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 -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% Nov-17 Dec-17 Dec-17 Jan-18 Feb-18 Feb-18 Mar-18 Apr-18 May-18 May-18 Jun-18 Jul-18 Jul-18 Aug-18 Sep-18 Sep-18 Oct-18 Nov-18 SCL BSE 500 Analyst: Vineet Agrawal Tel No: +91-22-49226006 e-mail: [email protected]
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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.
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
32
.3
10
50
1.4
12
57
7.9
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0.5
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10
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32
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20.3% 19.8%
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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
9.6
0.0
10.0
20.0
30.0
40.0
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
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%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Tiles - Others Tiles - JVs Tiles - Own Manufacture
4.9 5.4 6.1 5.9 5.9 7.0 6.1 6.8 7.80.1
1.42.8
5.8 6.57.1
6.76.9
8.1
3.5
3.5
3.1
2.93.5
2.61.9
2.1
2.2
0.0
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4.0
6.0
8.0
10.0
12.0
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16.0
18.0
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Rs
bn
Tiles - Others Tiles - JVs Tiles - Own Manufacture
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%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Tiles - Others Tiles - JVs Tiles - Own Manufacture
23
6.5
28
3.8
46
9.2
74
8.9
10
63
.1
12
97
.5
15
23
.5
17
94
.6
21
81
.0
36%
20%
65% 60%
42%
22%
17%18%
22%
0%
10%
20%
30%
40%
50%
60%
70%
0.0
500.0
1000.0
1500.0
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2500.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Sanitaryware Sales (Rs bn) - LHS % Growth - RHS
35
8.6
46
6.6
44
0.2 65
5.1 1
01
2.3 1
48
2.7
12
27
.6
85
4.3
13
70
.1
4.1%4.4%
3.5%
4.3%
5.9%
8.2%7.2%
4.7%
6.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
0.0
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1000.0
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1400.0
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FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
EBT (Rs mn) - LHS EBT Margins (%) - RHS
24
7.5
31
5.9
28
0.3 44
3.8 6
47
.0
93
0.7
70
4.4
47
8.2
80
8.3
2.8% 3.0%
2.2%
2.9%
3.8%
5.1%
4.1%
2.6%
3.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
1000.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
PAT (Rs mn) - LHS PAT Margins (%) - RHS
Somany Ceramics Ltd.
SKP Securities Ltd www.skpsecurities.com Page 5 of 9
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
Somany Ceramics Ltd.
SKP Securities Ltd www.skpsecurities.com Page 6 of 9
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
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Price
Upside
Potential
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Somany Ceramics Ltd.
SKP Securities Ltd www.skpsecurities.com Page 8 of 9
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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Somany Ceramics Ltd.
SKP Securities Ltd www.skpsecurities.com Page 9 of 9
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