Company Background Promoters FII 52% DII …...Somany Ceramics Ltd. SKP Securities Ltd Page 3 of 9 Q2FY19 & H1FY19 Consolidated Result Review (All data in Rs …

November 19, 2018

Somany Ceramics Ltd.

…coming out of GST blues

CMP INR 303 Target INR 439 Result Update – Buy

SKP Securities Ltd www.skpsecurities.com Page 1 of 9

Company Background

Somany Ceramics Limited (SCL), promoted by Mr. Shreekant Somany, Chairman and Mr. Abhishek Somany, Managing Director; is the third largest player in India’s Ceramic Tiles industry under “SOMANY” brand with a combined manufacturing capacity of ~59.53 MSM which includes its own manufacturing facilities in Kadi, Gujarat and Kassar, Haryana and its JV manufacturing partners. It also sells tiles imported from China. As strategic product extensions to leverage its channels and customers, it also manufactures sanitaryware and faucets through JV partners. It has a long term contract for natural gas, energy being a principal input. Investment Rationale: Topline to grow at a CAGR of ~11% over FY18-20E

During Q2FY19, SCL reported consolidated net sales of Rs 3,934.9 mn, registering a decline of 11.2% y-o-y, due to credit control measures, which impacted sales worth Rs 350-400 mn, adverse impact of Kerala floods (13% of revenue), truckers’ strike which had severe impact in Gujarat/Haryana markets and routine maintenance at Bahadurgadh plant (where it manufactures tiles) in September 2018. The topline was also impacted because the numbers of Commander Vitrified Pvt Ltd, one of Company’s JV, is not included as SCL has divested its stake from the said JV w.e.f. July 1, 2018. On a positive note, SCL was able to reduce receivable days to 83 days (105 days earlier), which will make the Company structurally strong, going forward.

The Company sold 12 MSM of tiles during the quarter vis-a-vis 12.45 MSM corresponding quarter last year, in all the three segments (owned manufacturing, JV and other tiles segments). Realisations from owned products declined owing to change in product mix whereas JV products improved slightly. Realisations from outsourced products declined significantly by 23%. Revenue contribution from owned, JV and outsourced tiles during the quarter was 37%, 36% and 15% respectively. Sanitaryware and faucets segment generated revenue of Rs 446.2 mn contributing 11% to the topline.

Management expects double digit volume growth from FY20 onwards. Furthermore, the Company has increased prices by 2-2.5% in tiles segment in October 2018 and 5-6% in sanitaryware segment in November 2018.

Going forward with SCL’s focus on value added products, increasing contribution from GVT& PVT segment with the modernization of existing manufacturing facilities coupled with structural shift towards organised players post E-way bill implementation; we expect topline to grow at ~11% CAGR during FY18-FY20E.

Margins expected to improve with better product mix:

EBT margins, before extraordinary items, during Q2FY19, declined by 560 bps y-o-y and 130 bps q-o-q, at 2.3%, mainly on account of lower revenues and higher gas prices. Gas prices for SCL has increased from Rs 27 per cubic meter to Rs 40 per cubic meter during the quarter. SCL is not able to pass on the gas price increase which has adversely affected profitability during the quarter. Going forward, the Company expects gas prices to remain at current levels and no further price rise is expected.

With the pick-up in demand from H2FY19 onwards due to SCL’s focus on superior, value-added products and price hike taken by the Company; going forward, we expect improvement in margins to ~6.5%by FY20E.

PAT margin is down by 350 bps to 1.4% in Q2FY19 from 4.9% reported in corresponding period last year. With improvement in working capital cycle and better product mix, we expect PAT margins to touch ~4.3% in FY20E.

The new JV in South India to be commissioned by January 2019:

SCL’s first GVT tiles plant in South India, near Tiruchirpali, Andhra Pradesh, will be commissioned in January 2019 with the annual installed capacity of 3.5 MSM.

In May 2018, SCL has commenced production of ceramic wall tiles from its greenfield value-added tile plant, having a capacity of 3.3 MSM, in a 51% JV with M/S Amora Ceramic Private Limited, Morbi, Gujarat.

SCL has estimated a capex of Rs 600–650mn, including maintenance capex, for FY20.

VALUATION

Better economic growth, leaving more disposable income for discretionary life style consumption, rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All”, structural shift towards organised players post E-way bill implementation coupled with strong brand equity recall and distribution network, augers well for the Company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route.

Valuations in this industry in general and SCL in particular have moderated significantly during CY18. We have currently valued the stock on the basis of P/E of 23x of FY20E earning, lowering it from 25x in the previous quarter, factoring in lower than expected growth. Stock is currently trading at Rs 303, after a sharp correction from Rs 974 recently. We have recommended buy on the stock with the target price of Rs 439 (~45% upside) in 15 months.

Key Share Data

Face Value (INR) 2.0

Equity Capital (INR Mn) 84.8

Market Cap (INR mn) 12841.0

52 Week High/Low (INR) 974/295

Avg. Daily Volume (BSE) 7,427

BSE Code 531548

NSE Code SOMANYCERA

Reuters Code SOCE.NS

Bloomberg Code SOMC:IN

Shareholding Pattern (Sept 30, 2018)

52%

5%

21%

23%

Promoters

FII

DII

Public & Others

Particulars FY17 FY18 FY19E FY20E

Net Sales 18,109.9 17,127.1 18,324.7 21,098.0

Growth (%) 5.8% -5.4% 7.0% 15.1%

EBT 1,442.1 1,183.6 854.3 1,370.1

PAT 930.7 704.4 478.2 808.3

Growth (%) 43.9% -24.3% -32.1% 69.0%

EPS (INR) 22.0 16.6 11.3 19.1

BVPS (INR) 123.0 137.0 143.5 155.3

Key Financials (INR Million)

Particulars FY17 FY18 FY19E FY20E

P/E (x) 13.8 18.2 26.9 15.9

P/BVPS (x) 2.5 2.2 2.1 2.0

Mcap/Sales (x) 0.7 0.7 0.7 0.6

EV/EBITDA (x) 7.9 9.4 11.2 8.4

ROCE (%) 20.7% 13.7% 9.7% 13.7%

ROE (%) 17.9% 12.1% 7.9% 12.3%

EBT Mar (%) 8.2% 7.2% 4.7% 6.5%

PAT Mar (%) 5.2% 4.6% 3.1% 4.3%

Debt - Equity (x) 0.4 0.8 0.9 0.8

Key Financial Ratios

Source: Company, SKP Research

Price Performance SCL vs BSE500

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SCL

BSE 500

Analyst: Vineet Agrawal

Tel No: +91-22-49226006

e-mail: [email protected]



Q2FY19 & H1FY19 Standalone Result Review

(All data in Rs mn unless specified, Y/e March)

Q2 FY19 Q2 FY18 % Change Q1FY19 % Change H1FY19 H1FY18 % Change

Net Sales 3928.2 4281.9 -8.3% 3621.7 8.5% 7549.9 7593.1 -0.6%

TOTAL EXPENDITURE 3764.1 3872.4 -2.8% 3405.7 10.5% 7169.8 7022.2 2.1%

Raw Material Consumed 503.6 539.1 -6.6% 269.4 86.9% 773.0 721.1 7.2%

% to Sales 12.8% 12.6% -- 7.4% -- 10.2% 9.5% --

Purchase of traded goods 2003.6 2099.2 -4.6% 1807.5 -100.0% 3811.1 3860.4 -1.3%

% to Sales 51.0% 49.0% -- 49.9% -- 50.5% 50.8% --

Employee Expenses 389.4 408.4 -4.7% 411.0 -5.3% 800.4 784.4 2.0%

% to Sales 9.9% 9.5% -- 11.3% -- 10.6% 10.3% --

Power & Fuel 421.3 314.8 33.8% 467.1 -9.8% 888.4 680.5 30.6%

% to Sales 10.7% 7.4% -- 12.9% -- 11.8% 9.0% --

Other Expenses 446.2 510.9 -12.7% 450.7 -1.0% 896.9 975.8 -8.1%

% to Sales 11.4% 11.9% -- 12.4% -- 11.9% 12.9% --

EBIDTA 164.1 409.5 -59.9% 216.0 -24.0% 380.1 570.9 -33.4%

EBIDTA Margin 4.2% 9.6% -- 6.0% -- 5.0% 7.5% --

Depreciation 77.6 64.1 21.1% 74.6 4.0% 152.2 120.1 26.7%

EBIT 86.5 345.4 -75.0% 141.4 -38.8% 227.9 450.8 -49.4%

EBIT Margin 2.2% 8.1% -- 3.9% -- 3.0% 5.9% --

Interest 63.5 45.4 39.9% 62.8 1.1% 126.3 85.3 48.1%

Other Income 51.2 41.7 22.8% 51.9 -1.3% 103.1 86.3 19.5%

EBT before Exceptional Items 74.2 341.7 -78.3% 130.5 -43.1% 204.7 451.8 -54.7%

EBT Margin before Excep Items 1.9% 8.0% -- 3.6% -- 2.7% 6.0% --

Exceptional Items 0.0 0.0 -- 0.0 -- 0.0 31.1 100.0%

Forex Difference 0.0 0.0 -- 0.0 -- 0.0 0.0 --

EBT After Exceptional items 74.2 341.7 -78.3% 130.5 -43.1% 204.7 420.7 -51.3%

EBT Margin after Excep Items 1.9% 8.0% 3.6% -- 2.7% 5.5% --

Tax 28.4 115.1 -75.3% 46.7 -39.2% 75.1 148.1 -49.3%

Extraordinary Items 0.0 14.1 -- 0.0 -- 0.0 0.0 --

Non Controlling Interest 0.0 0.0 -- 0.0 -- 0.0 0.0 --

Reported Profit After Tax 45.8 212.5 -78.4% 83.8 -45.3% 129.6 272.6 -52.5%

PAT Margin 1.2% 5.0% -- 2.3% -- 1.7% 3.6% --

Diluted EPS (Rs) 1.08 5.01 -78.4% 1.98 -45.3% 3.06 6.43 -52.5%

Source: Company, SKP research

Particulars

Standalone



Q2FY19 & H1FY19 Consolidated Result Review

(All data in Rs mn unless specified, Y/e March)

Q2 FY19 Q2 FY18 % Change Q1 FY19 % Change H1FY19 H1FY18 % Change

Net Sales 3934.9 4429.2 -11.2% 3807.2 3.4% 7742.1 7745.6 0.0%

TOTAL EXPENDITURE 3670.0 3915.1 -6.3% 3493.6 5.0% 7163.6 6961.0 2.9%

Raw Material Consumed 956.3 1108.4 -13.7% 789.9 21.1% 1746.2 1710.6 2.1%

% to Sales 24.3% 25.0% -- 20.7% -- 22.6% 22.1% --

Purchase of traded goods 777.1 771.6 0.7% 521.8 -100.0% 1298.9 1295.5 0.3%

% to Sales 19.7% 17.4% -- 13.7% -- 16.8% 16.7% --

Employee Expenses 536.1 564.6 -5.0% 582.2 -7.9% 1118.3 1087.9 2.8%

% to Sales 13.6% 12.7% -- 15.3% -- 14.4% 14.0% --

Power & Fuel 867.8 803.6 8.0% 1003.8 -13.5% 1871.6 1599.8 17.0%

% to Sales 22.1% 18.1% -- 26.4% -- 24.2% 20.7% --

Other Expenses 532.7 666.9 -20.1% 595.9 -10.6% 1128.6 1267.2 -10.9%

% to Sales 13.5% 15.1% -- 15.7% -- 14.6% 16.4% --

EBIDTA 264.9 514.1 -48.5% 313.6 -15.5% 578.5 784.6 -26.3%

EBIDTA Margin 6.7% 11.6% -- 8.2% -- 7.5% 10.1% --

Depreciation 107.5 102.7 4.7% 110.3 -2.5% 217.8 189.9 14.7%

EBIT 157.4 411.4 -61.7% 203.3 -22.6% 360.7 594.7 -39.3%

EBIT Margin 4.0% 9.3% -- 5.3% -- 4.7% 7.7% --

Interest 111.6 101.2 10.3% 115.8 -3.6% 227.4 192.5 18.1%

Other Income 42.9 41.7 2.9% 48.0 -10.6% 90.9 82.1 10.7%

EBT before Exceptional Items 88.7 351.9 -74.8% 135.5 -34.5% 224.2 484.3 -53.7%

EBT Margin before Excep Items 2.3% 7.9% -- 3.6% -- 2.9% 6.3% --

Exceptional Items 0.0 14.1 100.0% 0.0 -- 0.0 31.1 100.0%

Forex Difference 0.0 0.0 -- 0.0 -- 0.0 0.0 --

EBT After Exceptional items 88.7 337.8 -73.7% 135.5 -34.5% 224.2 453.2 -50.5%

EBT Margin after Excep Items 2.3% 7.6% 3.6% -- 2.9% 5.9% --

Tax 33.6 119.8 -72.0% 48.5 -30.7% 82.1 152.9 -46.3%

Extraordinary Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --

Non Controlling Interest 0.0 0.0 -- 0.0 -- 0.0 0.0 --

Net Profit For The Period 55.1 218.0 -74.7% 87.0 -36.7% 142.1 300.3 -52.7%

PAT Margin 1.4% 4.9% -- 2.3% -- 1.8% 3.9% --

Net Profit Attributed to Owners 45.7 210.1 -78.2% 85.1 -46.3% 130.8 279.2 -53.2%

Minority Interest 9.4 7.9 19.0% 1.9 394.7% 11.3 21.1 -46.4%

Diluted EPS (Rs) 1.08 4.96 -78.2% 2.01 -46.3% 3.08 6.58 -53.2%

Source: Company, SKP research

Particulars

Consolidated



Chart 1: Operating Revenues Chart 2: Volume wise tiles Sales

Chart 3: Volume Wise Revenue Contribution Chart 4: Value wise tiles sales

Chart 5: Tiles Contribution Chart 6: Value wise Sanitaryware Revenue

Chart 7: EBT & EBT Margins Chart 8: PAT & PAT Margin

Source: SKP Research Desk

87

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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Overall Revenue

Revenue Growth (%)

17.8 17.1 19.4 18.7 19.7 21.9 20.3 22.1 25.2

0.4 3.06.6

14.518.8

21.919.6

21.024.1

13.2 13.311.9

9.27.8

6.0 9.69.4

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MSM

Tiles - Others Tiles - JVs Tiles - Own Manufacture

57% 51% 51%44% 43% 44% 41% 42% 43%

1% 9%17% 34% 41%

44%40% 40% 41%

42% 40%32%

22% 17% 12%19% 18% 16%

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4.9 5.4 6.1 5.9 5.9 7.0 6.1 6.8 7.80.1

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58% 53% 50%40% 37% 42% 41% 43% 43%

1% 13% 24% 40% 41%42% 45% 44% 45%

41%34%

26% 20% 22% 16% 13% 13% 12%

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Sanitaryware Sales (Rs bn) - LHS % Growth - RHS

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2.3 1

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2.7

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EBT (Rs mn) - LHS EBT Margins (%) - RHS

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31

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0.3 44

3.8 6

47

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93

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70

4.4

47

8.2

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2.2%

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PAT (Rs mn) - LHS PAT Margins (%) - RHS



KEY CONCERNS

1. Competition from unorganised players: Building product industry is dominated by small unorganized players. Though, Indian consumers are gravitating towards the organized segment, offering branded products, any increase in the competitive intensity from unorganized segment may be detrimental for the company.

2. Any change in design preferences could affect the off-take: The Company possesses many decades of insight into design preferences across regions, ages, income profiles and social backgrounds. SCL is doing well to research consumer behaviour and develop designs accordingly. It has tied up with prominent design houses in Italy and Spain to have unique and appreciative designs.SCL also develops new technologies such as VCT and slip shield to remain ahead of competition.Still, any unexpected change in the design preferences by the end consumers may affect the business of the company.

3. Slowdown in real estate sector may dampen business sentiments: SCL’s tiles and sanitaryware segment is highly dependent on real estate sector. Any slowdown in Tier –II and Tier – III cities may dampen business prospects of SCL.

VALUATION

Better economic growth, leaving more disposable income for discretionary life style consumption,

rapid urbanisation, changing customer preference towards quality branded products particularly amongst the growing mass affluent, increasing nuclear families and Governments’ thrust on “Housing for All”, structural shift towards organised players post E-way bill implementation coupled with strong brand equity recall and distribution network, augers well for the Company. It has de-risked its growth strategy with an asset light business model, adopting a joint venture route.

Valuations in this industry in general and SCL in particular have moderated significantly during CY18. We have currently valued the stock on the basis of P/E of 23x of FY20E earning, lowering it from 25x in the previous quarter, factoring in lower than expected growth. Stock is currently trading at Rs 303, after a sharp correction from Rs 974 recently. We have recommended buy on the stock with the target price of Rs 439 (~45% upside) in 15 months.

Exhibit: 1 Year forward looking P/E chart

Source: SKP Research

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-187 14 21 28 35 42 Adj Close Price



Consolidated Financials

Exhibit: Income Statement Exhibit: Balance Sheet

Particulars FY17 FY18 FY19E FY20E Particulars FY17 FY18 FY19E FY20E

Total Income 18,109.9 17,127.1 18,324.7 21,098.0 Share Capital 84.8 84.8 84.8 84.8

Growth (%) 5.8% -5.4% 7.0% 15.1% Reserve & Surplus 5,127.6 5,722.0 5,996.3 6,498.6

Expenditure 16,195.2 15,268.6 16,748.8 19,009.3 Shareholders Funds 5,212.4 5,806.8 6,081.0 6,583.3

Material Cost 2,943.7 4,174.7 4,141.4 4,599.4 Minority Interest 271.42 959.06 1050.68 1156.17

Pur of Traded Goods 6,841.4 2,894.2 2,877.0 3,228.0 Total Debt 2,343.6 4,772.3 5,472.3 5,272.3

Employee Cost 1,576.4 2,174.5 2,638.8 3,059.2 Deferred Tax (Net) 372.9 523.6 523.6 523.6

Storage & Spare Parts 429.4 650.3 678.0 780.6 Other Long Term Liab 226.8 251.3 268.8 189.9

Power & Fuel & Othr Exp. 2,047.3 3,488.1 4,434.6 5,063.5 Total Liabilities 8,427.1 12,313.1 13,396.5 13,725.3

Other Expenses 2,356.9 1,886.8 1,979.1 2,278.6 Goodwill on Consol 9.60 44.10 44.10 44.10

EBITDA 1,914.7 1,858.5 1,575.9 2,088.7 Net Block inc. Capital WIP 4113.9 6716.9 6637.0 6822.4

Depreciation 349.8 412.8 450.6 464.6 Investments 1507.7 1141.8 1141.8 1141.8

EBIT 1,565.0 1,445.7 1,125.3 1,624.1 Non-Current Asset 55.0 144.3 274.9 253.2

Other Income 151.2 181.1 183.2 183.6 Inventories 1496.9 2597.2 3115.2 3586.7

Interest Expense 233.4 399.2 454.2 437.6 Sundry Debtors 4103.4 5037.1 3848.2 4008.6

Profit Before Tax (PBT) 1,442.1 1,183.6 854.3 1,370.1 Cash & Bank Balance 120.9 136.0 662.1 539.2

Income Tax 502.0 392.6 284.5 456.2 Other Current Assets 57.1 485.6 1099.5 1265.9

Profit After Tax (PAT) 940.1 791.0 569.8 913.8 Loans & Advances 661.9 87.9 109.9 126.6

Growth (%) 43.9% -24.3% -32.1% 69.0% Current Liabilities & Prov 3699.2 4077.8 3536.2 4063.1

Profit/(Loss) from Asso 27.2 0.0 0.0 0.0 Net Current Assets 2741.0 4265.9 5298.7 5463.8

Minority Interest 36.64 86.57 91.62 105.49 Total Assets 8427.1 12313.1 13396.5 13725.3

Adjusted PAT 930.68 704.43 478.22 808.35

Growth (%) 43.9% -24.3% -32.1% 69.0%

Diluted EPS 22.0 16.6 11.3 19.1

Exhibit: Ratio Analysis

Particulars FY17 FY18 FY19E FY20E Particulars FY17 FY18 FY19E FY20E

Profit Before Tax (PBT) 1,442.1 1,183.6 854.3 1,370.1 Earning Ratios (%)

Depreciation 386.8 412.8 450.6 464.6 EBT Margin (%) 8.2% 7.2% 4.7% 6.5%

Interest Provided 233.4 399.2 454.2 437.6 PAT Margins (%) 5.2% 4.6% 3.1% 4.3%

Chg. in Working Capital (527.4) (481.7) (619.7) (345.3) ROCE (%) 20.7% 13.7% 9.7% 13.7%

Direct Taxes Paid (445.2) (327.3) (284.5) (456.2) ROE (%) 17.9% 12.1% 7.9% 12.3%

Other Charges (143.5) (77.9) - - Per Share Data (INR)

Operating Cash Flows 946.2 1,108.8 854.9 1,470.8 Diluted EPS 22.0 16.6 11.3 19.1

Capital Expenditure (726.1) (1,354.2) (370.7) (650.0) Cash EPS (CEPS) 30.2 26.4 21.9 30.0

Investments (6,796.7) (5,790.0) - - BVPS 123.0 137.0 143.5 155.3

Others 6,533.7 6,040.1 - - Valuation Ratios (x)

Investing Cash Flows (989.1) (1,104.1) (370.7) (650.0) P/E 13.8 18.2 26.9 15.9

Changes in Equity - 38.1 - - Price/BVPS 2.5 2.2 2.1 2.0

Inc / (Dec) in Debt 310.3 421.7 700.0 (200.0) EV/Sales 0.8 1.0 1.0 0.8

Dividend Paid (inc tax) (116.9) (137.0) (204.0) (306.0) EV/EBITDA 7.9 9.4 11.2 8.4

Interest Paid (246.9) (395.5) (454.2) (437.6) EB/EBIT 9.6 12.1 15.7 10.8

Others 34.65 -22.98 0.00 0.00 Balance Sheet Ratios

Financing Cash Flows (18.9) (95.7) 41.8 (943.6) Debt - Equity 0.4 0.8 0.9 0.8

Chg. in Cash & Cash Eqv (61.8) (91.0) 526.1 (122.9) Current Ratio 1.7 2.0 2.5 2.3

Opening Cash Balance 182.7 120.9 136.0 662.1 Fixed Asset Turn. Ratios 4.8 2.7 2.8 3.1

Closing Cash Balance 120.9 136.0 662.1 539.2

Source: Company Data, SKP Research

Exhibit: Cash Flow Statement



Exhibit: Recommendation -History Table Exhibit: Recommendation -History Chart

26-Aug-15 BUY 315 456 45% 18

02-Nov-15 BUY 324 442 36% 18

11-Feb-16 BUY 365 521 43% 18

08-Jun-16 ACCUMULTE 496 556 12% --

02-Aug-16 NEUTRAL 595 -- -- --

28-Oct-16 ACCUMULTE 657 730 11% --

28-Jan-17 BUY 603 894 48% 18

29-May-17 BUY 763 924 21% 18

28-Aug-17 ACCUMULTE 794 905 14% --

29-Nov-17 NEUTRAL 889 -- -- --

08-Feb-18 BUY 695 958 38% 18Source: BSE, SKP Research

06-Jun-18 BUY 564 799 42% 18

14-Aug-18 BUY 480 682 42% 18

19-Nov-18 BUY 303 439 45% 15

Source: SKP Research

Period

(months)Date Rating

Issue

Price

Target

Price

Upside

Potential

0

200

400

600

800

1000

1200

Au

g-1

5

Oct

-15

De

c-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

De

c-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

De

c-17

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

Close Price Target Price



Note:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg and Thomson First Call.

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