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Company Background

Somany Ceramics Limited (Somany), promoted by Late Mr. H L Somany, now managed under the leadership of Mr. Shreekant Somany, Chairman and Mr. Abhishek Somany, Managing Director; is amongst India’s largest players in Ceramic Tiles industry under “SOMANY” brand with a combined manufacturing capacity of ~63 MSM which includes its own manufacturing facilities at Kadi, Gujarat and Kassar, Haryana, its JV and outsource manufacturing partners. It also sells imported tiles. As a strategic product extension to leverage its channels and customers, it also manufactures sanitaryware and faucets through JV partners.

Investment Rationale:

Sales volumes witnessed muted growth of 5% due to significant gas price rise

* During Q3FY22, Somany’s consolidated net sales witnessed a robust growth of ~19% y-o-y at Rs 5,869.8 mn; however it witnessed marginal growth of ~5% q-o-q. Somany reported muted volume growth of ~5% y-o-y during the quarter at 15.58 MSM vis-à-vis 14.87 MSM corresponding period last year on account of lower volumes from Morbi due to temporary shutdown of plants, before Diwali, due to unprecedented rise in gas prices. This has resulted in the loss of topline to the extent of Rs 250-300 mn during the quarter. Somany outsources its entire PVT production from Morbi. Overall realisation jumped by ~14% y-o-y from ~Rs 288/MSM to ~Rs 329/MSM.

* Gas prices for North, West and South plants increased from Rs 40/SCM, Rs 38/SCM and Rs 44/SCM in Q2FY22 to Rs 43.5-44/SCM, Rs 57/SCM and Rs 60/SCM respectively. Current average gas price for Kassar plant, Morbi and South India is ~Rs 50/SCM, ~Rs 62/SCM and ~Rs 90/SCM respectively. Management highlighted that gas price has stabilized in West and South. However, further price rise is expected in North. The Company has taken a price increase of 7-8% in Q3FY22. Full impact of the same is expected to be seen in Q4FY22 and FY23E. With the expected correction in gas prices, going forward, the Company is confident to maintain a growth trend in the coming quarters.

* Somany witnessed capacity utilisation (CU) of 95%, 48% and 102% in tiles, sanitaryware and faucetware segments respectively during the quarter. However, currently sanitaryware plant is working at 100% utilization levels. Revenue from tiles segment was at Rs 5,125.7 mn in Q3FY22 as against Rs 4,276.3 mn in Q3FY21, while revenue from bathware stood at Rs 576.2 mn (vis-àvis Rs 479 mn in Q3FY21).

* The Company has focused on improvement in receivable days for past many quarters, which has further improved from 51 days in Q3FY21 to 42 days during Q3FY22.

* Somany added ~150 dealers during 9MFY22 taking number of the active dealers to 2,200. The Company is expected to add another 250 dealers in Q4FY22.

* Somany is well positioned for growth in coming years. We have built in a revenue growth of ~29% for FY22E, ~17% each for FY23E and FY24E respectively, considering Somany’s robust track record and normalization of material availability (PVT Tiles from Morbi) with correction of gas prices.

EBIDTA Margin expected to improve with better product mix:

* During Q3FY22, EBITDA margin declined by 220 bps y-o-y at 10.6% due to continuous rise in gas cost. Management said that margins would have been better by 100-150 bps if the Company had not lost sales of Rs 250-300 mn (as mentioned above). Rising gas price has become critical to Somany as it comprises 20-25% of cost of production (and 60-65% of power & fuel cost). The rise in gas price is passed on to customers with a lag of 15-20 days. However, margins of the Company are protected due to wide difference in gas cost of Morbi and Northern Region.

* Going forward, we expect EBIDTA margin to stabilize at ~12.5% by FY24E, due to Somany’s focus on superior, value-added products, better cost control and structural shift towards organised players, which is expected to generate industry traction.

Planned brownfield and greenfield expansion of Rs 3.5 bn:

* Somany has planned expansion of Rs 1.8 bn during FY22E for construction of 5.28 MSM, 3.6 MSM and 3.48 MSM of tiles capacity at Kassar (owned plant), and its subsidiaries – Sudha Somany Ceramics Pvt Ltd (60% stake) and Somany Piastrelle Pvt Ltd (100% wholly owned subsidiary), with capex of Rs 450 mn, Rs 420 mn and Rs 900 mn respectively. Capacities at all the three venues are expected to be commissioned by Q4FY22. This capex will be funded through internal accruals, as the Company generates adequate free cash flow.

* Somany has also announced to set up a new Greenfield manufacturing facility of large format/ slab tile with the capacity of ~4 MSM p.a. in Gujarat. The investment will be done in the proposed subsidiary ‘Somany Max Pvt Ltd’ (SMPL) and would be up to Rs 1.7 bn in one or more tranches, through subscription/acquisition of equity shares and/or granting of unsecured loan(s) to SMPL. The plant is expected to get commissioned by April 2023.

* All the above capex will increase the installed capacity of Somany from ~63 MSM to ~76.7 MSM.

VALUATION

* Positive consumer sentiments and focus of Morbi players towards export market, augurs well for organised players like Somany in gaining market share which is sustainable going forward. Further, green shoots are visible in residential real estate sector, which bodes well for organised players and we expect Somany to emerge as a strong player with asset light model in place, strong brand recall and highly deleveraged balance sheet.

* We have currently valued the stock on the basis of P/E of 22x, and maintain ‘Buy’ on the stock with a target price of Rs 1,062 (~30% upside) in 18 months.

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