CRISIL IER Report on Somany Ceramics Ltd Highlights Profitable Growth Ahead

RESEARCH
CRISIL IER Independent Equity Research
Somany Ceramics Ltd
Detailed Report
Enhancing investment decisions
Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis
of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a
five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL
Fundamental Grade
Assessment
CRISIL
Valuation Grade
Assessment
5/5
Excellent fundamentals
5/5
Strong upside (>25% from CMP)
4/5
Superior fundamentals
4/5
Upside (10-25% from CMP)
3/5
Good fundamentals
3/5
Align (+-10% from CMP)
2/5
Moderate fundamentals
2/5
Downside (negative 10-25% from CMP)
1/5
Poor fundamentals
1/5
Strong downside (<-25% from CMP)
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Last updated: August, 2014
Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias
the grading recommendation of the company.
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Somany Ceramics Ltd
RESEARCH
Profitable growth ahead

Fundamental Grade
4/5 (Superior fundamentals)
August 20, 2015
Valuation Grade
4/5 (CMP has upside)
Industry
Building products
Fair Value
CMP
Somany to sustain above-industry growth rates

Despite industry headwinds, the company posted above-industry growth of 22% in FY15. The
high growth rate is expected to be sustained due to a pan-India distribution network
comprising 1,200 dealers and 10,000+ sales points, steady improvement in brand equity
supported by healthy A&P spend, and a wide range of products encompassing ceramic tiles,
vitrified tiles, digitally printed tiles, sanitary ware and bath fittings.
Rising share of vitrified tiles to boost PBT margins
Aided by Somanys focus on launching new designs and formats, and growing consumer
preference for premium products, contribution of vitrified tiles in total sales increased to 50%
in FY15 from 16% in FY10, leading to better realisations. With continuous focus on product
innovation and favourable industry dynamics, sales traction of these products is expected to
remain robust going ahead. Rising share of high-margin vitrified tiles, along with operating
leverage benefit stemming from healthy revenue growth are expected to be the main
catalysts for a 120 bps expansion in PBT margin over FY15-17E.
Challenges: Threat from Chinese imports and no manufacturing facility in South India
With no clarity on the anti-dumping duty on ceramic and vitrified tiles, which was removed in
June 2013, competition from Chinese tiles has increased, particularly at the low-end
segment. Further, absence of a manufacturing facility in South India, the largest domestic
market, has increased the companys freight cost.
Maintain earnings estimates; fair value increased to 426
We maintain our revenues and earnings estimates for FY16-17. However, we have raised our
long-term growth projections and, subsequently increased our DCF-based fair value to 426
per share from 378 earlier. At the current market price of 356, the valuation grade is 4/5.
Excellent
Fundamentals
5
4
3
2
1
Poor
Fundamentals
Valuation Grade
Strong
Upside
Strong
Downside
Indian tiles industry: Near-term pressure to persist, long-term prospects intact

With high inventory levels across major real estate markets such as Mumbai and National
Capital Region (NCR), incremental supplies are likely to be subdued in the near term.
Moreover, despite signs of revival, consumer spending is yet to pick up substantially.
However, near-term challenges notwithstanding, the long-term industry prospects look bright
based on certain structural factors such as increasing penetration of tiles driven by
substitution of mosaic tiles and natural stones, growing replacement demand and increase in
demand for value-added products (mostly vitrified and digital tiles). Owing to a shift in
consumer preference for branded products, organised players such as Somany are expected
to outpace industry growth of 12-13% over the next few years.
CFV MATRIX
Fundamental Grade
Despite moderate industry growth, Somany Ceramics Ltd (Somany) maintained its healthy
growth trajectory and reported 22% y-o-y growth in FY15. Although demand is expected to be
weak in the next couple of quarters on account of muted real estate supply and slowdown in
consumer spending, the long-term growth prospects of the tiles industry are intact. Going
forward, the company is expected to maintain its above-industry growth thanks to a wide
range of products, good designing capabilities, increasing brand equity and extensive
distribution reach. Growing share of vitrified tiles, focus on expansion through the JV route
and operating leverage benefits stemming from sturdy revenue growth are expected to drive
PBT margin and RoE expansion. We maintain our fundamental grade of 4/5.
426
356
KEY STOCK STATISTICS

NIFTY/SENSEX
NSE/BSE ticker
Face value ( per share)
Shares outstanding (mn)
Market cap ( mn)/(US$ mn)
Enterprise value ( mn)/(US$ mn)
52-week range ()/(H/L)
Beta
Free float (%)
Avg daily volumes (30-days)
Avg daily value (30-days) ( mn)
8373/27608
SOMANYCERA
10
38.9
13,825/212
15,206/233
535/244
0.5
43.8%
14,596
5.7
SHAREHOLDING PATTERN
100%
90%
80%
35.6%
35.2%
34.9%
34.9%
2.6%
5.6%
2.9%
5.7%
3.1%
5.8%
3.0%
5.8%
56.2%
56.2%
56.2%
56.2%
Sep-14
Dec-14
70%
60%
50%
40%
30%
20%
10%
0%
KEY FORECAST
( mn)
Operating income
EBITDA
Adj net income
Adj EPS ()
EPS growth (%)
Dividend yield (%)
RoCE (%)
RoE (%)
PE (x)
P/BV (x)
EV/EBITDA (x)
Promoter
FY13
10,538
871
323
9.4
28.3
0.3
21.9
23.2
38.0
8.0
15.8
FY14
12,645
835
303
7.8
(16.8)
0.4
17.1
15.9
45.6
6.1
17.9
Source: Company, CRISIL Research estimates
FY15
15,431
1,076
464
11.9
53.0
0.7
19.7
18.9
29.8
5.3
14.2
FY16E
17,988
1,303
600
15.4
29.4
0.9
20.6
20.9
23.0
4.5
12.6
FY17E
21,169
1,618
796
20.5
32.6
1.2
19.9
23.4
17.4
3.7
10.8
FII
Mar-15
DII
Jun-15
Others
PERFORMANCE VIS--VIS MARKET

Returns
1-m
3-m
6-m
12-m
Somany
-8%
-13%
-4%
21%
CNX 500
-2%
2%
-3%
11%
ANALYTICAL CONTACT
Bhaskar Bukrediwala
Sayan Das Sharma
bhaskar.bukrediwala@crisil.com
sayan.sharma@crisil.com
Client servicing desk

+91 22 3342 3561
clientservicing@crisil.com
For detailed initiating coverage report please visit: www.ier.co.in

CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

Table 1: Somany Ceramics - business environment
Manufacturing in-house
Manufacturing JVs
(VeilCraft, digitally printed and
(digitally printed, glazed and
glazed vitrified tiles)
polished vitrified tiles)
40%
38%
22%
32%
48%
20%
Ceramic (wall and floor), vitrified and
Largely value-added products -
Outsources
high-end tiles (digital ceramic); wall and
vitrified tiles (soluble salt and
medium
floor tiles in the range of 200-1,500 per
double charge) and high-end tiles
manufacturers in Morbi (Gujarat).
sq mt (square meter)
(digital glazed vitrified tiles)
It also imports high-end tiles from
Parameter
Revenue contribution
(FY15)
Revenue contribution
(FY17E)
Product offering
Manufacturing outsourced
the
and
production
low-end
tiles
of
to
Italy, Spain, China, etc. (~1%)

Geographic presence
Domestic: Northern states lead in revenue contribution (39% in FY15), followed by South (29%), East (16%) and
West (11%)
Exports: Account for ~4% of revenues. Kuwait, Saudi Arabia and UAE are the key export markets. Planning to
gradually increase export focus by entering new geographies beyond the Middle-East, Sri Lanka and Bangladesh
Market position
The third largest ceramic tiles
Through JVs, has access to 21 mn sq mt capacity as of March
Over the past couple of years, Somany has followed the asset light
company in India with a ~14%

share of the organised market.
2015. It commissioned 5.5 mn sq ft of capacity in its JVs in FY15
Over the past five years, has
model, where it has access to capacity through its JVs and markets
consistently
the products under its own brand. Contribution of JVs have
recorded
above-
industry growth rates
increased to ~41% in Q1FY16 from 12% in FY12
End market
Residential, commercial and retail real estate, hotels, hospitals and airports
Key competitors
Kajaria, H&R Johnson (under Prism Cement), Asian Granito, Nitco Tiles, Orient Bell and various unorganised players
Sales growth
(FY13-FY15 2-yr CAGR)
Sales forecast
(FY15-FY17E 2-yr CAGR)
Demand drivers
5%
66%
8%
5%
45%
13%
Owing to changing lifestyles, consumer preference has shifted towards branded tiles translating into market
Value-added and high-end tiles are being sought as substitutes for traditional and mosaic tiles. Rise in demand
The replacement cycle has shortened to once in 8-10 years compared to once or twice in a lifetime with the rise
In the past couple of years, a sharp increase in fuel costs has restricted margin expansion despite an increase
share gain for the organised players

for value-added tiles is likely to be a major growth driver
in income levels and changing lifestyles
Margin drivers
in the share of high-margin value-added products. However, lower fuel costs coupled with growing contribution
from value-added products should drive PBT margin going forward
Key risks
Imports from China
Slower-than-expected recovery in real estate demand
Source: Company, CRISIL Research
Somany Ceramics Ltd

RESEARCH
Grading Rationale
Tiles industry growth moderated in recent quarters
Owing to slowdown in real estate supply & weak consumer spending
Owing to prolonged slowdown in real estate supply and muted consumer spending (the main
driver for replacement demand), growth of the ceramic tiles industry has moderated marginally
over the past couple of years. Supply of residential space in key cities (NCR, Mumbai,
The ceramic tiles industry grew
Bengaluru, Chennai, Hyderabad and Pune) was sluggish in FY15 due to weak demand and
10% in CY14, slower than 18%
large existing inventory levels, and declined at a two-year CAGR of 22%. As per our channel
over CY10-13
checks, supply of residential space in tier-II and tier-III cities too has slowed down in recent
times. Supply of commercial space has also been low on account of high levels of vacancies
in the key cities. On the other hand, slower-than-expected recovery in the economy and
muted rural spending put a cap on consumer discretionary spending during the year. Due to a
combination of these factors, growth of the ceramic tiles industry moderated to 11% over
FY13-15 from 17-18% CAGR over FY10-13.
...But Somanys growth trajectory continued unabated

Despite muted demand, Somany maintained its growth momentum owing to improvement in
brand recall, an extensive distribution reach and increase in the contribution of vitrified tiles. In
FY15, its revenues grew 22% y-o-y, the highest among organised tiles manufacturers.
Consequently, its market share in the organised segment increased to 13% in FY15 from 10%
in FY11.
16.2%
9.0%
19.0%
-4.4%
14.7%
5.0%
120
140
170
195
215
240
FY10
FY11
FY12
FY13
FY14
FY15
0.0%
Size of ceramic tiles industry ( bn)
Source: Industry, CRISIL Research
y-o-y growth (RHS)
Kajaria Ceramics
10.0%
100
7.1%
-35.4%
15.0%
H&R Johnson
10.3%
150
11.6%
Asian Granito
200
22.0%
7.6%
20.0%
16.7%
18.5%
Somany Ceramics
21.4%
250
50
(%)
25.0%
Euro Ceramics
300
Figure 2: Somany grew faster than its peers in FY15
Orient Bell
(%)
Nitco Ltd
( bn)
Murudeshwar Ceramics
Figure 1: Growth of ceramic tiles industry moderated in FY14-15
FY15 y-o-y revenue growth
Source: Company, Industry, CRISIL Research

Ceramic tiles industry: Long-term prospects intact
Structural drivers are in place
CRISIL Research expects growth of the domestic ceramic tiles industry to pick H2FY16
onwards despite the short-term challenges, as structural growth drivers are in place. In value
Branded tiles manufacturers are
terms, the industry is expected to register a CAGR of 12-13% over FY15-18E. Volumes are
expected to grow at a CAGR of
expected to grow at ~10% CAGR, while realisations are expected to increase 2-3% on the
18-20%,
back of rising share of value-added products. The organised players are likely to grow at 18-
growth
faster
than
industry
20% CAGR over the same period, faster than the unorganised segment, owing to their brand
strength, wide distribution reach and shift towards branded tiles. The key growth drivers are as
follows:
Increasing penetration of tiles Despite a 6% share of global tiles production and 7%

share of global consumption, Indias per capita tiles consumption is significantly lower
than global standards (0.54 sq mt compared with 3.1 sq mt in China and 4 sq mt in
Brazil). However, per capita consumption has been on the rise and the trend is expected
to continue driven by substitution of mosaic tiles and natural stones (in rural and semiurban areas) and low-end marble (urban areas) with ceramic tiles supported by rising
income levels.
Rising share of value-added products: The value-added tiles (such as GVT, PVT,
digitally printed tiles) segment, which has been witnessing robust growth in recent years,
is expected to maintain its growth trajectory. Attributes such as aesthetic appeal, higher
resistance to chemicals and abrasion, and higher longevity are prompting a change in
consumer preference for these products. CRISIL Research expects demand for valueadded products to be the main driver of overall industry growth going forward. The share
of value-added products is estimated to increase to 49% in FY18 from 42% in FY15 (in
volume terms).
Growing replacement demand: Due to the shorter replacement cycle of ceramic tiles,
Replacement cycle of ceramic
thanks to constant innovation by branded tiles manufacturers and change in consumer
tiles has shortened to 8-10 years
lifestyle, replacement demand is expected to grow at a healthy 12-13% CAGR, providing
in recent years, from once or
an additional fillip to overall demand.
Prolonged slowdown in real estate, possibility

monsoons may play spoilsport in near term
twice in a lifetime
of
below-normal
Although we expect growth of the tiles industry to pick up in H2FY16, prolonged slowdown in
real estate supply and slower-than-anticipated pick-up in consumer spending may delay the
revival in demand. Inventory levels across key real estate markets are quite high, which
indicates that fresh supply of real estate space is likely to remain subdued in FY16 as well.
Additionally, consumer spending continues to be sluggish and the recovery is expected to be
gradual.
Owing to several factors (such as moderate hike in minimum support prices, lower agricultural
exports due to soft commodity prices, spending cut under MNREGA and muted construction
activity leading to fewer non-agricultural employment opportunities), growth in rural income
has moderated over the past few quarters. This, coupled with weak urban consumer
spending, has impacted demand. Many of the aforementioned factors are unlikely to show a
Somany Ceramics Ltd

RESEARCH
reverse trend in the near future and, hence, rural income growth and spending are expected
to remain muted in the near term.
Figure 3: Growth of the tiles industry expected to pick up gradually
( mn)
Figure 4: Share of value-added tiles to increase
(%)
14.7%
400
350
15.0%
14.1%
FY18P
14%
11.6%
9.6%
300
12%
250
10%
200
8%
150
6%
100
4%
50
9%
16%
215
240
263
300
345
FY14
FY15
FY16P
FY17P
FY18P
6%
36%
FY15
51%
58%
40%
Ceramic tiles
2%
PVT
0%
GVT
y-o-y growth (RHS)
Aptly positioned to capitalise on growth prospects

We expect Somany to sustain higher-than-industry growth rates on the back of rising share of
value-added products, improving brand equity supported by healthy advertising and
promotional spend, and a wide distribution network.
Vitrified tiles to continue to remain the primary growth catalyst

Healthy demand for vitrified tiles is likely to remain the primary growth driver for Somany going
Expect share of vitrified tiles to
forward. Driven by focus on launching new designs and formats, and growing consumer
increase to 60% in FY17 from
preference for premium products, contribution of vitrified tiles to total sales has grown to 50%
50% in FY15
in FY15 from 16% in FY10. This has benefitted blended realisations as well during the same
period blended realisations have grown to 382/ sq mt from 240/ sq mt. With continuous
focus on product innovation and favourable industry dynamics, sales traction of these
products is expected to grow at a CAGR of 26% over FY15-17E.
Figure 5: Share of vitrified tiles has been increasing...
Figure 6: ...translating into better realisations
(%)
( mn)
100%
90%
43.0% 43.4% 41.3%
70%
55.3% 49.4% 50.2% 52.1% 53.2% 51.0%
60%
40%
57.0% 56.6% 58.7%
20%
379
1,172 1,333 1,187 2,520 1,614 1,831 1,912 2,409 1,974
Vitrified tiles
Gross sales of vitrified tiles
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q1FY14
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Ceramic tiles
330
320
310
0%
390
380
350
340
341
500
10%
410
400
370
360
352
347
1,000
44.7% 50.6% 49.8% 47.9% 46.8% 49.0%
381
379
366
2,000
1,500
50%
30%
394
2,500
Q2FY14
80%
(%)
402
3,000
Blended realisation (RHS)

Healthy A&P spend to sustain brand equity
Owing to good product quality and a wide range of designs, Somany has developed strong
brand equity. The company has undertaken a number of branding and promotional activities
over the past couple of years, including advertising campaigns through various mediums such
Spends 1.5-2% of sales as A&P
as print and electronic media, out-of-home advertising and social media. As per our channel
spend, at par or above most of
checks, Somanys brand recall has improved in recent years, thanks to concerted initiatives.
its peers
Currently, the company spends 1.5-2% of its annual sales towards advertising and
promotional (A&P) activities, at par with Kajaria, and plans to increase it to 2-2.5% over the
next couple of years. We expect increasing recall of the Somany brand stemming from
robust A&P spend to be one of the key growth catalysts going forward.
Figure 7: A&P spend has grown at a healthy rate in recent years
( mn)
(%)
350
117.4%
300
250
66.3%
47.4%
29.1%
150
100
2.0%
120.0%
1.8%
100.0%
1.6%
60.0%
40.0%
40.3%
20.0%
0.0%
-26.9%
50
58
125
91
152
196
289
FY10
FY11
FY12
FY13
FY14
FY15
A&P spend
(%)
140.0%
80.0%
200
Figure 8: A&P spend is at par or above competitors
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
-20.0%
0.2%
-40.0%
0.0%
1.4% 1.6%
1.7% 1.7% 1.7%

1.1%
1.0%
Somany Ceramics
y-o-y growth (RHS)
FY12
Kajaria Ceramics
FY13
1.0%
0.7%
Asian Granito
FY14
*FY15 annual report of Kajaria and Asian Granito was not available on the
date of the report
Strengthened distribution network to augment presence in tier-II/III cities

Over the years, the company has developed a wide, pan-India distribution network, which is a
key success factor for tiles manufacturers. The company is particularly strong in the northern
states, which accounted for 39% of revenues in FY15, followed by South (29%), East (16%)
and West (11%); while exports comprise the rest. At present, it has 1,270 dealers, >10,000
sub-dealers, and a retail store network of 179 showrooms (Somany Exclusive and Studios). A
wide distribution network has enabled the company to increase its reach in tier-II and tier-III
cities, which remain less penetrated and, hence, offer better growth opportunities. The sales
contribution of these cities has increased to ~75% in FY15 from 70% in FY10. To improve
brand visibility, the company is also investing in retail studios and exclusive showrooms, and
has increased the number of retail stores to 179 from 127 in FY12. An extensive geographic
reach, which is unmatched by most other tiles manufacturers, gives the company a
competitive edge.
Currently have ~1,300 dealers

and 10,000+ sub-dealers
Somany Ceramics Ltd

RESEARCH
Table 2: Distribution network better than most peers
Figure 9: Sales contribution from tier-II/III cities is growing

(%)
100%
Number of
dealers
Number of subdealers/retailers
Somany
1,272
>10,000
H&R Johnson
1,200
15,000
900
10,000
1,000
5,000
Company
Kajaria
Nitco
3%
2%
2%
3%
4%
70%
72%
73%
73%
75%
27%
26%
25%
24%
21%
FY10
FY11
FY12
FY13
90%
80%
70%
60%
50%
40%
30%
Orient Bell
3,000
20%
Asian Granito
2,800
10%
0%
Tier-I
Tier-II and tier-III
FY14
Others
Plans to improve footprint in export markets

Apart from entrenching its presence in the domestic market, Somany is increasingly focusing
on improving its presence in the export markets. Currently, it is present in more than 40
countries, with exclusive showrooms in six-seven countries. It has established global offices
and warehouses, and is participating in various trade shows to improve brand visibility. As a
result, export contribution has grown to 4.2% of sales in FY15 from 1% in FY11. Going
forward, we expect export growth to grow steadily driven by expansion in new markets.
Sales traction in sanitary ware sales encouraging, but further ramp up to be

challenging
As a natural extension of its product line, the company has entered the sanitary ware and
faucet ware/bath fittings space, and successfully generated healthy sales traction in recent
years. Sales from sanitary ware and faucet ware products have grown at ~30% CAGR over
FY11-15, albeit from a low base (from 230 mn in FY11 to 793 mn in FY15). These products
are sold through the existing dealer network. It has acquired 47.8% stake in Somany
Sanitaryware Pvt. Ltd, with a capacity of 0.3 mn pieces per annum. It plans to increase the
capacity. For faucet ware, the company is evaluating expansion opportunities (joint
venture/greenfield).
Ramp-up in the sales of these products is a positive for the company as it helps it to become a
complete bathroom solution provider, and also fetches considerably higher margins. However,
Sales from sanitary and faucet
we do not expect the company to gain a substantial share in the sanitary ware and faucet
ware grew at ~36% CAGR over
ware markets in the near term owing to 1) the presence of a number of well-established
FY11-15
national (Cera, HSIL, Jaquar) and international (Roca, Duravit, Kohler, Toto) brands; 2)
relatively lower brand awareness of the company at present; and 3) significantly lower
addressable market size sanitary ware is 28-30 bn and faucet ware is 48-50 bn compared
to the 215 bn ceramic tiles market.

Figure 10: Sanitary and faucet ware products witnessing healthy growth
( mn)
(%)
90.0
90%
78.0%
80%
80.0
70.0
70%
58.7%
60%
60.0
41.9%
50.0
40.0
40%
24.1%
23.6%
30.0
30%
20%
20.0
10.0
50%
23.0
28.5
35.2
55.9
79.3
FY11
FY12
FY13
FY14
FY15
10%
0%
Gross sales from sanitaryware and bath fittings
Continues to benefit from focus on asset light (JV) model

The company continues to benefit through the asset light JV route. Over FY13-15, it entered
into JVs with five Morbi-based manufacturers 26% stake in four companies and 51% in one.
During the same period, the total access to capacity increased to ~51 MSM (mn sq mt) from
~36 MSM, primarily through the JV model. In FY15, the capacity of two JVs Amora Tiles and
Acer Granito was enhanced by 2.4 MSM and 3.1 MSM, respectively. Going forward, we
expect the capacity addition through the JV route to continue. Thanks to the asset light model,
the companys asset turnover has improved to 3.0x in FY14 from 2.2x in FY11, although
RoCE expansion has been limited as PAT margin has shrunk owing to higher fuel and power
costs. We expect focus on the asset light model to boost return ratios going ahead. Apart from
the JV model, the company is also expanding the capacity in Kasar plant by 4 MSM.
Figure 12: ...leading to better asset turnover and working

Figure 11: Production mix shifting towards JVs...
capital management
(Days)
(%)
100%
90%
80%
37%
35%
31%
27%
25%
22%
21%
26%
50%
20%
2.2x
16%
17%
16%
32%
33%
36%
43%
38%
41%
3.5x
3.0x
2.4x
2.5x
40
2.0x
30
47%
48%
53%
1.5x
41%
41%
41%
37%
36%
36%
10%
20
1.0x
10
Owned manufacturing
JV
Outsourced
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
0%
2.7x
50
40%
30%
3.0x
23%
70%
60%
(x)
3.3x
60
0.5x
54
37
32
25
30
FY11
FY12
FY13
FY14
FY15
0.0x
Working capital days
Asset turnover (RHS)
Somany Ceramics Ltd

RESEARCH
Table 3: Access to capacity through JV route has increased to 21 MSM

JV partner
Stake
Capacity (MSM)
Utilisation as of Q1FY16
Amora Tiles Pvt. Ltd
51%
4.6
79%
Products
Ceramic wall tiles
Acer Granito Pvt. Ltd
26%
5.1
82%
PVT
Commander Vitrified Pvt. Ltd
26%
4.8
96%
GVT and PVT
Vicon Ceramic Pvt. Ltd
26%
4.0
92%
Parking and ceramic tiles
Vintage Tiles Pvt. Ltd

Total
26%
3.0
21.0
91%
PVT
Expansion in PBT margins to be driven by rising share of

vitrified tiles, operating leverage benefits
As already mentioned, PBT margins are expected to expand by 120 bps over FY15-17E,
driven mainly by rising contribution from vitrified tiles (expected to inch up to 59% in FY17
from 51% in FY15). Sturdy revenue growth over the next couple of years is expected to result
in better absorption of fixed costs, translating into operating leverage benefits.
Despite rising contribution of vitrified tiles, PBT margins over the past few years have
remained flat owing to a sharp increase in power and fuel costs. Following a sharp decline in
crude prices, the companys power and fuel costs have been coming down over the past
couple of quarters (by 160 bps y-o-y and 90 bps y-o-y in Q1FY16 and Q4FY15, respectively).
With crude oil prices expected to remain subdued (CRISIL Research expects crude oil to
remain at $70-$80/barrel in the next three-four years), fuel costs are likely to remain soft going
ahead. Although bulk of this benefit is likely to be passed on, power and fuel costs are likely to
remain flat as a percentage of sales, aiding PBT margin expansion.
Figure 13: PBT margins set to expand
(%)
5.6%
6.0%
5.0%
4.8%
4.5%
4.0%
4.4%
3.3%
3.0%
2.0%
1.0%
0.0%
FY13
FY14
FY15
FY16E
FY17E
PBT margin
Change in competitive landscape beneficial for organised

players, Chinese imports remain a threat
Competition from unorganised players has moderated...
Many developments in the past couple of years have reduced the competitiveness of the
unorganised players, benefitting the branded manufacturers.
Developments in Morbi: As per a Gujarat High Court verdict in November 2013, the
unorganised manufacturers in Morbi, which accounts for ~70% of total tiles production in
India, have been asked to shift operations from coal gasifiers to natural gas. Since the
cost of natural gas is significantly higher than coal, this has reduced the cost advantage
of these players vis-a-vis the organised segment.
Consolidation in the industry: Leading branded tiles manufacturers, such as Kajaria

and Somany, have entered into JVs with unorganised players in the past two-three
years. This model is beneficial for both organised and unorganised players. It has
reduced competition for the branded manufacturers from the unorganised segment, as
they have effectively become the suppliers.
...But high in organised segment

Although competition from the unorganised segment has reduced, competitive pressure in the
organised segment continues to be high. Apart from the presence of a number of wellestablished players such as Kajaria, H&R Johnson, Asian Granito and NITCO, the entry of
sanitary ware manufacturers (Cera and HSIL) into the tiles space has intensified competition.
Table 4: Competitive positioning of Somany

Asian
Particulars
Somany
Kajaria
Product offerings
Ceramic (50%)
Ceramic (47%)
(revenue
and vitrified tiles
and vitrified tiles
contribution)
(50%)
(53%)
14%
Market share in the

organised industry
Brand equity
Capacity (including
JVs) MSM
Strong
55
Manufacturing base
Haryana and
(including JVs)
Gujarat
Distribution network
H&R Johnson
Granito
Orient Bell
Ceramic (70%)
Ceramic (50%) and vitrified
Ceramic and
tiles (50%)
vitrified tiles
21%
23%
10%
7%
Leading brand in
Strong but market share is
the industry
declining
Moderate
Moderate
62.6
54.0
36.0
25.0
Rajasthan,
Maharashtra, Gujarat,
Gujarat, UP and
Karnataka, Pondicherry, MP,
AP
Andhra Pradesh and HP
1,200 dealers
900 dealers and
and >10,000
sales points
10,000 sales
points
1,200 dealers and ~15,000

sales points
Gujarat
NA
and vitrified tiles

(30%)
UP, Gujarat and

Karnataka
3,000 dealers
Nitco Ltd
Ceramic (45%) and
vitrified tiles (55%)
10%
Strong but market
share is declining
16.0
Maharashtra
1,000 dealers and

5,000 sub-dealers
No clarity on anti-import duty, increased Chinese imports remain a threat

Although the risk from Chinese tiles imports has partially mitigated with technological
improvements by Indian tiles players and depreciation of the rupee, it remains a threat to the
domestic tiles manufacturers. Over FY06-08, there was a large influx of Chinese tiles in the
Indian market, which adversely impacted the volumes and margins of domestic tiles
manufacturers. Subsequently, the government imposed an anti-dumping duty of 137 per sq
mt on Chinese tiles, which led to a decline in import volumes. In 2013, the anti-dumping duty
was revoked, and has not been re-imposed since. If the duty is not re-imposed, competition
from low-cost Chinese products may increase. Moreover, mandatory shift from coal gas to
LNG has increased the production cost of Morbi-based manufacturers, and reduced their cost
10
Status quo on anti-dumping duty
Somany Ceramics Ltd

RESEARCH
competitiveness against Chinese manufacturers. Hence, increase in competition from Chinese

tiles manufacturers is a monitorable.
No plant in South India = high freight costs

With no manufacturing facilities in South India, Somany has to cater to this market from its
facilities based in Gujarat and Haryana. Despite being the largest market for tiles in India with
a 40% share of overall domestic demand, only 20% of the manufacturing facilities are situated
Average freight cost of 2.6% of
in the southern region owing to limited availability of natural gas. Among the organised
sales against Kajarias 1%
players, H&R Johnson and Murdeshwar Ceramics have manufacturing plants in South India,
while Kajaria has access to capacity through a JV partner in Andhra Pradesh. As Somany has
to cater to this key market through its North-based facilities, its freight cost is higher than its
peers with facilities in South its average freight cost over the past three years has been
2.6% of gross sales compared to 1% of gross sales for Kajaria.
11

Key Risks
Slower-than-expected recovery in real estate supply
The prospects of the ceramic tiles industry are dependent on the supply of real estate
projects. Growth rates of the ceramic tiles industry has moderated over the past couple of
years the tiles industry grew at a two-year CAGR of 11% over FY13-15 compared to 18%
CAGR over FY11-13 - owing to a slowdown in real estate supply in major cities. Although we
expect real estate supply to pick up gradually driven mainly by economic recovery, in case the
recovery is slower than our expectations, the ceramic tiles industrys growth prospects would
suffer.
Inability to retain benefits of lower fuel prices may lead to

shortfall in our margin estimates
We have built in PBT margin expansion on the assumption that the company is likely to retain
some benefits of the lower energy costs while passing on the rest to the consumers. However,
in a subdued demand environment amidst competitive pressure, if the company has to pass
on a major portion of benefits to its consumers, it may lead to a shortfall in our PBT margin
estimates.
12
Somany Ceramics Ltd

RESEARCH
Financial Outlook
Revenues to grow at 17.7% CAGR over FY15-17 driven by
volumes
We expect revenues to grow at a two-year CAGR of 17.7% to 21.2 bn in FY17, driven
Demand
primarily by 13.3% volume growth, while average realisations are expected to grow 5% over
for
vitrified
tiles
is
the same time period. Value-added products - such as digitally printed tiles, glazed and
expected to grow faster than that
polished vitrified tiles - are expected to grow faster than ceramic tiles and are likely be major
for ceramic tiles
catalysts of revenue growth. Total contribution of vitrified tiles is expected to reach 58% in
FY17 from 52% in FY15.
Table 5: Product-wise sales forecast (gross sales)

Product
CAGR (FY15-17)
Revenue contribution in FY17 (%)
Ceramic tiles
10.2%
42%
PVT
GVT
26.4%
26.4%
30%
28%
Source: CRISIL Research
Figure 14: Expect revenue growth of 19% CAGR over FY14-
Figure 15: ...driven by higher contribution from value-added
17E...
products
( mn)
(%)
25,000
25.0%
22.0%
20.0%
(%)
100%
90%
20.0%
20,000
16.6%
17.7%
20.0%
15.0%
15.7%
16.1%
31.0%
35.3%
26.5%
28.0%
28.3%
30.1%
80%
70%
15,000
15.6%
24.1%
60%
50%
10,000
10.0%
5,000
5.0%
40%
30%
10,538
12,645
15,431
17,988
21,169
FY13
FY14
FY15
FY16E
FY17E
Revenue
53.3%
48.6%
45.2%
41.9%
FY14
FY15
FY16E
FY17E
10%
0.0%
60.3%
20%
0%
FY13
y-o-y growth (%) (RHS)
Ceramic
PVT
GVT
Change in product mix to aid margin expansion

EBITDA margin is expected to expand by 60 bps over FY15-17E to 7.6% driven by increasing
contribution from high-margin vitrified tiles and operating leverage benefits stemming from
higher revenue growth. Subsequent to expansion in EBITDA margin, we expect PBT margin
to also expand to 5.6% in FY17 from 4.4% in FY15.
13

Figure 16: EBITDA margin to expand by 60 bps over FY15-17
(%)
( mn)
9.0%
1,400
( mn)
8.3%
1,800
1,600
7.0%
6.6%
1,400
7.6%
7.2%
Figure 17: PBT to improve significantly
8.0%
1,200
4.4%
1,000
6.0%
1,000
5.0%
800
800
4.0%
600
600
3.0%
400
2.0%
871
835
1,076
1,303
1,618
FY13
FY14
FY15
FY16E
FY17E
EBITDA
4.0%
3.3%
2.0%
400
1.0%
200
1.0%
472
420
681
871
1,188
FY13
FY14
FY15
FY16E
FY17E
0.0%
EBITDA margin (RHS)
PBT
5.0%
3.0%
0.0%
6.0%
4.8%
4.5%
7.0%
1,200
200
(%)
5.6%
PBT margin (RHS)
Adjusted PAT expected to grow at a two-year CAGR of 31%

Sturdy top-line growth, coupled with expanding operating margins, is expected to propel PAT
Higher EBITDA growth, lower
to 796 mn from 464 mn in FY15 at a robust 38% CAGR over the period. During the same
interest obligations owing to
period, PAT margin is expected to improve by 80 bps to 3.8%.
reduction in debt to propel PAT
Figure 18: PAT to grow at a healthy three-year CAGR of 38%

( mn)
(%)
3.8%
900
800
3.3%
3.1%
3.5%
3.0%
700
3.0%
2.4%
600
2.5%
500
2.0%
400
1.5%
300
1.0%
200
100
4.0%
323
303
464
600
796
FY13
FY14
FY15
FY16E
FY17E
0.5%
0.0%
PAT
PAT margin (RHS)
Return ratios set to improve

Boosted by improving profitability, we expect return ratios to expand over the next couple of
years. We expect RoE to increase to 23.7% in FY17 from 18.9% in FY15. RoCE is expected
Expanding margins, asset
to increase to 26.9% in FY17 from 19.7% in FY15. Asset turnover ratio is expected to improve
turnover to boost return ratios
to 4.0x from 3.3x in FY14 owing to the companys strategy of expanding through the asset
light model.
14
Somany Ceramics Ltd

RESEARCH
Figure 19: Return ratios are expected to improve...
Figure 20: ...driven by expanding PAT margin, asset turnover
(%)
24%
(%)
23.4%
23.2%
4.0x
9%
23%
22%
21%
10%
20.9%
21.9%
20%
7%
19.9%
19.7%
19%
17%
16%
15.9%
FY14
3.1%
2.4%
3.0%
3.3%
3.8%
FY15
RoE
FY16E
RoCE
FY17E
2.0x
1.5x
2%
1.0x
1%
0.5x
0%
15%
FY13
3.0x
2.5x
3%
18.9%
3.5x
3.0x
6%
4%
18%
4.0x
2.7x
5%
20.6%
17.1%
3.6x
3.3x
8%
4.5x
0.0x
FY13
FY14
FY15
PAT margin
FY16E
FY17E
Asset turnover
15

Q1FY16 result update
Somanys Q1FY16 standalone revenues and earnings were in line with CRISIL Researchs
expectations. Revenues grew 18.9% y-o-y to 3,936 mn driven mainly by 14% y-o-y growth in
volumes. Blended realisations grew 4% y-o-y. EBITDA margin expanded by 22 bps y-o-y,
despite a decline in high-margin self manufacturing, primarily due to fall in power and fuel
costs as a percentage of sales. Sturdy EBITDA growth (23.4% y-o-y) along with lower
depreciation expenses (48 mn compared to 51 mn owing to change in depreciation policy to
comply with the companies act) translated into healthy 32% y-o-y growth in PBT. PBT margin
expanded by 41 bps y-o-y to 4.1%. Adjusted PAT grew 30% y-o-y to 105 mn.
Healthy growth in vitrified tiles drove revenues

Muted demand notwithstanding, revenues reported healthy growth of 19% driven by valueadded vitrified tiles (y-o-y growth of 22% vs y-o-y growth of 14% in ceramic tiles).
Subsequently, the share of value-added products increased to 51% of gross sales. Real
estate supply continues to remain sluggish, impacting fresh demand. Replacement demand
was also muted on account of weak consumer demand.
Lower power and fuel costs led to PBT margin expansion

Owing to higher contribution from low-margin outsourced manufacturing (share of JV and
outsourced manufacturing increased to 64% from 59% a year ago), gross margin contracted
to 35% from 37% in Q1FY15. However, power and fuel costs as a percentage of sales
declined by 156 bps y-o-y to 11.7%. Employee cost and other expenses as a percentage of
sales declined by 24 bps and 76 bps y-o-y, respectively, as higher revenues led to better
absorption of fixed costs. Subsequently, EBITDA margin expanded by 22 bps y-o-y to 6.1%.
Q1FY16 Results Summary (Standalone)

( mn)
Q1FY16
Q4FY15
Q1FY15
q-o-q (%)
y-o-y (%)
Net sales
3,936
4,591
3,318
(14.3)
18.6
Raw materials cost
2,565
3,159
2,084
(18.8)
23.1
65%
69%
63%
-363bps
239bps
Power and fuel cost
461
463
440
(0.5)
4.7
Employee cost
261
232
228
12.5
14.4
Other expenses
409
448
370
(8.8)
10.5
EBITDA
240
289
196
(16.9)
22.2
6.1%
6.3%
5.9%
-19bps
18bps
Raw materials cost (% of net sales)
EBITDA margin
Depreciation
48
60
51
(19.2)
(5.8)
192
229
143
(16.3)
33.9
44
48
37
(8.2)
17.8
148
182
106
(18.5)
39.5
13
18
16
(28.1)
(20.0)
PBT
161
199
122
(19.3)
31.7
Tax
56
52
41
8.5
35.0
PAT
105
148
81
(29.0)
30.0
Adj PAT
105
148
81
(29.0)
30.0
2.7%
3.2%
2.4%
-55bps
23bps
38.8
2.7
38.8
3.8
38.8
2.1
(29.0)
30.0
EBIT
Interest and finance charges
Operating PBT
Other income
Adj PAT margin

No. of equity shares (mn)
Adj EPS ()
16
Somany Ceramics Ltd

RESEARCH
Management Overview
CRISILs fundamental grading methodology includes a broad assessment of management
quality, apart from other key factors such as industry and business prospects and financial
performance.
Experienced promoters supported by a strong second line

Somany has a strong top management team. Mr Shreekant Somany, Chairman and
Managing Director, has over two decades of experience in the ceramic tiles and sanitary ware
Led by experienced promoters
industries. He has held positions of eminence such as Chairman of the Indian Council for
Mr Shreekant Somany and Mr
Ceramic tiles and Sanitaryware (ICCTAS), member of committees with Assocham and
Abhishek Somany
member of the National Council of Confederation of Indian Industry (CII). Mr Shreekant

Somany is responsible for providing strategic guidance to the company, while Mr Abhishek
Somany, Joint Managing Director, is responsible for the day-to-day operations. The top
management team is well supported by a professional second line.
Successfully executed growth strategies

While many ceramic tiles companies have reported muted growth over the past couple of
years owing to a slowdown in consumer spending and tepid fresh demand, Somany has
continued to grow at a healthy rate. Owing to above-industry growth, the company has gained
market share from the smaller ceramic tiles companies and unorganised players.
Management has been successful in strengthening the recall of the Somany brand and in
establishing a wide distribution reach, which have been major growth catalysts.
Focus on asset light model bearing fruit

Over the past three years, Somanys management has been focusing on gaining access to
capacity through the asset light model. As a part of this strategy, the company has acquired
minority stake in five Morbi-based manufacturers. The asset light strategy has enabled the
company to achieve growth with minimum investments in capacity, thereby boosting return
ratios.
17

Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate
governance and management quality, apart from other key factors such as industry and
business prospects, and financial performance. In this context, CRISIL Research analyses the
shareholding structure, board composition, typical board processes, disclosure standards and
related-party transactions. Any qualifications by regulators or auditors also serve as useful
inputs while assessing a companys corporate governance.
Good disclosure standards, robust quality of earnings
Robust quality of earnings: In our opinion, Somanys quality of earnings is good, which
is reflected in the following:
The accounting policies adopted by the company are appropriate and conservative.
There have few material changes in accounting policies in the recent past.
Debtor and inventory days have been on a declining trend over the past few years,
although organic revenues have registered healthy growth. The companys revenue
growth has been significantly higher than growth in gross block.
The company has consistently generated operating cash flow over the past few
years, which has been in line with growth in organic revenues. However, owing to
the capital intensive nature of the business, the company has to incur capex which
has led to negative free cash flows in some of the previous years.
Healthy dividend payment: Over the past few years, Somany has maintained a healthy
dividend payout ratio of 10-20%, despite consistent capacity addition. Comparing the
dividend payout with PAT growth and increase in gearing over the past few years, we
opine that the dividend is appropriate and, hence, beneficial to the minority shareholders.
Good disclosure standards: Based on the publicly available information, including

investor presentation, annual reports, website and other public documents, we opine that
the companys disclosure standards are good and at par with other large players in the
industry. Over the years, we have found management to be forthcoming in sharing
information.
Long tenure of auditors

The current auditors, Lodha & Co Ltd, have been associated with the company for more than
10 years. The long tenure may impair their objectivity and independence. As per the
Companies Act 2013, companies are required to change their auditors every 10 years.
18
Maintained consistent dividend

payout ratio of 10-20%
Somany Ceramics Ltd

RESEARCH
Valuation
Grade: 4/5
We continue to use the discounted cash flow (DCF) method to value Somany. We maintain
our revenue and earnings estimates for FY16 and FY17, but have raised our growth
projections over FY16-26E, considering the robust growth prospects of the company.
Raised fair value to 426 per
Subsequently, we have raised our fair value estimate to 426 per share from 378 earlier. The
share
fair value implies P/E multiples of 27.6x FY16 EPS and 20.8 FY17 EPS. The stock is currently
trading at 356 which implies P/E multiples of 23.01x and 17.4x on FY16E and FY17E EPS,
respectively. Given the current market price, the valuation grade is 4/5.
Key DCF assumptions
We have considered the discounted value of the firms estimated free cash flows from
FY17 to FY26.
We have assumed cost of equity of 15.3%.

We have assumed terminal growth rate of 4% beyond the explicit forecast period until
FY26.
WACC computation
FY16-25
Terminal value
15.3%
15.3%
Cost of equity
Cost of debt (post tax)
WACC
Terminal growth rate
8.0%
8.0%
11.7%
12.0%
4.0%
Source: CRISIL Research estimates
Sensitivity analysis to terminal WACC and terminal growth rate

Terminal year EBITDA margin
2.0%
3.0%
4.0%
5.0%
6.0%
9.7%
386
414
450
496
556
10.7%
373
402
438
483
544
11.7%
362
390
426
472
533
12.7%
351
380
415
461
522
13.7%
341
370
405
451
512
Terminal WACC
WACC
Terminal growth rate
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
417
510
603
696
789
11.0%
353
427
500
574
648
12.0%
306
366
426
486
546
13.0%
271
321
370
420
470
14.0%
244
286
328
370
411
Source: CRISIL Research estimates
One-year forward P/E band
P/E premium / discount to CNX 500

150%
()
500
450
400
350
300
250
200
150
100
50
0
100%
50%
0%
Apr-15
Aug-15
Aug-14
Dec-14
Jan-14
May-14
Sep-13
May-13
Oct-12
Jan-13
Jun-12
Oct-11
Feb-12
Jun-11
Mar-11
Jul-10
Nov-10
Mar-10
25x
Jul-09
10x
20x
Nov-09
5x
15x
Apr-15
-100%
Apr-09
Somany
Aug-15
Dec-14
Aug-14
Jan-14
May-14
Sep-13
Jan-13
May-13
Jun-12
Sep-12
Oct-11
Feb-12
Jun-11
Feb-11
Jul-10
Nov-10
Mar-10
Jul-09
Nov-09
Apr-09
-50%
Premium/Discount to CNX 500
Source: NSE, CRISIL Research
19

P/E movement
Fair value movement since initiation
(Times)
()
('000)
30
500
2,000
450
1,800
400
1,600
350
1,400
300
1,200
250
1,000
200
800
150
600
100
400
25
20
15
+1 std dev
10
5
Total Traded Quantity(RHS)
Median PE
CRISIL IER reports released on Somany Ceramics Ltd

Valuation
CMP
Date
Nature of report
grade
Fair value
grade
(on the date of report)
06-Dec-10
Initiating coverage
4/5
79
5/5
60
28-Jan-11
4/5
84
5/5
40
06-Jun-11
4/5
84
5/5
43
22-Jul-11
4/5
84
5/5
45
04-Nov-11
4/5
72
5/5
43
01-Feb-12
4/5
68
5/5
40
10-Apr-12
Event Update
4/5
68
5/5
41
07-Mar-12
Detailed report
4/5
68
5/5
35
01-Jun-12
4/5
80
5/5
43
23-Jul-12
4/5
80
5/5
44
22-Oct-12
4/5
80
4/5
71
26-Dec-12
Detailed report
4/5
120
5/5
95
22-Jan-13
4/5
120
4/5
98
24-May-13
4/5
120
5/5
79
31-July-13
4/5
109
5/5
70
31-Oct-13
4/5
102
4/5
86
25-Feb-14
Detailed report
4/5
149
3/5
137
10-Jun-14
4/5
203
2/5
260
31-Jul-14
4/5
270
4/5
244
10-Nov-14
4/5
300
3/5
313
20-Feb-15
4/5
378
3/5
371
23-Jun-15
4/5
378
3/5
375
20-Aug-15
Detailed report
4/5
426
4/5
356
20
Aug-15
Mar-15
Nov-14
CRISIL Fair Value
Fundamental
Jun-14
Jan-14
Sep-13
Apr-13
Nov-12
Jul-12
Feb-12
Oct-11
May-11
Jan-11
Apr-15
Aug-15
Dec-14
Jan-14
May-14
Sep-13
Jan-13
May-13
Jun-12
Sep-12
Oct-11
Feb-12
Jun-11
Feb-11
Jul-10
Nov-10
Mar-10
Jul-09
Nov-09
Apr-09
1yr Fwd PE (x)
Aug-14
-1 std dev
200
50
Somany
Somany Ceramics Ltd

RESEARCH
Company Overview
Incorporated in 1968 as Somany Pilkingtons Ltd in collaboration with the UK-based
Pilkingtons Tiles, Somany is among the leading and branded tile manufacturing companies in
India. It is part of the HL Somany group and is present in the ceramic and vitrified segments. It
has two manufacturing plants, one each in Kadi (Gujarat) and Kassar (Haryana), with a total
manufacturing capacity of 19.2 MSM. In the past two years, the company has acquired stakes
in five Morbi-based companies, which has gained it access to additional manufacturing
capacity of 15.5 MSM. The company is present across varied price points - from low-cost tiles
that cost 200 per sq mt to top-end tiles that cost 2,500 per sq mt. It has a pan-India
distribution network and earns 70% of revenues from the northern and southern markets. It
earns ~2% of revenues from the sanitary ware business.
Table 6: Milestones
1968
Incorporated as Somany Pilkingtons Ltd in collaboration with the UK-based

Pilkingtons Tiles
1971
Production started in November
1996
R&D facility received government recognition
1999
Kadi unit was accredited ISO 14001 for environment-friendly manufacturing
2002- Natural gas supply to the Kassar (Haryana) plant was suspended which affected
04
production and profitability
2007
Changed name to Somany Ceramics Ltd
2009
Only company in the Indian ceramic tile industry to get a patent for its product VC
Shield (Indias highest abrasion resistant tiles)
2010
Brownfield expansion with capacities of 2.45 MSM in Haryana
2010
Stock split from 10 to 2
2010
Purchased 15-acre land near its existing unit for greenfield expansion
2011
Acquired 26% stake in Vintage Tiles having manufacturing capacity of 2.65 MSM
2012
Acquired 26% stake in Commander Vitrified Pvt. Ltd having manufacturing capacity of
2.55 MSM
2012
Ventured into the sanitary ware segment and chrome-plated bathroom fittings under
the Aquaware brand
2012
Installed two digital printing machines one in Kadi (Gujarat) and the other in Kassar
(Haryana) plants to produce higher value-added tiles. Received the Indian Power
Brands Award for the second consecutive year
2013
Acquired stake in three Morbi-based tile manufacturing companies for 200 mn
2014
Mauritius-based private equity firm Creador acquired 11.2% stake (post issue capital)
for a consideration of 500 mn
21

Annexure: Financials
Income statement
( m n)
Operating incom e
EBITDA
EBITDA m argin
Depreciation
EBIT
Interest
Operating PBT
Other income
Exceptional inc/(exp)
PBT
Tax provision
Min. interest/Share of profit from associates
PAT (Reported)
Less: Exceptionals
Adjusted PAT
Balance Sheet
FY13
10,538
871
8.3%
205
666
200
466
9
(3)
472
152
320
(3)
323
FY14
12,645
835
6.6%
224
611
185
425
24
(29)
420
170
23
274
(29)
303
FY15
15,431
1,076
7.0%
266
810
205
605
77
681
222
4
464
464
FY16E
FY17E
17,988 21,169
1,303
1,618
7.2%
7.6%
263
282
1,040
1,337
196
177
844
1,160
27
28
871
1,188
296
404
26
12
600
796
600
796
FY13
FY14
FY15
FY16E
FY17E
Grow th
Operating income (%)
EBITDA (%)
Adj PAT (%)
Adj EPS (%)
20.0
16.6
28.3
28.3
20.0
(4.1)
(6.3)
(16.8)
22.0
28.8
53.1
53.0
16.6
21.1
29.4
29.4
17.7
24.2
32.6
32.6
Profitability
EBITDA margin (%)
Adj PAT Margin (%)
RoE (%)
RoCE (%)
RoIC (%)
8.3
3.1
23.2
21.9
19.5
6.6
2.4
15.9
17.1
16.6
7.0
3.0
18.9
19.7
22.1
7.2
3.3
20.9
20.6
18.3
7.6
3.8
23.4
19.9
17.1
Valuations
Price-earnings (x)
Price-book (x)
EV/EBITDA (x)
EV/Sales (x)
Dividend payout ratio (%)
Dividend yield (%)
38.0
8.0
15.8
1.3
12.9
0.3
45.6
6.1
17.9
1.2
21.3
0.4
29.8
5.3
14.2
1.0
20.8
0.7
23.0
4.5
12.6
0.9
20.8
0.9
17.4
3.7
10.8
0.8
20.8
1.2
51
82
57
32
2.7
5.4
5.2
1.4
1.1
0.9
4.4
3.3
31
75
62
25
3.0
5.8
5.6
1.5
0.7
0.5
4.5
3.3
39
81
62
30
3.3
6.2
6.1
1.4
0.6
0.5
5.2
3.9
41
70
54
27
3.6
7.0
5.5
1.4
0.9
0.8
6.6
5.3
41
69
54
25
4.0
8.3
4.6
1.4
1.0
0.9
9.2
7.6
FY13
9.4
15.3
44.4
1.2
34.5
FY14
7.8
13.6
58.7
1.5
38.8
FY15
11.9
18.8
67.8
2.5
38.9
Ratios
B/S ratios
Inventory days
Creditors days
Debtor days
Working capital days
Gross asset turnover (x)
Net asset turnover (x)
Sales/operating assets (x)
Current ratio (x)
Debt-equity (x)
Net debt/equity (x)
Interest coverage (EBITDA/interest)
Interest coverage (EBIT/interest)
Per share
Adj EPS ()
CEPS
Book value
Dividend ()
Actual o/s shares (mn)
FY16E
15.4
22.2
79.7
3.2
38.9
FY17E
20.5
27.7
95.4
4.3
38.9
Note: Historical numbers are classified as per CRISILs internal standards

Source: CRISIL Research
22
( m n)
Liabilities
Equity share capital
Reserves
Minorities
Net w orth
Convertible debt
Other debt
Total debt
Deferred tax liability (net)
Total liabilities
Assets
Net fixed assets
Capital WIP
Total fixed assets
Investm ents
Current assets
Inventory
Sundry debtors
Loans and advances
Cash & bank balance
Marketable securities
Total current assets
Total current liabilities
Net current assets
Intangibles/Misc. expenditure
Total assets
FY13
FY14
FY15
FY16E
FY17E
69
1,461
1,530
1,624
1,624
262
3,416
78
2,157
44
2,279
1,707
1,707
284
4,270
78
2,502
53
2,633
1,616
1,616
287
4,537
78
2,955
64
3,097
2,757
2,757
284
6,138
78
3,552
78
3,708
3,857
3,857
284
7,848
1,991
102
2,093
165
2,388
40
2,429
240
2,589
40
2,629
385
2,551
1,390
3,941
521
2,525
2,740
5,265
728
1,205
1,747
811
175
7
3,945
2,795
1,150
8
3,416
906
2,246
965
668
4,785
3,201
1,585
17
4,270
1,365
2,591
1,434
235
5,624
4,119
1,506
17
4,537
1,725
2,809
1,169
266
5,969
4,310
1,659
17
6,138
2,030
3,306
1,164
336
6,836
4,998
1,839
17
7,848
Cash flow
( m n)
Pre-tax profit
Total tax paid
Depreciation
Working capital changes
Net cash from operations
Cash from investm ents
Capital expenditure
Investments and others
Net cash from investm ents
Cash from financing
Equity raised/(repaid)
Debt raised/(repaid)
Dividend (incl. tax)
Others (incl extraordinaries)
Net cash from financing
Change in cash position
Closing cash
FY13
475
(144)
205
(20)
516
FY14
449
(148)
224
52
577
FY15
681
(218)
266
(355)
374
FY16E
871
(300)
263
(122)
712
FY17E
1,188
(404)
282
(109)
956
(350)
(49)
(398)
(569)
(68)
(637)
(466)
(145)
(612)
(1,575)
(136)
(1,711)
(1,605)
(207)
(1,812)
(42)
(48)
(3)
(93)
25
175
485
83
(68)
52
552
493
668
0
(91)
(116)
11
(196)
(433)
235
1,141
(150)
39
1,030
31
266
1,100
(199)
26
927
70
336
Quarterly financials*
( m n)
Net Sales
Change (q-o-q)
EBITDA
Change (q-o-q)
EBITDA m argin
PAT
Adj PAT
Change (q-o-q)
Adj PAT m argin
Adj EPS
Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

3,310
3,742
3,757
4,591
3,936
-19%
13%
0%
22%
-14%
195
236
244
289
240
-28%
22%
3%
18%
-17%
5.9%
6.3%
6.5%
6.3%
6.1%
81
105
110
148
105
81
105
110
148
105
-28%
30%
5%
35%
-29%
2.4%
2.8%
2.9%
3.2%
2.7%
2.1
2.7
2.8
3.8
2.7
Somany Ceramics Ltd

RESEARCH
Focus Charts
Indian Ceramic industry to grow at 13% CAGR over FY15-18
( bn)
Indias per capita tile consumption is lower than global

(x)
(%)
400
5.5
6.0
25%
21.4%
4.8
350
5.0
4.0
20%
16.7%
300
14.7%
14.1%
250
200
10.3%
11.6%
4.0
15.0%
15%
3.0
10%
2.0
3.7
3.1
9.6%
150
1.1
1.0
0.5
1.0
100
5%
-
345
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
0%
Per capita consumption of tiles
y-o-y growth (RHS)
Revenues to grow at a two-year CAGR of 17%
Share of vitrified tiles is on the rise
( mn)
(%)
25,000
25.0%
22.0%
20.0%
(%)
100%
90%
20.0%
20,000
India
300
Europe
263
Russia
240
Vietnam
215
Indonesia
195
Iran
170
Brazil
140
China
50
16.6%
17.7%
20.0%
15.0%
15.7%
16.1%
31.0%
35.3%
26.5%
28.0%
28.3%
30.1%
41.9%
80%
70%
15,000
15.6%
24.1%
60%
50%
10,000
10.0%
5,000
5.0%
40%
30%
FY13
FY14
FY15
FY16E
FY17E
0.0%
Revenue
FY14
FY15
FY16E
0%
FY13
Ceramic
y-o-y growth (%) (RHS)
PVT
Adjusted PAT to grow at a CAGR of 31% over FY15-17E
Fair value movement since initiation
1,800
400
1,600
3.0%
350
1,400
2.5%
300
1,200
250
1,000
200
800
150
600
100
400
2.0%
400
1.5%
300
200
1.0%
100
0.5%
323
303
464
600
796
FY13
FY14
FY15
FY16E
FY17E
0.0%
PAT
PAT margin (RHS)
50
200
Total Traded Quantity(RHS)
Sep-13
500
Apr-13
2.4%
Nov-12
3.5%
3.0%
700
600
2,000
450
Jul-12
3.1%
('000)
Feb-12
3.3%
()
500
Oct-11
800
(%)
4.0%
May-11
3.8%
900
Jan-11
( mn)
FY17E
GVT
CRISIL Fair Value
Aug-15
21,169
10%
Mar-15
17,988
45.2%
Nov-14
15,431
48.6%
Jun-14
12,645
53.3%
Jan-14
10,538
-
60.3%
20%
Somany
23
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CRISIL IER Report on Somany Ceramics Ltd Highlights Profitable Growth Ahead

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RESEARCH

CRISIL IER Independent Equity Research

Somany Ceramics Ltd

Enhancing investment decisions

CRISIL IER Independent Equity Research

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

Strong upside (>25% from CMP)

Upside (10-25% from CMP)

Align (+-10% from CMP)

Downside (negative 10-25% from CMP)

Strong downside (<-25% from CMP)

About CRISIL Limited

About CRISIL Research

Somany Ceramics Ltd

Profitable growth ahead

4/5 (Superior fundamentals)

August 20, 2015

4/5 (CMP has upside)

Somany to sustain above-industry growth rates

Indian tiles industry: Near-term pressure to persist, long-term prospects intact

KEY STOCK STATISTICS

Source: Company, CRISIL Research estimates

PERFORMANCE VIS--VIS MARKET

Client servicing desk

For detailed initiating coverage report please visit: www.ier.co.in

CRISIL IER Independent Equity Research

(VeilCraft, digitally printed and

(digitally printed, glazed and

glazed vitrified tiles)

polished vitrified tiles)

Ceramic (wall and floor), vitrified and

Largely value-added products -

high-end tiles (digital ceramic); wall and

vitrified tiles (soluble salt and

floor tiles in the range of 200-1,500 per

double charge) and high-end tiles

manufacturers in Morbi (Gujarat).

(digital glazed vitrified tiles)

It also imports high-end tiles from

Italy, Spain, China, etc. (~1%)

The third largest ceramic tiles

Through JVs, has access to 21 mn sq mt capacity as of March

company in India with a ~14%

2015. It commissioned 5.5 mn sq ft of capacity in its JVs in FY15

Over the past five years, has

the products under its own brand. Contribution of JVs have

industry growth rates

increased to ~41% in Q1FY16 from 12% in FY12

share gain for the organised players

Imports from China

Slower-than-expected recovery in real estate demand

Source: Company, CRISIL Research

Somany Ceramics Ltd

The ceramic tiles industry grew

10% in CY14, slower than 18%

...But Somanys growth trajectory continued unabated

Source: Industry, CRISIL Research

y-o-y growth (RHS)

Figure 2: Somany grew faster than its peers in FY15

Figure 1: Growth of ceramic tiles industry moderated in FY14-15

FY15 y-o-y revenue growth

Source: Company, Industry, CRISIL Research

CRISIL IER Independent Equity Research