard (CBM)
Laminate (Sheets)
MDF (CBM)
Volume growth in in FY16 and FY17 largely driven by

12% Sainik. We expect strong recovery in FY18, led by recovery
in construction
Volume growth in FY18 to be driven by capacity
18%
expansion
MDF capacity will start contribution to sales from FY18,
we build in 60% capacity utilisation in the first year
108,000
Plyboard (`/CBM)
64
68
73
5%
6%
7% Realisation improvement to be driven by price hikes
Laminate (`/sheet)
983
1,042
1,115
5%
6%
7% Realisation growth to be driven by improving product mix
24
Realisation
MDF (Rs/CBM)
We estimate 10% lower realisation to Greenply
Financials
Net Sales
Adjusted EBITDA
Adjusted EBITDA
margin (%)
Depreciation
Interest
17,495
20,601
27,090
12%
18%
3,018
3,493
4,720
21%
16%
17.3%
17.0%
17.4% 135 bps -30 bps
450
554
659
0%
23%
Significant volume growth in ply and lam will drive strong

revenue growth in FY18. We include revenue for the
particle board unit of `840mn and `960mn in FY16 and
31%
FY17 assuming 70% and 80% capacity utilisation and
`2.6bn revenue from MDF in FY18 (Assuming 60%
utilisation)
35%
Margin expansion is largely a function of lower raw
47 bps material prices
19% Increase as capacities get capitalised
314
305
306
-27%
-3%
PAT
1,833
2,155
3,054
34%
18%
0%
PAT margin (%)
10.5%
10.5%
11.3% 176 bps
-2 bps
2,539
2,847
2,393
77%
12%
(1,468)
(1,484)
(2,231)
267%
1%
1,071
1,363
162
4%
27%
3.0
3.1
3.6
0.0
0.2
3.0
2.7
2.9
(0.1)
(0.3)
1.9
1.8
2.0
0.0
(0.0)
RoCE
22.7%
22.6%
25.8%
82 bps -18 bps
329 bps
RoE
40.2%
34.7%
36.5%
34 bps -547 bps
183 bps
ROIC
24.0%
24.5%
27.7%
94 bps
327 bps
42% Sharp increase with higher EBITDA and lower interest

81 bps costs
Cash flow parameters

CFO
Capex
FCF
Turnover ratios
Working capital
(ex-cash)
Gross Block
Capital employed
High working capital investment will restrict CFO growth

in FY16
Capex to fund office building, maintenance and addition
50%
of new plyboard/laminate and MDF
-88% FCF to remain positive leading to debt repayment
-16%
Improving WC cycle with lower inventory days and mostly

towards FY18
0.1 GB turnover to improve as utilisation rates increase
Higher GB and WC turnover to drive capital employed
0.2
turnover
0.5
Profitability Ratios
50 bps
Improvement in EBIT margins and higher capital

employed turnover to drive profitability for the company
Exhibit 2: Ambit vs consensus

Particulars
Consensus
Ambit
FY16
17,476
17,368
FY17
21,145
19,630
FY16
2,974
3,018
FY17
3,757
3,493
FY16
1776
1,833
FY17
1819
2,216
Divergence Comments
Revenue (` mn)
-0.6% Our revenue estimates are lower than
consensus as we build in tepid demand growth
-7.2% for ply until FY17
EBITDA (` mn)
1.5% Our EBITDA estimates are lower than
consensus despite similar margins in FY17 due
-7.0% to lower revenues
PAT (` mn)
3.2% Our PAT is higher than consensus despite
21.8% lower EBITDA, since we do not build forex loss
December 01, 2015
Page 60
Century Plyboards
Valuation: Stretched multiples but large opportunity

Ply is a large category, wherein 50% market share is held by unorganised players,
which is facing rising liquidity and regulatory challenges. The organised market is
largely oligopolistic, and over the last four years, Century has done the right things in
terms of building scale and brand, ramping up distribution and assuring long-term
raw material supply. In a category which is undergoing a structural shift, near-term
earnings multiples often look stretched. However, this should be seen in light of the
long-term earnings growth potential, which is higher than most other categories,
provided incumbents are able to re-invest efficiently, launch new products which will
replace wood products (polymers/wood plus paper composites) and sustainably
improve asset turnover and RoEs. The stock is trading at 16x FY17E EPS; our
estimates imply 33% EPS CAGR and 34% average RoEs over FY15-18E; our target
price implies 21x FY17E EPS.
Exhibit 3: CPBI re-rated significantly
Exhibit 4: but premium profitability justifies premium

multiples
50%
One-yr fwd P/E (X)
FY13
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
0%
Apr-14
0
Jan-14
10%
Oct-13
10
Jul-13
20%
Apr-13
20
Jan-13
30%
Oct-12
30
Jul-12
40%
Apr-12
40
FY14
FY15
RoCE
FY16E
FY17E
FY18E
RoE
Exhibit 5: Explanation for the accounting Flags

Segment
Score
Comments
Accounting
AMBER
Centurys cash conversion cycle is materially longer than Greenply (110-130 days in FY13-14 as against 70-76
days for Greenply), mainly due to significantly lower creditor days (16-20 days in FY13-14 against 53-60 days for
Greenply. Centurys CFO/EBITDA has been low at <50% for the two years, as revenue growth required investment
in working capital.
Predictability
AMBER
Management has made time announcements of capacity expansion and volume growth guidance has been fair.
The only concern is unpredictable forex losses.
Earnings momentum
GREEN
Consensus estimates have remained flat in the last month.
December 01, 2015
Page 61
Century Plyboards
Key catalysts
Further margin improvement: We have built in 50bps margin expansion both in
FY16 and FY17, led by lower input prices. Improvement in margin alongside
improving revenue growth will be a key catalyst for the stock.
Market share gains: Century has continuously gained market share over peers for
the last 2-3 years. We have built in higher than industry volume growth for the
company on the premise that its established scale and RM security will accelerate
market share gains. Higher than industry volume growth could be a key positive
catalyst
Success in particle boards and MDF: Whilst we have built in 50% utilisation rates
in initial years, which could need upgrades if the company is able to launch these
products successfully.
Price hikes and further decline in input costs: If unorganised players lose
competitiveness, the organised players pricing power will improve which means that
even in a deflationary input cost environment, incumbents will be able to push
through price hikes. We have built in 4% price hikes in FY17.
Risks
Product disruption: Given that timber reserves globally are shrinking, there is a
major risk that innovative product launches (specifically plastic composites - already
eating into the wood market in the US), would displace plyboards. Century needs to
actively think through long-term disruptions or it risks losing the opportunity to a
global innovator.
INR depreciation: The company has `1.4bn of buyers credit outstanding in USD and
if the INR depreciates before the payments, the company will suffer forex losses.
Face veneer export ban in Myanmar: Myanmar has banned the export of raw
timber but face veneer export is allowed. If Myanmar were to ban exports of face
veneer as well, a key raw material source would be eradicated.
Capital misallocation: Century is incurring `500mn to build a corporate
headquarters in Kolkata. The managements argument is that, given the increasing
scale of the business and high-profile talent acquisition, the company needs a
corporate office. We believe that Centurys CFO generation will be much higher than
it capex needs and if the company misallocates or digresses in unrelated businesses,
it will erode shareholder value. In the past, the Group has expanded into multiple
businesses from one listed entity; in the last year, the company has demerged its
cement business into a separate ferro chrome and cement subsidiary (Star Ferro and
Cement).
December 01, 2015
Page 62
Century Plyboards
Balance Sheet
` mn unless mentioned
Share capital
FY14
FY15
FY16E
FY17E
FY18E
223
223
223
223
223
Reserves and surplus
2,708
3,526
5,040
6,820
9,343
Total Networth
2,931
3,749
5,262
7,042
9,565
Loans
5,276
4,677
4,527
4,327
4,477
2,002
1,500
1,100
800
800
Of which Buyers credit

Deferred tax liability (net)
(7)
(63)
(63)
(63)
(63)
Sources of funds
8,314
8,418
9,782
11,362
14,035
Net block
3,164
2,781
3,800
4,730
6,301
31
31
31
31
Capital work-in-progress
Investments
387
374
526
1,069
607
Sundry debtors
2,089
2,683
2,855
2,958
3,775
Inventories
3,029
3,322
3,093
3,227
4,202
Loans and advances
1,100
1,323
1,475
1,613
2,137
6,793
7,819
8,065
8,983
10,836
1,914
2,041
2,114
2,382
3,134
Net current assets
4,879
5,778
5,951
6,601
7,702
8,314
8,418
9,782
11,362
14,035
Income statement
FY14
FY15
FY16E
FY17E
FY18E
13,477
15,525
17,368
19,630
25,995
Plyboards
10,480
12,126
12,961
14,655
17,562
Laminates
2,587
3,372
4,249
4,954
6,255
Revenue
yoy growth
15%
15%
12%
13%
32%
11,961
13,015
14,350
16,289
21,467
1,766
2,488
3,018
3,493
4,720
yoy growth
52%
41%
21%
16%
35%
Depreciation
387
448
450
554
659
1,416
2,231
2,605
2,999
4,123
603
432
314
305
306
37
46
37
60
62
Adj PBT
629
1,654
2,291
2,693
3,818
124
290
458
539
764
Adjusted PAT
786
1,365
1,833
2,155
3,054
yoy growth
63%
74%
34%
18%
42%
Reported PAT
633
1,509
1,833
2,155
3,054
10
14
Total expenses
EBITDA
EBIT
Interest and financial charges
Other income
EPS basic (`)

December 01, 2015
Page 63
Century Plyboards
Cash Flow statement
Rs mn unless mentioned
FY14
FY15
FY16E
FY17E
FY18E
PBT
629
1,799
2,291
2,693
3,818
Depreciation
387
448
450
554
659
Interest paid
603
432
314
305
306
CFO before change in WC
1,623
2,633
3,018
3,493
4,720
(1,168)
(911)
(21)
(107)
(1,564)
(117)
(290)
(458)
(539)
(764)
338
1,432
2,539
2,847
2,393
Direct taxes paid

CFO
Net capex
CFI
Proceeds from borrowings
Change in share capital
Interest & finance charges paid
Dividends paid
CFF
643
400
1,468
1,484
2,231
(706)
(327)
(1,459)
(1,424)
(2,168)
372
364
(150)
(200)
150
(287)
(432)
(314)
(305)
(306)
(60)
(516)
(319)
(375)
(531)
(281)
(1,263)
(783)
(880)
(687)
Net increase in cash
(649)
(158)
298
543
(462)
FCF
(305)
1,032
1,071
1,363
162
Opening cash balance
983
387
229
526
1,069
Closing cash balance
334
229
526
1,069
607
Source: Company, Ambit Capital research,
Ratio Analysis
FY14
FY15
FY16E
FY17E
FY18E
Revenue growth
14.7
15.2
11.9
13.0
32.4
EBITDA growth
52
41
21
16
35
PAT growth
25
138
21
18
42
EPS norm (dil) growth
63
74
34
18
42
EBITDA margin
13
16
17
18
18
EBIT margin
11
14
15
15
16
Net margin
11
11
12
RoCE
19
22
23
23
26
RoIC
23
24
24
28
30
RoE
36
40
40
35
37
FY14
FY15
FY16E
FY17E
FY18E
Working capital turnover
2.5
2.9
3.0
3.1
3.6
Debt/Equity(x)
1.7
1.2
0.9
0.6
0.5
Net debt/Equity(x)
1.6
1.1
0.7
0.5
0.4
P/E (x)
50.7
29.2
21.7
18.5
13.0
P/B(x)
13.1
10.5
7.5
5.6
4.1
EV/EBITDA(x)
25.3
17.7
14.5
12.3
9.3
Valuation Parameter
December 01, 2015
Page 64
Kajaria Ceramics
NOT RATED
KJC IN EQUITY
December 01, 2015
Good quality but expensive
Building materials
Well positioned for the demand recovery

Kajaria is strengthening its franchise, whilst most other peers worry about tepid
demand, low profitability and weak balance sheets. Whilst demand recovery
might take some time, levy of anti-dumping duty on Chinese imports and working
capital stress of smaller players should support volume growth for Kajaria.
Consensus estimates 16%/23%/25% revenue/EBITDA/PAT CAGR for Kajaria and
RoEs of 27% in FY15-17.
AMBER
Accounting:
Predictability:
Earnings Momentum:
GREEN
GREEN
Potential catalysts
Strong
volume
growth
post
commissioning of capacities in FY17
Margin
expansion
with
further
reduction gas prices from 3QFY16
RoE
expansion
with
improving
margins and reducing capital intensity
Performance
160
140
120
100
SENSEX
KJC
Expensive valuations leave no margin of safety

Kajaria is displaying the traits of a champion franchise and hence its profitability
and earnings could grow sustainably. However, the stock has become expensive
(26x FY17 consensus EPS) post the recent re-rating, which leaves no margin of
safety and its rich multiples could shrink if the demand slowdown persists. The
rich multiples build in an underlying assumption that no large building material
company will enter the tile industry and disrupt the growth momentum of the
incumbents.
Key financials (` mn)
Analyst Details
Profit and Loss account
FY11
FY12
FY13
FY14
FY15
Revenue
9,533
13,130
16,120
18,388
30,518
EBITDA
1,489
2,064
2,455
2,808
3,081
Adj PAT
618
829
1,091
1,314
1,464
RoE (%)
30
33
34
30
17
92.3
68.8
52.3
44.6
42.1
P/E
Achint Bhagat
Tel: +91 22 3043 3178
achintbhagat @ambitcapital.com
Nitin Bhasin
Tel: +91 22 3043 3241

Nov-15
Oct-15
Aug-15
80
Jul-15
Leveraging its brand and cost leadership

Kajaria is increasing its capacity by ~40% (20.2msm) over FY15-17, including
large cost efficient capacities in Rajasthan and AP (6.5msm and 5.7 msm,
respectively). Its brand and cost leadership transpires into industry-leading
EBITDA margin; scale benefits and lower gas cost are further levers to margin
expansion. Alongside, the company is investing in building its talent pool and
professionalising management across key business functions. It continues to
invest 2.5-3% of sales on branding alongside increasing sales touch points.
Flags
May-15
A leader in every sense

Over FY10-15, Kajarias sales/EBITDA tripled, earnings jumped six-fold and RoE
tripled to 30% (from 10%), as it built the best tile franchise in India. Despite a
sharp deceleration in the tile industrys growth in 1HFY16, its volumes grew 10%.
EBITDA margin expanded by 440bps in 1H, led by deflation in gas prices
especially for the Morbi capacities. Stable pricing and working capital cycle
(unlike peers) are a testament of the strength of its franchise.
`75/US$1.1
`95.4/US$1.4
` 945
Apr-15
Mcap (bn):
6M ADV (mn):
CMP:
Feb-15
Recommendation
Jan-15
Kajaria, undeniably, is the scale, brand and cost leader of the Indian tile
industry. It is displaying the traits of a champion franchise, evident from
its industry-leading margins (18% in 1HFY16) and RoEs (28%) and strong
bargaining power with the channel (stable working capital cycle in
1HFY16 unlike peers). Moreover, its reputation helps attract JV partners
(thereby reducing its capital intensity) and build/retain its talent pool.
Receding Chinese competition and lower gas prices also bode well for
leading brands. Whilst we acknowledge the franchise of Kajaria, we
believe that the current valuations adequately factor this in. The stock has
rallied by 54% in the last one year and it now trading at 26x FY17
consensus EPS. Current valuations leave little room for re-rating and
could be ignoring rising competitive intensity, limited options to expand
margins/ RoCEs and potential entry of larger home building brands.
Dec-14
COMPANY INSIGHT
Kajaria Ceramics
Consolidated financials
Balance sheet
Share capital
FY12
FY13
FY14
FY15
147
147
151
159
2,674
3,462
5,144
7,251
Total Networth
2,821
3,609
5,295
7,409
Loans
2,782
3,202
1,938
2,220
644
656
713
791
Sources of funds
6,319
7,742
8,355
11,045
Net block
5,209
6,200
6,916
8,601
24
78
405
778
Investments
72
55
61
112
Sundry debtors
1,190
1,436
1,649
2,071
Inventories
1,865
2,197
1,931
3,033
Loans and advances
549
508
794
997
3,675
4,196
4,434
6,213
2,590
2,732
3,401
4,547
Net current assets
1,085
1,464
1,033
1,666
6,319
7,742
8,355
11,045
Income statement
Revenue
yoy growth
Total expenses
EBITDA
yoy growth
Net depreciation
EBIT
Other income
FY12
FY13
FY14
FY15
13,130
16,120
18,388
21,778
38
23
14
18
11,066
13,664
15,593
18,350
2,064
2,455
2,808
3,520
39
19
14
25
393
446
470
559
1,671
2,009
2,338
2,962
487
462
408
294
15
30
63
94
1,199
1,577
1,993
2,761
381
499
678
854
Adj PAT
Adj PBT
829
1,091
1,314
1,850
yoy growth
34
32
20
41
EPS basic (`)
11
15
17
23
December 01, 2015
Page 66
Kajaria Ceramics
Cash flow statement
PBT
Depreciation
Others
Interest paid
Direct taxes paid
CFO
Net capex
Net investments
CFI
FY12
FY13
FY14
FY15
1,199
1,577
1,993
2,761
393
446
470
559
15
18
379
399
408
294
1,985
2,440
2,871
3,614
(356)
(599)
437
(583)
(337)
(483)
(678)
(854)
1,292
1,358
2,629
2,177
(725)
(1,509)
(1,648)
(1,782)
38
(687)
(1,501)
(1,648)
(1,782)
(23)
568
(1,264)
282
997
(384)
(407)
(408)
(294)
Dividends paid
(171)
(214)
(264)
(369)
CFF
(578)
117
(975)
(343)
28
(27)
51
568
(152)
981
395
FY12
FY13
FY14
FY15
RoCE
20
20
20
20.0
RoIC
19
19
20
20.8
RoE
33
34
30
29.1
Debt/Equity(x)
1.0
0.9
0.4
0.3
Net debt/Equity(x)
1.0
0.9
0.4
0.3
FCF
Ratio analysis
Gross Block Turnover (X)
1.7
Working capital Turnover (X)
13
11
19
14.1
P/E (x)
69
52
45
33.3
P/B(x)
20
16
11
8.3
2.9
29
25
22
18.1
EV/Sales(x)
EV/EBITDA(x)
December 01, 2015
Page 67
Kajaria Ceramics
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December 01, 2015
Page 68
Astral Poly Technik

NOT RATED
ASTRA IN EQUITY
December 01, 2015
Flow and Fix guard
Industrials
Flags
Accounting:
GREEN
Predictability:
GREEN
Earnings Momentum:
AMBER
Potential catalysts
EBITDA margin expansion in pipes

and adhesives business in 2HFY16
Market share gains in adhesives

business post re-launch of products
with new packaging, campaigns in
2HFY16
Increased contribution from new pipe

products improving CE turnover
Performance (%)
160
140
120
100
SENSEX
ASTRAL
Unlikely single digit growth rates could give misleading multiples

Astrals management has displayed efficient capital allocation plus swiftness
and uniqueness. The next 6-12 months can be a low-growth phase, but
management continues to further strengthen its competitive advantages. RoCE
should remain high as margins increase with innovation and cash flows get reinvested in large opportunities; assuming low terminal growth rate ten year out
could provide misleading exit multiples (eg: Asian Paints in last 10-15 years).
Astral trades at 26x consensus FY17 EPS, closer to adhesives/paints companies.
Key Financials (consolidated)
Y/E March (` mn)
FY11
FY12
FY13
FY14
FY15
Operating Income
10,732
12,526
14,975
17,910
22,352
EBITDA
1,556
1,505
1,992
2,427
3,029
Nitin Bhasin
+91 22 3043 3241
EBITDA %
14.5%
12.0%
13.3%
13.6%
13.6%
Net Profit (Adj)
976
755
1,141
1,445
1,869
Adjusted EPS (`)
8.7
6.4
9.6
12.2
15.8
35.1%
16.3%
17.1%
18.4%
20.0%
Achint Bhagat, CFA

+91 22 3043 3178
ROE (%)
Analyst Details

Nov-15
Oct-15
80
Aug-15
Superlative revenue growth, synergies to keep earnings growth high

Over the next five years Astrals pipe revenues could grow~20% from new
launches (Blazemaster, column pipes, electrical conduits, agriculture) and
capacity expansions in South/North/East. Alongside, we believe India adhesives
business could grow material ahead of pipes given small base and Astrals
aggression on branding, capacity expansion, channel connect and more
importantly intermediary connect; Seal ITs silicon portfolio also holds potential.
`43.4/US$0.7
`414
Jul-15
Sub-category leader to now a national building materials brand

Over the last decade, Astral effectively moved from a CPVC pipes manufacturer
to now a national plastic pipes brand. Its recent acquisition of Resinova, one of
the fastest growing and high RoE generating adhesives company with a strong
brand BONDTiTE, puts Astral in a unique position to grow materially ahead of
respective sector peers. We are already witnessing increased awareness of
product in channel/institutional clients from change in packaging/new launches
6M ADV (mn):
CMP:
May-15
A franchise built around innovation in products, branding, processes

Astral is one of the fastest growing pipe franchises in the country (41% CAGR
over FY10-15). Alongside continuous capacity expansions and rising acceptance
of plastic pipes, the key drivers for Astrals market leading growth were (a)
innovation not only in products but also in branding (first pipe company with
TVC) and processes (pricing and automation), (b) business architecture built
around strong reach and expanding manufacturing footprint and (c) strategic
assetsrelationships with Lubrizol and thousands of plumbers.
`50/US$0.7
Apr-15
Changes to this position: STABLE
Mcap (bn):
Feb-15
Recommendation
Jan-15
Focus on innovation (products, pricing, branding) has helped Astral

become a leading name in the evolving/fast growing polymer-based
plumbing piping industry. Its recent foray into adhesives market and
emerging signs of replication of similar approach w.r.t new
products/branding/distribution suggests compounding of growth and
moat. Adhesives/construction chemicals industry is in its infancy
wherein applications are evolving akin to pipes 5-10 years back and
Astrals acquisitions along with pipes make it one of the few A
segment-specific companies to transition into a larger home-building
brand. Current premium multiples can become even richer from an
effective capture of these two large-potential high-growth categories.
Dec-14
COMPANY UPDATE
Astral Poly Technik

The following section is from our recent Coffee Can Portfolio wherein we had
discussed Astral as one of the companies as part of the portfolio
Astral on the IBAS framework

As I planned to enter into plastics, I decided against entering PVC given multiple
players and instead I chose CPVC for which I travelled to USA and stayed there for a
few months to learn the product and then launched an industrial CPVC product
We grew at 40% plus CAGR for more 7-8 years up to 2014 whilst economy wasnt that
strong; where was the slowdown? Slowdown is in the mind! If you create new product
segments, if you create leadership, if you create brand, growth will be strong and
ahead of industry
When we were a small company (`250mn revenues) we started branding to effectively
compete with the stalwarts, for building awareness with not only intermediaries but
also end consumers. Alongside we started plumber meets for training them how to use
CPVC product.
Sandeep Engineer, Promoter, Astral PolyTechnik
Astral Poly Technik is one of Indias leading plastic pipe companies with leadership in
CPVC pipes. Astral was incorporated by Mr Sandeep Engineer (a chemical engineer)
in 1996, wherein he first entered into relationship with BF Goodrich (which later
became Lubrizol), a leading CPVC player and a patent holder in CPVC resin
technology. Later, it entered into a JV relationship (for manufacturing know-how) with
US-based Specialty Processes LLC which remains a shareholder till today. With its
recent acquisition of Resinova and BondIt in UK, Astral has now become a pipes,
adhesives and construction chemical company, with a larger home building materials
brand.
Our primary data checks and a reading of its history reveals that the companys high
ROCE generating fast face growth in the last decade has been driven by (a)
innovation not only in products but also in branding and processes, (b) business
architecture built around strong reach and (c) connect and strategic
relationships which have helped in innovation.
1. Focus and determination of the promoter
Mr Engineers journey before start of Astral was full of half successful/
unsuccessful ventures and even in the early years (98-02) of Astrals pipe
business, he didnt taste success and came close to bankruptcy. His associates
indicate that despite near-bankruptcy in 2001, Mr Engineer never lost
determination to make this novel product a success and would travel back and
forth to customers and international partners to bring down the cost, launch new
products and sign up new customers. Mr Engineer mentioned recently that we
continue to remain focused on the product and not the sales; but focus on pipes
does not mean we will let go of certain opportunities whilst we simultaneously
focus on our client and hence have diversified into adhesives/construction
chemicals having established leadership in pipes.
Promoters of Astral, Ashirvad and Supreme are equally fanatic about not only
growing their brands and products but also maintaining/upgrading quality of their
products said a senior person working with a leading pipes company
2. Innovation in products, branding and now processes:
(a) Innovation focus for launching novel products: Since its inception, Astral,
led by Mr Engineer, has continuously launched new products at very regular
intervals (see exhibit) not only in the CPVC but also in the otherwise very
established PVC plumbing systems. Today, Astral is the only licensee of
Lubrizol to manufacture and sell all Lubrizols four brands (Corzan,
FlowGuard, Blazemaster and Bendable) and in some cases the only one to
sell in the world (Bendable). Apart from its relationship with Lubrizol, it has
entered into relationships with multiple players (Wavin, Spears, IPSC, Hunter
and Harvell), from across the developed world for various products and then
December 01, 2015
Page 70
Astral Poly Technik

later commenced manufacturing of the same. Whilst its key competitor
Supreme has a wide portfolio of fittings, we have seen that over the last few
of years, Supreme has entered into products once Astral announced its entry
(CPVC, CPVC-based fire sprinkler, noise-free pipes).
Mr. Kajaria, who is also a dealer for other companies such as Supreme and
Prince, attributes the success of CPVC in India to Astral. Mr. Kajaria said,
Astral's branding is the most aggressive. Astral knows how to catch hold of the
right intermediaries. They have good-quality products and have created a great
brand by doing frequent meetings with dealer and plumber meets. Astral has a
lot of buzz in the industry. People look forward to new launches from them.
Mr M P Taparia, promoter of Supreme Amongst all the pipe manufacturers,
we consider Astral to be one of the key competitors given its focus on quality
Exhibit 1: Astral has consistently launched new products through partnerships with
global majors
Year
Product
Strategic Partners
1999
Flowguard CPVC Piping and plumbing systems
Lubrizol
2001
CPVC pipes and fittings
Specialty Products LLC (USA)
2003
PVC pressure pipes
Lubrizol
2004
CPVC and PVC fittings, flanges and valves
Spears (USA)
2004
Solvent Chemicals
IPSC (USA)
2005
Underground speciality fittings
Hunter (U.K.)
2006
Large Diameter PVC pipes
Harvell (USA)
2008
Sound Proof piping
Wavin
2012
Lead free column pipes
Lubrizol
2013
Bendable Pipes
Lubrizol
2014
Blazemaster*
2015
2015
2016
Lubrizol
Seal It (Acquired Bond It (UK based
Silicon Sealants / adhesives
Adhesives manufacturer))
Resinova (Acquired Resinova (Bondtite,
Expoy based adhesives and construction chemical Resibond etc) Indian based adhesives
manufacturer)
Construction Chemicals (Thormet)
Through its subsidiary Resinova
Source: Company, Ambit Capital research. * In Blazemaster, the company entered into the partnership in 2006,
but the government approval in 2013
(b) Brandingfirst one with a unique and a big budget: Prompted by a

dealers comment unless someone asks for your product (CPVC) or your
brand (Astral), I will not market/store your product Mr Engineer started
investing in branding in smaller scale in this raw category unlike its peers.
Later, in FY05, Astral took its brand nationwide to attract more distributors. It
hired Mudra, a leading Indian ad agency, for an aggressive ad campaign.
Recalling the move, Mr. Engineer had this to say in a press article: That year,
we ploughed our profit of `25mn into branding. I was certain there was a huge
replacement market in galvanised iron and we needed a pan-India brand if we
had to matter. Later, Astral used aggressive promotional activities such as
co-branding with Dabangg-2, stadium sponsorships for Sachin Tendulkars
last test match series and heavy outdoor campaigning nationwide to increase
visibility with retail customers. Astral presently has one of the highest
expenditure on publicity amongst peers (2.2% of sales); now it is about to
commence one of the biggest campaigns for its recently acquired and rebranded adhesives and construction chemicals business as it sets to compete
with
industry
stalwart
like
Pidilite
built
around
innovative
packaging/branding. In the process, it has re-branded/re-packaged Resinova
products to Astral branded products.
December 01, 2015
Page 71
Astral Poly Technik
1.0
CE turnover (X)
50
0.5%
0.0%
FY15
FY14
FY13
FY12
FY11
FY10
0.0%
FY09
FY08
4.0%
FY07
0.5
1.0%
100
FY15
8.0%
FY14
1.5
1.5%
150
FY13
12.0%
2.0%
200
FY12
2.0
250
FY11
16.0%
2.5%
FY10
2.5
300
FY09
20.0%
FY08
3.0
Exhibit 3: Branding expenditure expanded at a 48% CAGR

over FY07-12; a higher 2.2% of materially higher sales in
FY15 against 1.2% in FY07 (small base)
FY07
Exhibit 2: Astrals EBIT margin has been stable and CE

turnover has improved consistently (the drop in FY15 is on
account of capacity additions) driving its RoCE
Branding expenditure (Rs mn)

Branding exp/sales (RHS)
EBIT Margin (RHS)
(c) Processesof pricing and now automation: In order to effectively

compete against the traditional GI/CI pipes, Astral followed pricing processes
to gain customer entry and then demonstrate value before seeking price
hikes. For the builders, the CPVC or noise-free pipes were sometimes priced
lower than the traditional product. Builders and distributors mention that
pricing was one of the biggest factors of increasing adoption; in India you
not only have to give a lower price for a new product, but also demonstrate
more value, which Astral did. Astrals innovation in processes continues with
increased adoption of automation; very recently without considering payback
duration, company installed robotic truck filling machines to reduce truck
loading times by more than half but more importantly reducing the
probability of work disruption. Astral is set to adopt more automation (more
so in packaging) in its recently acquired Resinova facilities using experience of
its UK-based subsidiary BondIt.
Architecturechannel and relationships continue to expand
Astral has built a strong network of not only distributors/ dealers but also plumbers
and institutional customers. Training of thousands of plumbers across multiple events
every year, engagement with consultants/architects and strong branding has helped
company expand this architecture. Over the years, company has simultaneously
increased its manufacturing capacities and warehouses to enter into newer markets.
Rising distributors and dealers

Distributors
Dealers
FY12
350
11,000
FY13
400
13,000
FY14
400
18,000
FY15
700
20,000
Quality and branding have strengthened Astrals recall with builders/ plumbers, which Source: Company, Ambit Capital research
leads to relatively higher sales of Astrals pipes compared to Supreme or Ashrivads
says a Mumbai based hardware retailer.
We note that Astral is set to leverage on its pipe reach/connect and Resinovas reach
(700+ distributors and 20,000+ dealer points) to become an even larger home
building material brand, a feat not yet displayed by many (note that the companys
distribution reach has doubled over FY12-15). Risks of diversifying into a new
segment are mitigated given Resinovas quality product, limited overlap with Astrals
customers and effective use of its Astrals strong brand equity with channel.
December 01, 2015
Page 72
Astral Poly Technik

Income statement
Particulars (` mn)
FY11
FY12
FY13
FY14
FY15
Operating Income
4,108
5,793
8,211
10,732
12,526
% YoY revenue growth
41.6%
41.0%
41.7%
30.7%
16.7%
Total expenses
3,548
4,975
7,095
9,176
11,021
EBITDA
560
818
1,116
1,556
1,505
13.6%
14.1%
13.6%
14.5%
12.0%
Net depreciation / amortisation
107
134
177
213
330
EBIT
465
723
960
1,364
1,188
44
228
181
82
129
EBITDA margin
Interest Expense/(income)
Other income
13
39
20
21
13
Adjusted PBT
422
496
779
1,013
966
86
106
184
242
278
Adjusted PAT
334
512
679
976
755
EPS (Adjusted) (`.)
3.0
4.6
6.0
8.7
6.4
FY11
FY12
FY13
FY14
FY15
Balance sheet
Particulars (` mn)
Share capital
112
112
112
112
118
1,376
1,744
2,306
3,035
6,012
Total Networth
1,488
1,856
2,418
3,148
6,130
448
887
895
941
1,118
Sources of funds
1,953
2,760
3,401
4,219
7,427
Net block
1,040
1,551
2,055
2,745
3,000
102
350
114
11
71
Loans

Sundry debtors
1,133
1,692
1,700
1,805
2,325
Inventories
862
1,255
1,481
1,892
2,046
Loans and advances
395
427
575
587
720
2,143
3,057
3,217
3,915
4,725
Current Liabilities
1,280
1,943
1,928
2,548
3,017
Provisions
Net current assets
32
48
75
65
73
831
1,067
1,214
1,303
1,635
December 01, 2015
Page 73
Astral Poly Technik

Cash Flow statement
Particulars (` mn)
FY11
FY12
FY13
FY14
FY15
PBT
422
504
779
1,013
966
Depreciation
107
134
177
213
330
43
160
137
82
129
Other income
(21)
69
53
(21)
(13)
Direct taxes paid
(87)
(92)
(84)
(242)
(278)
(3)
66
(373)
(149)
(281)
Interest expense/ (income)

CFO (post -exceptions)
461
841
688
896
854
Purchase of fixed assets
(335)
(687)
(681)
(940)
(549)
CFI
(328)
(668)
(717)
(919)
(535)
Share capital
2,409
Net borrowings
274
(41)
46
177
Dividends paid
(26)
(29)
(29)
(52)
(51)
Interest paid
(46)
(169)
(137)
(82)
(129)
CFF
(70)
75
(207)
(88)
2,405
Net Cash
64
249
(236)
(111)
2,723
Cash at the beg
38
101
350
114
Cash at the end
101
350
114
2,726
Free cash flow
126
154
(44)
305
FY11
FY12
FY13
FY14
FY15
Net debt/Equity
0.2
0.3
0.3
0.3
0.2
Working capital turnover (x)
6.1
8.0
9.0
9.0
8.8
Gross block turnover (x)
3.3
3.4
3.5
3.4
3.2
ROCE
21.4%
25.4%
23.6%
27.7%
14.7%
ROE
25.0%
30.6%
31.8%
35.1%
16.3%
P/E (x)
131.9
86.1
64.9
45.2
61.5
P/B (x)
29.6
23.7
18.2
14.0
7.6
EV/EBITDA (x)
79.3
54.5
40.2
28.9
30.0
Key ratios
Particulars
December 01, 2015
Page 74
Somany Ceramics
NOT RATED
SOMC IN EQUITY
December 01, 2015
Sailing through tough times
Building materials
Somanys three-pronged game plan to grow scale and profitability

After doubling its capacities in FY10-14, Somany expects to increase capacities
by 27% over FY14-16. Alongside, it endeavours to improve the product portfolio
(higher share of value-added vitrified tiles) and grow the sanitaryware/bath
fittings business to ~8-10% of sales by FY17 (vs ~4% in FY15). The
management expects 200bps PBT margin expansion over FY14-18, led by lower
gas prices, higher vitrified mix and operating leverage benefits.
Accounting:
Predictability:
Earnings Momentum:
GREEN
GREEN
AMBER
Potential catalysts
Sustaining industry-leading growth,
after 4msm JV capacity addition in
FY16
PBT margin expansion due to increase
in vitrified mix and operating leverage
RoE expansion given low-cost capacity

addition
and
improvement
PBT
margin
Performance
160
140
120
100
SENSEX
SOMC
40% discount to Kajaria is excessive

Somany trades at 17x one-year forward P/E (a 40% discount to Kajaria);
however, consensus expects higher earnings CAGR in FY15-17 (33% vs 24% for
Kajaria) and gradual RoE convergence. The multiples should be seen in light of
the large opportunity and few competitors with established scale and brand.
Somanys scale and low RoE deserve a discount albeit not so much.
Key financials (` mn)
Profit and Loss account
FY11
FY12
FY13
FY14
FY15
Revenue
7,199
8,790
10,539
12,648
15,431
EBITDA
677
741
857
815
1,076
Adj PAT
243
254
321
289
453
RoE (%)
26.0
22.1
23.0
12.7
17.2
P/E
48.3
46.2
36.6
45.7
29.1
Analyst Details
Achint Bhagat
Tel: +91 22 3043 3178
achintbhagat @ambitcapital.com
Nitin Bhasin
Tel: +91 22 3043 3241
Source:
````` Company, Ambit Capital research
Nov-15
Oct-15
Aug-15
80
Jul-15
A large pie but few contenders

Tiles is the third-largest home building category (`230bn), wherein the
unorganised segment is facing regulatory issues (GST) and challenges in
working capital financing (black money clamp-down). We expect organised
manufacturers, barring Kajaria and Somany, with weak balance sheets to pose
lower competition and Chinese imports will lose competitiveness with the levy of
the anti-dumping duty. Kajaria and Somany can break away from competition,
given their extensive reach and ability to grow with low capital intensity through
JV partnerships with smaller players.
Flags
May-15
Industry-leading growth in tough times vindicates franchise strength

The tile industrys volume growth decelerated to 3-4% in 1HFY16 (vs past tenyear CAGR of 12%), accentuated by rising liquidity constraints and housing
slowdown. Somany posted 10% volume growth, gaining market share both from
unorganised and struggling organised manufacturers. Strengthening brand,
higher vitrified share, expanding scale/distribution facilitated the strong growth;
PBT margin expanded by 50bps in 1HFY16, in line with managements
guidance.
`15/US$0.2
`6.9/US$0.1
` 386
Apr-15
Mcap (bn):
6M ADV (mn):
CMP:
Feb-15
Recommendation
Jan-15
In the worst tile industry slowdown of the last decade, Somany posted
10% volume growth in 1HFY16 (~2x industry growth), led by premium
product launches and brand/reach expansion. PBT margin expansion of
50bps in 1HFY16 was in line with the managements guidance, led by
higher vitrified mix, savings in gas procurement costs and operating
leverage benefits. Somany strengthened it franchise through continued
capacity expansions during times of a paradigm industry shift due to: (a)
rising affinity for 2-3 brands, (b) unorganised manufacturers (50%
market share) facing financing pressures, and (c) anti-dumping duty on
Chinese imports. The stock is trading at 17x FY17 consensus EPS (40%
discount to Kajaria); multiples should be seen in light of the large
opportunity but few credible participants (as other organised players
have significantly smaller scale and weaker balance sheets).
Dec-14
COMPANY INSIGHT
Somany Ceramics
Consolidated financials
Balance sheet
(` mn)
Share capital
FY12
FY13
FY14
FY15
69
69
78
78
1,190
1,462
2,157
2,502
Total Networth
1,259
1,531
2,235
2,580
Loans
1,666
1,624
1,707
1,913
254
262
284
287
Sources of funds
3,178
3,417
4,270
4,833
Net block
1,911
1,999
2,405
2,638
33
94
29
Investments
61
88
548
466
222
258
346
154
Sundry debtors
1,400
1,748
2,149
2,591
Inventories
1,006
1,205
906
1,365
Loans and advances
670
821
1,087
1,434
3,298
4,032
4,489
5,543
2,124
2,796
3,201
3,822
Net current assets
1,173
1,236
1,288
1,721
3,178
3,417
4,270
4,833
Income statement
(` mn)
FY12
FY13
FY14
FY15
Revenue
8,790
10,539
12,648
15,431
Total expenses
8,050
9,682
11,832
14,355
741
857
815
1,076
yoy growth
9.3
15.7
(4.9)
32.0
Net depreciation
183
205
224
266
EBIT
557
652
591
810
207
200
185
205
12
26
31
77
Adj PBT
362
478
437
682
111
153
170
222
Adj PAT
254
321
289
453
yoy growth
4.4
26.4
(10.0)
56.9
EPS basic (`)
7.4
9.3
7.4
11.7
EPS diluted (`)
7.4
9.3
7.4
11.7
DPS (`)
0.8
1.2
1.5
2.0
EBITDA
Other income
December 01, 2015
Page 76
Somany Ceramics
Cash flow statement
(` mn)
FY12
FY13
FY14
FY15
PBT
364
478
435
681
Depreciation
183
205
224
266
(6)
16
Interest paid
199
184
164
159
755
861
839
1,112
141
34
(648)
(110)
(155)
(134)
(213)
786
707
739
251
(311)
(377)
(590)
(508)
(43)
(19)
(449)
129
CFI
(353)
(396)
(1,039)
(379)
(136)
(42)
84
209
536
(205)
(202)
(184)
(205)
(28)
(32)
(48)
(68)
(369)
(276)
388
(64)
Others
Direct taxes paid

CFO
Net capex
Net investments

Dividends paid
CFF
64
36
88
(192)
476
330
149
(257)
FY12
FY13
FY14
FY15
RoCE
12.5
14.4
9.6
12.7
RoIC
13.6
15.9
11.7
14.0
RoE
22.1
23.0
12.7
17.2
P/E (x)
FCF
Ratio analysis
46.2
36.6
45.7
29.1
Debt/Equity(x)
1.3
1.1
0.7
0.7
Net debt/Equity(x)
1.1
0.8
0.4
0.5
EV/Sales(x)
1.7
1.4
1.2
1.0
19.8
17.0
17.9
13.9
EV/EBITDA(x)
December 01, 2015
Page 77
Somany Ceramics
Institutional Equities Team

Saurabh Mukherjea, CFA
CEO, Institutional Equities
(022) 30433174
saurabhmukherjea@ambitcapital.com
Research
Analysts
Industry Sectors
Nitin Bhasin - Head of Research
E&C / Infra / Cement / Industrials
(022) 30433241
Desk-Phone E-mail
Aadesh Mehta, CFA
Banking / Financial Services
(022) 30433239
aadeshmehta@ambitcapital.com
Abhishek Ranganathan, CFA
Retail / Mid-caps
(022) 30433085
abhishekr@ambitcapital.com
Achint Bhagat, CFA
Cement / Roads / Home Building
(022) 30433178
Ashvin Shetty, CFA
Automobile
(022) 30433285
ashvinshetty@ambitcapital.com
Bhargav Buddhadev
Power Utilities / Capital Goods
(022) 30433252
bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal
Power Utilities / Capital Goods
(022) 30433275
deepeshagarwal@ambitcapital.com
Gaurav Khandelwal
Automobile
(022) 30433132
gauravkhandelwal@ambitcapital.com
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Strategy / Derivatives Research
(022) 30433255
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Mid-caps / Small-caps
(022) 30433211
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Strategy
(022) 30433251
karankhanna@ambitcapital.com
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Technology
(022) 30433203
kushankpoddar@ambitcapital.com
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(022) 30433206
pankajagarwal@ambitcapital.com
Paresh Dave, CFA
Healthcare
(022) 30433212
pareshdave@ambitcapital.com
Parita Ashar, CFA
Metals & Mining
(022) 30433223
paritaashar@ambitcapital.com
Prashant Mittal, CFA
Derivatives
(022) 30433218
prashantmittal@ambitcapital.com
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Consumer
(022) 30433201
rakshitranjan@ambitcapital.com
Ravi Singh
(022) 30433181
ravisingh@ambitcapital.com
Ritesh Gupta, CFA
Oil & Gas / Chemicals / Agri Inputs
(022) 30433242
riteshgupta@ambitcapital.com
Ritesh Vaidya, CFA
Consumer
(022) 30433246
riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA
Economy / Strategy
(022) 30433175
ritikamankar@ambitcapital.com
Ritu Modi
Automobile
(022) 30433292
ritumodi@ambitcapital.com
Sagar Rastogi
Technology
(022) 30433291
sagarrastogi@ambitcapital.com
Sumit Shekhar
Economy / Strategy
(022) 30433229
sumitshekhar@ambitcapital.com
Utsav Mehta, CFA
E&C / Industrials
(022) 30433209
utsavmehta@ambitcapital.com
Vivekanand Subbaraman, CFA
Media
(022) 30433261
vivekanands@ambitcapital.com
Sales
Name
Regions
Sarojini Ramachandran - Head of Sales
UK
Desk-Phone E-mail
Dharmen Shah
India / Asia
(022) 30433289
dharmenshah@ambitcapital.com
Dipti Mehta
India / USA
(022) 30433053
diptimehta@ambitcapital.com
Hitakshi Mehra
India
(022) 30433204
hitakshimehra@ambitcapital.com
Krishnan V
India / Asia
(022) 30433295
krishnanv@ambitcapital.com
Nityam Shah, CFA
USA / Europe
(022) 30433259
nityamshah@ambitcapital.com
Parees Purohit, CFA
UK / USA
(022) 30433169
pareespurohit@ambitcapital.com
Praveena Pattabiraman
India / Asia
(022) 30433268
praveenapattabiraman@ambitcapital.com
Shaleen Silori
India
(022) 30433256
shaleensilori@ambitcapital.com
Pramod Gubbi, CFA Director
Singapore
+65 8606 6476
pramodgubbi@ambitpte.com
Shashank Abhisheik
Singapore
+65 6536 1935
shashankabhisheik@ambitpte.com
+44 (0) 20 7614 8374 sarojini@panmure.com
Singapore
USA / Canada
Ravilochan Pola - CEO
Americas
+1(646) 361 3107
ravipola@ambitpte.com
Production
Sajid Merchant
Production
(022) 30433247
sajidmerchant@ambitcapital.com
Sharoz G Hussain
Production
(022) 30433183
sharozghussain@ambitcapital.com
Joel Pereira
Editor
(022) 30433284
joelpereira@ambitcapital.com
Nikhil Pillai
Database
(022) 30433265
nikhilpillai@ambitcapital.com
E&C = Engineering & Construction
December 01, 2015
Page 78
Somany Ceramics
Supreme Industries Ltd (SI IN, BUY)
May-15
Jul-15
May-15
Jul-15
Sep-15
Nov-15
Jul-15
Sep-15
Nov-15
Nov-15
Mar-15
Mar-15
Sep-15
Jan-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
800
700
600
500
400
300
200
100
0
SUPREME INDUSTRIES LTD

Century Plyboards India Ltd (CPBI IN, BUY)

300
250
200
150
100
50
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
CENTURY PLYBOARDS INDIA LTD

Kajaria Ceramics Ltd (KJC IN, NOT RATED)

1,000
800
600
400
200
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
KAJARIA CERAMICS LTD

December 01, 2015
Page 79
Somany Ceramics
Astral Poly Technik Ltd (ASTRA IN, NOT RATED)
600
500
400
300
200
100
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
ASTRAL POLY TECHNIK LTD

Somany Ceramics Ltd (SOMC IN, NOT RATED)

500
400
300
200
100
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
SOMANY CERAMICS LTD

December 01, 2015
Page 80
Somany Ceramics
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>10%
SELL
NO STANCE
UNDER REVIEW
NOT RATED
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
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BUILDING

I ve been selling this

When can you

No, I want only

Time to build for tomorrow

December 01, 2015

Ambit Capital Pvt. Ltd.

Time to build for tomorrow

Building materials demand recovery may be uncertain but the

Current slowdown akin to FY96-99

Source: Company, Ambit Capital research

Home building materials

Delve a bit depeer

How to choose my category?

Other strong franchises

Source: Ambit Capital research

December 01, 2015

Ambit Capital Pvt. Ltd.

Structural resets caused the slowdown

The severe clamp-down on black

Revenue growth (HBM)

Nominal GDP growth

YoY revenue growth

Median growth rate

Source: Company, Ambit Capital research. Sum of 15 building material companies

December 01, 2015

Ambit Capital Pvt. Ltd.

Its uncertain but certainly not over

Demand recovery could take 3-4

Could FY15-18 be akin to FY96-99?

After FY96, 1HFY16 is the only

#1: Problems faced by the channel

Low channel liquidity and stress of

Source: Company, Ambit Capital research

#2: Real estate slowdown

December 01, 2015

Ambit Capital Pvt. Ltd.

Source: Media articles, Ambit Capital research

#3: Factors that could drive the demand recovery in

Low inflation regime could drive

Exhibit 7: Asian Paints commentary in FY99 - Rebound in growth rates

Exhibit 9: which is visible again in CY15 as well

Source: RBI, Ambit Capital research

December 01, 2015

Source: RBI, Ambit Capital research

Ambit Capital Pvt. Ltd.

#4: Factors that bode well for the long term

Fall in real estate prices

December 01, 2015

Ambit Capital Pvt. Ltd.

GST will wipe out the

Exhibit 11: Product pricing divergence between organised/unorganised

Price difference explained by

December 01, 2015

Ambit Capital Pvt. Ltd.

Learnings from the decade gone by

Most home building categories

Sector multiplier to nominal GDP

Total Size (` mn)

Source: Company, Ambit Capital research

The key observations from the above analysis are:

Source: Company, Ambit Capital research

December 01, 2015

Ambit Capital Pvt. Ltd.