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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:

Strong volume growth backed by positive consumer sentiments

* During Q2FY22, Somany’s consolidated net sales witnessed a robust growth of ~32% y-o-y at Rs 5,607.4 mn due to positive consumer sentiments post COVID second wave and rapid pace of vaccination. The Company witnessed capacity utilisation (CU) of 92%, 38% and 90% in tiles, sanitaryware and faucetware segments respectively during the quarter. CU of sanitaryware segment dipped on account of production outage due to rain. However, currently plant is working at 100% utilization levels. Somany reported sales growth of ~50% at Rs 8,906.8 mn during H1FY22. The Company is confident to maintain growth trend in the coming quarters.

* Somany witnessed volume growth of ~25% y-o-y during the quarter at 16.17 MSM vis-à-vis 12.93 MSM corresponding period last year. The overall realisation also jumped by ~6.5% y-o-y from ~Rs 288/MSM to ~Rs 306/MSM. Revenue from tiles segment was at Rs 4,954.7 mn in Q2FY22 as against Rs 3,719.1 mn in Q2FY21, while revenue from bathware stood at Rs 529.6 mn (vis-à-vis Rs 404.3 mn in Q2FY21).

* Management said that month of July witnessed slowdown as South market did not open fully and there was a trucker’s strike for 10-12 days in Morbi. However, volumes rebounded strongly in the month of August and September.

* The Company has focused on improvement in receivable days for past many quarters, which has improved from 49 days in Q1FY22 to 44 days during Q2FY22.

* With exponential rise of freight rates and unavailability of containers, exports from Morbi dwindled in September to Rs 6-7 bn from average exports of Rs 11-12 bn in July and August. Morbi plants had to undergo a month long shutdown in all kinds of tiles (viz. PVT, double charged and wall tiles) during August and September due to deferment of export orders. Morbi exported tiles worth Rs 120 bn during FY21.

* Gas price rise continued during Q2FY22 and Q3FY22. Current average gas price for Kassar plant, Morbi and South India is Rs 41-42/SCM, Rs 61-62/SCM and Rs 92/SCM vis-à-vis Rs 36/SCM, 33/SCM and Rs 32/SCM respectively in Q1FY22. Further rise in gas prices is expected in North to Rs 47-48/SCM in next 3-4 months and in Morbi to Rs 70-72/SCM in next 15-20 days respectively, whereas it is estimated that prices in South India has peaked. Thus, the Company has taken a price increase of 4.5% and 3.5% in H1FY22 and Q3FY22. Keeping in view the continuous gas price rise, further price hike is expected within a couple of weeks.

* Somany is well positioned for growth in coming years. We have built in a revenue growth of ~34%, ~16% and ~15% for FY22E, FY23E and FY24E respectively, considering Somany’s robust track record and rise in demand pickup, post COVID second wave.

EBIDTA Margins expected to improve with better product mix:

* During Q2FY22, EBITDA margins improved by 50 bps y-o-y at 12.2% inspite of continuous rise in gas cost and freight rates. 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 ~13% 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 1.8 bn in FY22E:

* 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. This capex will increase the installed capacity of Somany from ~63 MSM to ~75 MSM.

VALUATION

* Better than expected rebound in tiles volumes 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 1,148 (~30% upside) in 18 months.

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