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Company Background Somany Ceramics Ltd (Somany), promoted by Late H L Somany, now managed under the leadership of Mr Shreekant Somany, Chairman and Mr Abhishek Somany, MD, is amongst India’s largest players in Ceramic Tiles industry under “SOMANY” brand with a combined manufacturing capacity of ~80 MSM which includes its own manufacturing facilities at Kadi, Gujarat & Kassar, Haryana and 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: Muted Q3FY24 due to sluggish demand

* During Q3FY24, consolidated sales declined by 1.7% y-o-y to Rs 6,121 mn due to continued sluggish demand. Tiles volume declined by ~2.5% y-o-y during the quarter at ~15.75 MSM on account of weaker domestic demand. Realisation decreased by ~2.5% y-o-y at Rs 328/MSM.

* Revenue from tiles segment declined by ~5% y-o-y but there has been increase in sales of bathware by ~12.6% y-o-y (includes ~16% in bath fittings and ~3% in sanitaryware).

* Somany had capacity utilization (CU) of 83%, 60% and 79% in tiles, sanitaryware and faucetware segments respectively during the quarter. In Q3FY24, contribution from GVT increased by ~2% y-o-y to ~34%, PVT remained flat at ~30% and Ceramic was down by ~2% y-o-y to ~36%.

* Average blended gas prices in Q3FY24 stood at Rs 44/SCM - ~Rs 42/SCM, ~Rs 47/SCM and ~Rs 54/SCM for Northern, Western and Southern plants, respectively (Rs 43/SCM, Rs 43/SCM and Rs 50/SCM in Q2FY24 respectively).

* Somany has added significant capacity for GVT which is slowly showing up in more value added sales. The max plant which is the latest GVT large format slab tile plant with 4 MSM capacity has started on time; commercial production for thick 15 mm tile called cover stone has received good response and would add ~Rs 2.75 bn revenue at full CU. Further, 9 mm tile will be launched in Q4FY24.

* Somany invested ~6 bn in last 2 years and thus in FY24 and FY25 there will be only maintenance capex of ~Rs 400 mn (includes ~Rs 200 mn for Nepal project). The next major capex will be for expansion in sanitaryware will be mostly in FY26.

* Management has decided to invest ~Rs 37.6 mn in solar power to reduce electricity cost for Haryana plant which will start getting benefit from Q3FY25 onwards.

* There has been a significant improvement with addition of ~300 new dealers as of 9MFY24. Company is concentrating on advertising & brand building, spending ~2.75% of the total annual revenue.

* India’s exports slowed down post October 2023 due to issues in the Red Sea region which has increased freight cost and increased the transit time resulting in capacity cut down in Morbi (CU under ~70%). It has no major impact on Somany as its export is under 3% of total revenue to Rs 600-650 mn as of FY24 but has intensified competition in the domestic market.

* Company is scaling up the sanitaryware segment by changing the value mix. It will add another sanitaryware line and scale up the capacity by at least 50% from present.

* Management is confident to grow 5%-6% higher than the growth in the domestic tile industry, with an improving business scenario from FY25 as many real estate projects are near completion giving robust demand visibility. Muted demand was experienced in January 2024 and Q4FY24 is expected to remain soft with no price hike and ~5% annual growth expected in FY24. Bathware-Sanitaryware segment is expected to grow at 12-16% for Somany going forward with emphasis on promotions.

* With expectations of a revival in demand going forward, the Company is well positioned for growth in coming years with CU upto ~90%. We have built in revenue growth of ~3.5%, ~12.1% and ~14.7% for FY24E, FY25E & FY26E respectively, considering Somany’s robust track record.

EBITDA margins to improve with higher CU

* EBIDTA grew by ~46% y-o-y to Rs 590 mn along with 313 bps y-o-y increase in EBIDTA margin to 9.6% mainly due to softening in power & fuel cost and its focus on cost optimization measures.

* At standalone levels it is net debt free but at console level its debt stood at Rs 3.24 bn towards south plant and max plant.

* We expect EBITDA margin to remain ~9.5% in FY24 and will stabilize ~9.8% & ~10.3% in FY25E & FY26E respectively due to expectations of demand pick-up resulting in higher contribution from inhouse manufacturing and high margin value-added products, higher usage of low cost biofuel, better cost control and structural shift towards organised domestic players which is further expected to generate traction in the industry.

Investment in Nepal based tiles JV

* BOD of Somany, during Q4FY23, proposed to make investments up to Rs 625 mn for a 50% stake in JV with Murarka Group, a diversified conglomerate operating in Nepal. The proposed JV will be engaged in the manufacturing of tiles with an annual capacity of ~3.5 MSM. It is expected to get commissioned in next 18 months. Tiles manufactured here will be sold in Nepal only.

Other major updates

* Buyback: The maiden share buyback of 14,70,588 equity shares (FV Rs 2), representing 3.46 % of the total number of equity shares for Rs 1.25 bn was successfully completed.

* Somany has made provision of ~Rs 184 mn towards SREI Bonds about three years ago and has received the Resolution Plan from the authority for ~Rs 46.1 mn. During the quarter, it has received Rs 13 mn disclosed under exceptional item.

VALUATION

Recently, Building Products including Ceramic Tiles industry is witnessing a muted demand on account of inflationary environment. However, with expectations of interest rate topping out, new launches in real estate, increasing urbanization, a gradual recovery of demand is expected, going forward, which augers well for entire ceramic tiles industry in general and Somany in particular. We expect Somany to emerge as a strong player with its dedicated growth strategy in place which includes expanding market share and increasing number of dealers across India. We have valued the stock on the basis of P/E valuation method and assigned a P/E multiple of 25x FY26E EPS of Rs 40.7/share and recommend a ‘BUY’ on the stock with a target price of Rs 1,018 in 15 months (~38% upside).

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