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Company Background

Somany Ceramics Limited (Somany), promoted by 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 ~53 MSM which includes its own manufacturing facilities at Kadi, Gujarat and Kassar, Haryana and its JV 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. It has a long-term contract for natural gas, energy being a principal input.

Investment Rationale:

Strong volume growth witnessed backed by robust demand from tier-III plus cities

* During Q3FY21, Somany’s consolidated net sales witnessed a growth of 12.9% y-o-y and 16.2% q-o-q, on the back of robust demand from tier-III cities, resulting in 100% capacity utilisation of plants, barring sanitaryware. The overall realisation improved marginally by ~1% y-o-y to Rs 289/MSM, on the back of better sales mix. The sales mix for the quarter improved by 2% y-o-y in favour of GVT.

* The Company managed sales volume growth of ~12% y-o-y at 14.9 MSM during the quarter as against 13.3 MSM reported during the corresponding period last year. Majority of the demand came from tier – III, IV and V cities. Revenue from tiles segment was at Rs 4,283 mn in Q3FY21 as against Rs 3,805 mn in Q3FY20 (Rs 3,727.9 mn in Q2FY21), while revenue from bathware stood at Rs 508.9 mn (Rs 405.2 mn in Q2). Ceramic Tiles, GVT and PVT contributed 40%, 35% and 25% respectively.

* The Company has not taken any price hike during the quarter. However the Company took a price hike in bathware segment during January 2021, on account of an increase in brass prices. Price hike in tiles segment will be taken from February 1, 2021 onwards to the tune of 5-9% on the back of steep price increase in gas prices taken by GSPCL in Gujarat.

* The Company has focused upon improvement in receivable days for past many quarters, which has further improved from 63 days in Q3FY20 to 56 days during Q3FY21. Further improvement in debtor days is expected going forward. Inventory days are maintained at 35 days. Also, the Company is net debt free on standalone levels.

* Exports of tiles have increased recently in the light of global and domestic anti-China wave post COVID-19 outbreak with anti-dumping duty levied by various countries on China. India is the second most competitive tile producer after China. Most of the export demand is met by Morbi players, leaving the domestic market to be catered by organised players, leveraging their brand equity, resulting in reduced competitive intensity and better profitability. Till December 2020, Morbi has exported tiles worth ~Rs 73 bn which is expected to cross ~Rs 110 bn March 2021.

* Gas prices for Kassar plant which is linked with three months average crude prices, has gone up by Rs 2/SCM to Rs 29-30/SCM. In Kadi and Morbi gas prices have gone up steeply by Rs 6/SCM to Rs 34-35/SCM. For South plant, Somany witnessed gas price of Rs 33/SCM and 38/SCM during January and February which is expected to fall to Rs 33- 34/SCM in March.

* We have factored in a ~1% growth in FY21E topline on the back of subdued Q1FY21. We expect demand momentum to sustain, going forward, with a rise in economic activity. Thus, we have upgraded sales volume from our earlier estimates of 46.2 MSM and 51.4 MSM for FY21E and FY22E to 48.9 MSM and 55.5 MSM and introduced volumes for FY23E at 62.8 MSM.

Margins expected to improve with better product mix:

* The Company witnessed significant improvement in EBITDA margin (by 360 bps y-o-y) at 12.9%, backed by prudent cost and operating efficiency management of operating efficiencies achieved due to prudent cost control measures undertaken by the Company. With the improvement in business environment, the Company has reinstated the salaries of the employees during the quarter. The Company witnessed flat EBIDTA margin of 9.3% during 9MFY21 on the back of subdued performance in Q1FY21.

* Going forward, we expect EBIDTA margin to stabilize at ~12% by FY23E, 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.

* The Company witnessed a profit of Rs 282 mn at PAT level, a rise of ~171% y-o-y, on the back of improved operating profits and decrease in interest by ~24% at Rs 94.1 mn.

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, signs of green shoots are visible in the residential real estate sector 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 20x of FY23E earnings of Rs 29.8, and maintain ‘Buy’ on the stock with a target price of Rs 595 (~57% upside) in 18 months.

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