Somany Ceramics Ltd. - Myirisbreport.myiris.com/SKPSEC/SPL_20150826.pdf · Somany Ceramics Ltd. ......

August 26, 2015

Somany Ceramics Ltd.

...de-risked growth

CMP INR 315 Target INR 456 Initiating Coverage - BUY

SKP Securities Ltd www.skpmoneywise.com of 18

Key Share Data

Face Value (INR) 2.0

Equity Capital (INR Mn) 77.7

Market Cap 12236.1

52 Week High/Low (INR) 535/263

Avg. Daily Volume (NSE) 20,138

BSE Code 531548

NSE Code SOMANYCERA

Reuters Code SOCE.NS

Bloomberg Code SOMC:IN

Shareholding Pattern (June 30, 2015)

56%

6%

3%

35%

Promoters

FII

DII

Public & Others

Particulars FY14 FY15 FY16E FY17E

Net Sales 12,577.9 15,410.5 18,342.2 21,663.7

Growth (%) 19.8% 22.5% 19.0% 18.1%

EBITDA 816.4 962.5 1,214.1 1,542.3

PAT 280.3 443.8 587.1 770.9

Growth (%) -11.3% 58.3% 32.3% 31.3%

EPS (INR) 7.2 11.4 15.1 19.8

BVPS (INR) 56.8 65.4 78.1 95.5

Key Financials (INR Million)

Particulars FY14 FY15 FY16E FY17E

P/E (x) 43.7 27.6 20.8 15.9

P/BVPS (x) 5.5 4.8 4.0 3.3

Mcap/Sales (x) 1.0 0.8 0.7 0.6

EV/EBITDA (x) 16.2 14.0 11.3 9.0

ROCE (%) 17.0% 18.7% 22.0% 23.9%

ROE (%) 12.7% 17.5% 19.4% 20.8%

EBT Mar (%) 3.5% 4.3% 4.8% 5.3%

PAT Mar (%) 2.2% 2.9% 3.2% 3.6%

Debt - Equity (x) 0.6 0.6 0.5 0.5

Key Financials Ratios

Source: Company, SKP Research

Price Performance SCL vs BSEMIDCAP

-10%

10%

30%

50%

70%

90%

110%

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

SCL

BSE Mid Cap

Company Background

Somany Ceramics Limited (SCL), promoted by Mr. HL Somany (now Chairman Emeritus) in 1968, is the third largest player in India’s Ceramic Tiles industry under “SOMANY” brand with a combined manufacturing capacity of 52 MSM which includes its own manufacturing facilities in Gujarat & Haryana and its JV manufacturing partners. It also sells tiles imported from China. As strategic product extensions to leverage its customers and channels, it also manufactures sanitaryware and bathroom fittings through JV partners. It has a long term contract for natural gas, energy being its principal input.

Investment Rationale

Capacity Expansion – Increasing tiles capacity to meet growing demand

There is an increased demand for life style consumption products, especially from aspiring mass affluents. To meet the resultant demand of ceramic tiles, SCL is increasing its own capacity of GVT tiles by 4 MSM in Kassar, with an approximate capex of Rs 900 mn. The project is expected to get commissioned by Q1FY17 and has a potential to generate additional revenue of Rs 2.4 - 2.8 bn at full capacity utilization.

The company is also in the process of acquiring 51% stake in Somany Fine Vitrified Tiles Pvt Ltd (a JV), having presence in PVT segment, with an investment of ~Rs 180 mn. This capacity is expected to become operational by October 2015 with a potential to generate additional revenue of Rs 1.3 - 2.1 bn at full capacity utilization.

Margins expected to improve with better product mix:

During FY10 - FY14, EBT Margins of the company was under pressure, reducing from 5.7% to 3.5%. Margins have since improved to 4.3% and 4.1% during FY15 and Q1FY16, respectively due to better product mix. Contribution from GVT and PVT tiles, which enjoy better realizations and margins, has increased from 36% (combined) in FY12 to ~51% during FY15. With SCL’s focus on superior, value-added products, going forward, we expect the product mix to result in further improvement of margins to 5.3% in FY17E.

Topline from tiles to grow at a CAGR of ~18% over FY15-17E

During FY15, SCL’s tiles division reported net sales of Rs 14.6 bn, registering a robust growth of 21% y-o-y, which could be attributed to increased sales of value-added products such as VC tiles, Duragres tiles, and digital tiles; and increased contribution from sales of GVT and PVT tiles through JVs and outsourcing.

Contribution from GVT and PVT tiles together was 51% during FY15 via-a-vis 47% last year. PVT and GVT tiles witnessed a robust CAGR growth of 27% and 55% during FY12-FY15.

Going forward, with SCL’s focus on value-added products and increasing contribution from PVT and GVT segment, we expect the segment to grow at a CAGR of 18% during FY15-FY17E.

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

affluents, increasing nuclear families and Governments’ thrust on “Housing

for All” coupled with strong brand equity and 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.

We have valued the stock on the basis of P/E - method of relative valuation

- of 23x of FY17E. We recommend a Buy on the stock with a target price of

Rs 456/- in 18 months (~45% upside).

Analysts: Nikhil Saboo

Tel No: +91-33-40077019; Mobile: +91-9330186643

e-mail: [email protected]

Vineet Agrawal

Tel No: +91-22-49226006; Mobile: +91-9819510575

e-mail: [email protected]



Indian Tiles Industry – An Overview:

Ceramic Tiles market can be broadly divided into two sub-segments viz Ceramic Tiles and

Vitrified Tiles. Vitrified Tiles can be further sub divided in to Polished Vitrified Tiles (PVT) and Glazed Vitrified Tiles (GVT).

Market Size: Ceramic tiles are an essential building material now. Despite the industrial slowdown in the past few years, Indian Tiles market grew from 494 million sq. Meters (MSM) in CY09 to 748 MSM in CY13 witnessing a CAGR of ~11%.

Structural shift from ceramic to vitrified tiles: A major change took over the ceramic tiles industry in the recent past with the introduction of the next generation vitrified tiles and porcelain tiles.

Globally, these tiles account for ~50% of total tile sales (by value). Contribution of these products is increasing year-on-year, in India, with structural shift in the consumer preference for superior, value added products.

Source: Company Presentation – Feb 2015

India is the third largest tiles producer, globally, with lowest per capita consumption: Top 3 tile producing countries in CY13 and per capita consumption is given below:

Country Production

(MSM) Production (% Share)*

Consumption (MSM)

Consumption (% Share)**

Per Capita Consumption

(sqm)

China 5700 48% 4556 39% 3.4

Brazil 871 7% 837 7% 4.1

India 748 6% 748 6% 0.5

Source: Company Presentation – Feb 2015; * Global Market Size in CY13 11913 MSM; ** Global Consumption 11574 MSM

Despite the double digit growth (~11%) of tiles market in India, its per capita consumption is about a third of global average. Majority of the tiles demand comes from residential segment followed by commercial and replacement segment.



Morbi (Gujarat), the second largest tiles cluster in the world, is the nerve centre of Indian tile industry: Value wise, Indian tiles industry is evenly divided amongst organized and unorganised sector. A major concentration of unorganised ceramic producers is in Morbi, Gujarat accounting for nearly 50% (earlier 70%) of the total production. It is home for more than 600 tile manufacturers out of 700 in India.

India’s leading Ceramic Tiles players have strategically engaged Morbi’s tiles producers as outsourcing or joint venture (JV) partners. Morbi’s proximity to key raw materials and the overall manufacturing eco-system makes it a formidable region for tile manufacturers. Some tile producing units at Morbi are growing steadily and sustainably and are setting new benchmarks not just in terms of efficiency and quality but also in setting new trends in creative and customized designs, shades, sizes, etc. But they lack strong distribution network and brand recall at national level and have limited resources and management bandwidth. This provided a win-win situation for national and Morbi players to have a strategic engagement.

Break-up of domestic tiles market at a glance:


Unorganised market losing sheen: Earlier the unorganised market was highly competitive due to low cost manufacturing on account of tax evasion and low operating cost due to usage of coal based fuel, presence in highly fragmented tier-I cities, low level of premiumisation – ceramic tiles dominated sales, with no technology innovation.

Unorganised market is now loosing sheen due to –

Government’s move to curb black money: Liquidity crunch is expected to occur due to Central Government’s engineered move towards curbing black money. The move by the Government will lead to reduced cash transactions in building material segment, impacting the turnover of small unorganised players.

Policy Shift - Ban on coal based plant: Ban on usage of coal for manufacturing tiles has further marred liquidity of small players as natural gas is 30% costlier than coal, leading them to increase prices of ceramic tiles, thus, making their pricing competitive with organized players.

Change in Consumer Preference: With change in consumer preference for branded value-added building products (from ceramic to vitrified tiles) demand for GVT and PVT tiles are increasing, which offers better designs than ceramic tiles.

70%

15%

15%

Residential Demand

Commercial

Replacement

49%51%Organised

Unorganised



Demand Drivers: Given the various growth and development initiatives of the current

Government, the opportunity landscape for the industry is quite wide in India. Following

are the demand drivers which could propel tiles market in the near future:

Increasing Urbanization: India is rapidly organizing, which is gradually translating into more demand for ceramic tiles. A report by McKinsey Global Institute projects 40% of India’s population would be urbanized by 2030.

Growing Mass Affluent Segment: India’s mass affluents – probably the largest such segment in the world in PPP terms – is expected to grow from 58 mn in 2010 to 110 mn by 2020 (40% of the total national households from 24% in 2010). This segment is evolving towards international standards of lifestyle, translating into upsurge in demand for modern tiles.

Rising disposable income: With growing middle class and rising income, real household disposable income has increased by about four times since 1990, translating in to a greater investment in homes. Rising disposable income at a glance:

1679 1776

2896

3290

3619

4395

4913 4931

6005

6671

0

1000

2000

3000

4000

5000

6000

7000

1990 1995 2004 2005 2006 2007 2008 2009 2010 2011

USD

Per

House

hold


Growth in real estate: Urban household development, demand for pucca houses and changing consumer preference towards tiles is encouraging the demand for tiles to go up. There is a growth in demand for tiles owing to the water seepage problem that leads to mold formation in walls and ceilings.

Government’s Initiatives: GoI plans to develop 100 smart cities,

development of industrial corridors, housing for all by 2022, etc., all will lead

to a boost in demand for ceramic tiles. ‘Swaccha Bharat Abhiyaan’ will lead

to building of toilets and community toilets.

Organized market gaining ground: Gradually, organized market is stemming up from the unorganized predominance previously, for the reasons mentioned above. This is encouraging for better control purposes and price mechanisms to play.

With more and more unorganized players becoming part of the organized players, market segmentation is skewing towards creation of a centralized market, which can be brought under the purview of regulations. A proper government support and other infrastructural reforms could lead to a better play for Indian ceramic tiles industry in years to come.



Outlook:

With increasing construction activities, especially in tier - II & tier - III cities, tiles market in the country is set to flourish. Demand from institutional customers is outpacing the retail demand in many regions of the country.

The overall Indian tiles market is expected to witness CAGR of more than 18% for next five years. However, during the same period demand for vitrified tiles is expected to grow at CAGR of 21% due to increasing institutional sales and changing consumer preferences.

Global Scenario:

The world ceramic tiles production is growing at a healthy CAGR of 8.5% over 2009-13, with the market size of 11,913 MSM. China is the world’s largest tiles producer with 47% market share. Brazil is the second largest tile producer with production capacity of 871 MSM followed by India at 748 MSM.

In terms of exports China is the largest exporter followed by Spain and Italy. These top three countries together contribute close to 66% to the overall world ceramic tiles exports.

Top Ten Ceramic Tiles Producing Nations Top Ten Ceramic Tiles Exporting Nations

Source: The Company Annual Report 2015

India has not grown much in terms of exports of ceramic tiles and currently consists of less than 0.5% of global market. As per ‘Indian Council of Ceramic Tiles and Sanitaryware’, India has exported tiles worth USD 441 mn in 2014. India Exports ceramics to markets such as UAE, Saudi Arabia and Malaysia.

Top Ten Ceramic Tiles Importing Nations

160150

121

9684 83 80

68 65 63

0

20

40

60

80

100

120

140

160

180

USA

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Fran

ce

Nig

eri

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Ge

rman

y

Ru

ssia

Thai

lan

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th K

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a

UA

E

MSM

Source: The Company Annual Report 2015

1148

318 303

114 88 80 63 51 50 48

0

200

400

600

800

1000

1200

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5700

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0

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6000

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ina

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Ind

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Iran

Spai

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MSM



Company Profile

SCL was incorporated in 1968 as Somany Pilkington Ltd (SPL), in collaboration with Pilkington’s Tiles Holdings, UK. SPL established a manufacturing facility for tiles in Kassar, Haryana with a capacity of 0.52 MSM and started its first commercial production in 1972. In 1981, SCL’s established its second manufacturing facility at Kadi, Gujarat. Somany family purchased Pilkington’s stake in the company, in 1994. During the year 2007, the company’s name was changed to Somany Ceramics Ltd.

Under the leadership of Mr. Sreekant Somany, Chairman and Managing Director, with ~40 years experience in ceramic and glass industry and his son Mr. Abhishek Somany, Joint Managing Director, with ~19 years experience in the ceramic industry, SCL has now become the third largest manufacturer of ceramic and vitrified tiles in India.

SCL ventured in sanitaryware business in 2007 and bath fittings in 2010. The Company has taken strategic move in this space by investing 26% equity stake in Morbi based Somany Sanitaryware Pvt. Ltd. (erstwhile Sonic Sanitaryware Pvt. Ltd.) which has an existing capacity to produce 0.3 mn pieces per annum.

Somany produces and sells mix of ceramic and vitrified tiles. Following is the business model of SCL:

Source: The Company

Strategic capacity enhancement through asset light model – Outsourcing through JVs to de-risk growth: In order to capitalize on the low per capita consumption of tiles and the growing demand in the industry, the Company has been focusing on enhancing its production volumes by entering into joint ventures with Morbi based ceramic tile manufacturers (asset light model) and acquisitions.

SCL’s focus on enhancing capacities through asset light model not only reduces its capital investments but also de-risks the balance sheet, enhances return ratios and provides faster access to capacities thereby, resulting into low debt equity ratio (D/E). SCL’s D/E has significantly reduced from 2x in FY10 to 0.6x in FY15 (as shown in the graph below).

SCL

Sanitaryware & Bath Fittings

Under JV Model with Somany

Sanitaryware Pvt. Ltd.

(Revenue Contribution: 5%)

Tiles

Including Owned Manufacturing & Asset Light Model

Asset Light Model includes JVs & outsourcing with Morbi based players,

and imports from China


Tiles – Own Mfg (Revenue Contribution: 40%)

Tiles – JVs


Sanitaryware (Revenue Contribution: 57%)

Bath Fittings (Revenue Contribution: 43%)

Tiles – Others

(Imports & Outsourcing) (Revenue Contribution: 20%)

Ceramic Tiles (Revenue Contribution: 49%)

PVT


GVT




Investment in JV LTD and D/E

60

92

217

241

180.0

0

50

100

150

200

250

FY12 FY13 FY14 FY15 FY16E

Inve

stm

en

t in

JV (

Rs

mn

)

Source: Company and SKP Research

The JVs into which SCL entered in the recent past till FY15 are given below:

Joint Ventures Year of Acquisition Tile Category StakeInvestment

(Rs mn)

Capacity

(MSM)

Vintage Tiles Ltd 2012 PVT 26% NA 2.55

Commander Vitrified Pvt Ltd 2013 PVT and GVT 26% NA 4.76

Vicon Ceramic Pvt Ltd 2014 Vitrified & Ceramic 26% 18.85 3.98

Amora Tiles Pvt Ltd 2014 Ceramic 51% 53.04 4.58

Acer Granito Pvt Ltd. 2014 PVT 26% 51.1 5.10

Total JV Capacity 20.97 Source: The Company

Outsourcing through imports and local (Morbi) players: Apart from the above mentioned JVs, SCL also procures tiles through outsourcing it from Morbi based players. It also imports tiles from China and has design collaboration with Italy and Spain based tiles manufacturers.

Since unorganised sector players are willing to enter into an agreement with established players, JVs and outsourcing model diminishes competition and capital risk. During FY15, JVs and outsourcing model contributed 60% of total tiles sales.

Owned Manufacturing: SCL has its state-of-the-art manufacturing facilities at Kassar, Haryana and Kadi, Gujarat with total manufacturing capacity at ~21.55 MSM.

Break-up of SCL’s total capacity is given below:

Capacity Pattern Owned Plant/JVCurrent Capacity

(MSM)

Kassar 13.13

Kadi 8.42

JV/Associates Morbi, Gujarat 20.97

Others

(Imported/Outsourced)

Imported from China & sourced from Morbi,

Gujarat9.50

52.02

Owned

Total

Source: The Company

18

32

.99

66

8.4

7

61

5.5

4

56

5.7

7

61

3.2

9

61

5.1

7

58

5.4

2

1.90

1.21

0.94

0.59 0.55 0.51 0.46

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0

200

400

600

800

1000

1200

1400

1600

1800

2000

FY11 FY12 FY13 FY14 FY15 FY16E FY17E

D/E

(x)

Lon

g Te

rm D

eb

t (R

s m

n)



Periodic Technology Development: SCL continuously strives for developing cutting edge technology. It developed Veil Craft Technology (VCT) in 2009 which represents pioneering high-abrasion-resistant glaze composition tile which retains its look even after years. SCL got VCT patented under the Indian Patent Act, which authorises exclusive rights for production and commercialisation of VC tiles for twenty years, in India. Such tiles are pioneered as well as popular among consumers. Within five years of launch the brand has touched Rs 2 bn sales mark (in FY14), providing first mover advantage to SCL.

SCL has also introduced digital high-definition (HD) technology to transfer realistic images on tiles. SCL launched a special range of tiles, Glosstra, in 2014, which is India’s glossiest tiles, with a special glossy coating that accentuates the colours and the design of the tiles.

Recently, SCL has developed and filed patent for Slip Shield Technology (SST) in which a unique coating is applied on the tiles which keeps the co-efficient of friction high, giving it anti-skid property, even when the surface is wet and soapy. SST could further open the markets for SCL.

These periodic technology innovations provide an edge to SCL over it peers, helping it grow faster than the industry.

Generates majority of revenues from Tier – II and Tier – III Cities: SCL’s revenues are heavily skewed towards the rapidly growing Tier – II and Tier – III cities with ~75% contribution. With urbanization trends increasing in Tier - II and Tier - III cities, demand for tiles, sanitaryware and bathroom fittings are on rise, providing SCL an opportunity to tap this market.

SCL has a strong presence in Northern and Southern India, together contributing ~68% of total sales during FY15 (of tiles and sanitaryware). Region wise SCL’s revenue at a glance:

Revenues from Tier – I and Tier – III cities: Region wise Revenues:

27% 26% 25% 24% 21% 21%

70% 72% 73% 73% 75% 75%

3% 2% 2% 3% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY10 FY11 FY12 FY13 FY14 FY15

Others

Tier II & III

Tier - I

36% 37% 39%

33% 32% 29%

15% 16% 16%

13% 13% 12%

2% 2% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY13 FY14 FY15

Misc

Exports

West

East

South

North

Source: The Company

63

0 93

0

10

50 1

57

0 20

00

0

200

400

600

800

1000

1200

1400

1600

1800

2000

FY10 FY11 FY12 FY13 FY14

VCT Sales (Rs mn)

Source: The Company



Strong Distribution Network: Over the years, SCL has established a strong and widespread distribution network, encompassing ~1,700 dealers (1,400+ active) and ~10,000 touch points through which it reach wide spectrum of retail customers (in Tier – II and Tier – III cities) and maintains its strong position in the tile industry. SCL’s revenue from these regions has increased from 66% in FY08 to 75% in FY15 (refer graph above).

Good Clientele and Brand Recall: The Company’s greatest asset is the recall value of its brands among customers. Being present in the industry for many decades has enabled SCL to develop long standing customer relationships. About 65% of the SCL’s revenue comes from retail clients while the rest is contributed by institutions (majorly developers and Government orders).


Raw Materials

Tiles: Sand and white clay are the main raw materials for manufacturing tiles, apart from Feldspar, dolomite and some other minerals.

Sanitaryware and Bathroom Fittings: The basic ingredients for making ceramics is Kaolinite, clay, feldspar and quartz sand which form the basis for this extremely durable and hard material. The basic raw material used in manufacturing bathroom fittings is brass, since it is highly resistant to corrosion and calcification.

Procurement and Pricing: SCL procures the above mentioned raw materials locally from contract miners, to whom the mines are leased by the Government on long term basis. There is not much fluctuation in the prices of raw materials of tiles and sanitaryware. Raw material cost to sales ratio for SCL reflects a gradual increasing trend from 49.9% in FY10 to 63.9% during FY15.



Investment Rationale

1. Capacity Expansion – Increasing Tiles capacity:

Brownfield expansion at Kassar, Haryana: To take advantage of robust demand, SCL is increasing its own capacity of GVT tiles by 4 MSM, in Kassar, with an approximate capex of Rs 900 mn.

The project is expected to get commissioned by Q1FY17 and has a potential to generate additional revenue of about Rs 2.4 - 2.8 bn at full capacity utilization.

Acquisition of Somany Fine Vitrified Pvt Ltd. (SFVPL): SCL is also in the process of acquiring 51% stake in SFVPL, having presence in PVT segment, with an investment of ~Rs 180 mn. The acquisition will enhance the JV capacity of SCL by 4.29 MSM.

This capacity is expected to go on-stream by October 2015 and has a potential to generate additional revenue of about Rs 1.3 - 2.1 bn at full capacity utilization.

Installed capacity of SCL, for tiles, post expansion, at a glance:

Ownership Pattern (MSM) Plant/Co Pre-Expansion ExpansionPost

ExpansionKassar 13.13 4.00 17.13 Kadi 8.42 - 8.42 Vintage Tiles Ltd 2.55 - 2.55 Commander Vitrified 4.76 - 4.76 Vicon Ceramic Pvt Ltd 3.98 - 3.98 Amora Tiles Pvt Ltd 4.58 - 4.58 Acer Granite Pvt Ltd 5.10 5.10 Somany Fine Ceramics - 4.29 4.29

Others

(Imported/Outsourced)- 9.50 - 9.50

52.02 8.29 60.31

Owned

JV/Associates

Total

Source: The Company

Increasing stake in Sanitaryware JV: SCL is also increasing its stake in Somany

Sanitaryware Pvt Ltd from current 26% to 51% and increasing its capacity from 300,000 pieces to 1,000,000 pieces. We have not incorporated these numbers for valuation purposes due to lack of further clarifications.

2. Margins expected to improve with better product mix:

EBT Margins of the company was under pressure since FY10 till FY14, reducing from 5.7%

to 3.5%. The margins have improved to 4.3% and 4.1% during FY15 and Q1FY16, respectively due to better product mix.

The contribution of GVT and PVT tiles, which enjoys better realizations and margins vis-à-vis ceramic tiles, has increased from 36% (combined) in FY12 to ~51% during FY15. With SCL’s focus on value-added products, going forward, we expect the product mix to improve further, resulting in to expansion of margins.

PAT margins were also dragged down to 2.2% in FY14 from 3.8% in FY10 which was improved to 2.9% and 2.7% during FY15 and Q1FY16 respectively. We expect PATM to improve further to ~3.6% by FY17E.



Tiles – Product Mix EBT & EBT Margins (%)

PAT & PAT Margins (%) ROE & ROCE (%)

Source: SKP Research Desk

3. Top-line expected to grow at a CAGR of ~19% over FY15-17E, with focus on value-added products:

Tiles Division: In FY15, SCL reported net sales of Rs 14.6 bn, registering a robust growth

of ~21% y-o-y which could be attributed to higher sales of value-added products such as VC tiles, Duragres Tiles, and digital tiles and increased contribution from sales of GVT and PVT tiles through JVs and outsourcing model.

Contribution from GVT and PVT tiles together was 51% during FY15 via-a-vis 47% in the previous year. PVT and GVT tiles witnessed a robust CAGR growth of 27% and 55% during FY12-FY15.

The Segment grew by 14% to 10.71 MSM in Q1FY16 vis-à-vis 9.39 MSM corresponding quarter last year.

Going forward, with SCL’s focus on value-added products and increasing contribution from PVT and GVT segment, we expect the segment to grow with a CAGR of 18% during FY15-FY17E.

Sales Contribution from tiles segment at a glance:

64% 57%

53% 49% 46% 43%

31%13%

36% 34% 27% 28%

8%16% 16% 16% 17% 17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13 FY14 FY15 FY16E FY17E

GVT

PVT

Ceramic Tiles

35

6.9

46

6.6

44

0.2 6

55

.1 88

0.6 1

15

6.3

4.1%4.4%

3.5%

4.3%

4.8%

5.3%

0%

1%

2%

3%

4%

5%

6%

0

200

400

600

800

1000

1200


EBT (Rs mn) - LHS

EBT Margins (%) - RHS

24

7.5

31

5.9

28

0.3 4

43

.8 58

7.1 7

70

.9

2.8%3.0%

2.2%

2.9%

3.2%

3.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

100

200

300

400

500

600

700

800

900


PAT (Rs mn) - LHS

PAT Margins (%) - RHS

20%21%

13%

17%

19%

21%

20%

22%

17%

19%

22%

24%

10%

12%

14%

16%

18%

20%

22%

24%


ROE

ROCE



Tiles – Volume wise Sales Tiles – Volume wise Segment Contribution

17.8 17.1 19.4 18.7 19.8 22.6

0.4 3.06.6

14.518.8

22.9

13.213.3

11.9

9.2

9.5

9.5

0

10

20

30

40

50

60


MSM

Tiles - Others

Tiles - JVs

Tiles - Own Manufacture

57% 51% 51%44% 41% 41%

1% 9%17% 34% 39% 42%

42% 40%32%

22% 20% 17%

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Tiles - Others

Tiles - JVs


Tiles – Value wise Sales Tiles – Value wise Segment Contribution


Sanitaryware division: In FY15, sanitaryware division reported net sales of Rs 748.9 mn, registering a growth of ~60% y-o-y on account of small revenue base. The division reached 88% capacity utilization during Q1FY16. Going forward we expect it to grow at a CAGR of 30% during FY15-FY17E due to expected revival in Indian economy and change in consumer preferences for branded products.

Overall Standalone Sales: SCL has grown at a CAGR of 21% during FY12-15, on standalone basis. With the Company’s focus on value added products, expected revival in the economy and changing consumer preferences, we expect its growth path to continue and report a CAGR of ~19% during FY15-FY17E.

23

6.5

28

3.8

46

9.2

74

8.9

10

48

.5

12

58

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Sanitaryware Sales (Rs bn) -LHS

% Growth - RHS


58% 53% 50%40% 37% 36%

1% 13%24% 40% 45% 48%

41%34%

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Tiles - Others

Tiles - JVs


4.9 5.4 6.1 5.9 6.4 7.40.1

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2.85.8

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Tiles - JVs




4. Focus on Asset Light Model helps in De-leveraging Balance Sheet:

As mentioned above, SCL has been focusing on enhancing its production volumes by entering into joint ventures with Morbi based ceramic tile manufacturers (asset light model) and acquisitions.

SCL’s focus on enhancing capacities through asset light model not only reduces its capital investments but also de-risks the balance sheet, enhances return ratios and provides faster access to capacities thereby, resulting into low debt equity ratio (D/E). SCL’s D/E has significantly reduced from 2x in FY10 to 0.6x in FY15 (as shown in the graph below).

Debt position of SCL at a glance:

12

67

.74

18

32

.99

66

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7

61

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56

5.7

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61

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.29

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Long Term Debt (LHS) Short Term Debt (LHS) D/E (RHS)


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 offtake: 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. Increase in fuel prices: Increase in gas prices, a key input in this energy intensive industry, poses a threat to business in terms of increase in operating cost. To mitigate this, the company has entered into long term agreement with GAIL, IOC and GSPL.

4. Extended slowdown in real estate sector may dampen business sentiments: SCL’s tiles and sanitaryware segment is highly dependent on real estate sector. Any extension of slowdown to Tier – II and Tier – III cities may dampen business prospects of SCL.



5. Competition from China: Cheap tiles imported from China could pose a threat to the business of SCL due to absence of anti-dumping duty. Presently, GoI and State Government of Gujarat, where majority of tiles are manufactured, are supporting Indian manufacturers against dumping to tiles.

6. Forex Risk: The Company faces foreign exchange risks due to its imports and exports. Any adverse currency fluctuation may pose threat to the profitability of SCL.

Valuations

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” coupled

with strong brand equity and 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.

SCL is among the top three players in tiles segment with strong brand recall. We have valued the stock

on the basis of P/E - method of relative valuation - of 23x of FY17E. We recommend a Buy on the stock

with a target price of Rs 456/- in 18 months (~45% upside).

Source: SKP Research

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Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Adj Close Price 1 11 21 31 41



Q1FY16 Standalone SCL Result Review

(All data in Rs mn unless specified, Y/e March)

Particulars Q1 FY16 Q1 FY15 % Change Q4FY15 % Change FY15 FY14 % ChangeNet Sales 3935.5 3318.0 18.6% 4591.1 -14.3% 15410.5 12596.7 22.3%TOTAL EXPENDITURE 3695.5 3121.6 18.4% 4302.2 14448.0 11780.3 22.6%Raw Material Consumed 302.4 298.2 1.4% 602.4 -49.8% 1348.9 1984.3 -32.0%% to Sales 7.7% 9.0% -- 13.1% -- 8.8% 15.8% --Purchase of traded goods 2199.0 1720.4 27.8% 2493.4 -- 8504.0 5791.2 --% to Sales 55.9% 51.9% -- 54.3% -- 55.2% 46.0% --Employee Expenses 260.9 228.0 14.4% 231.9 12.5% 953.6 822.9 15.9%% to Sales 6.6% 6.9% -- 5.1% -- 6.2% 6.5%Stores & Spare Parts 63.8 64.9 -1.7% 63.2 0.9% 248.3 231.7 7.2%% to Sales 1.6% 2.0% -- 1.4% -- 1.6% 1.8% --Fuel Cost 460.8 440.3 4.7% 463.3 -0.5% 1776.3 1647.2 7.8%% to Sales 11.7% 13.3% -- 10.1% -- 11.5% 13.1% --Other Expenses 408.6 369.8 10.5% 448.0 -8.8% 1616.9 1303.0 24.1%% to Sales 10.4% 11.1% -- 9.8% -- 10.5% 10.3% --EBIDTA 240.0 196.4 22.2% 288.9 -16.9% 962.5 816.4 17.9%EBIDTA Margin 6.1% 5.9% -- 6.3% -- 6.2% 6.5% --Depreciation 48.3 51.3 -5.8% 59.8 -19.2% 222.7 220.6 1.0%EBIT 191.7 145.1 32.1% 229.1 -16.3% 739.8 595.8 24.2%EBIT Margin 4.9% 4.4% -- 5.0% -- 4.8% 4.7% --Interest 43.7 37.1 17.8% 47.6 -8.2% 163.0 183.0 -10.9%Other Income 12.8 14.1 -9.2% 17.8 -28.1% 78.3 27.4 185.8%Exceptional Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --Forex Difference 0.0 0.0 -- 0.0 -- 0.0 0.0 --EBT 160.8 122.1 31.7% 199.3 -19.3% 655.1 440.2 48.8%EBT Margin 4.1% 3.7% 4.3% 4.3% 3.5%Tax 55.9 41.4 35.0% 51.5 8.5% 211.3 159.9 32.1%Extraordinary Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --Prior period taxes written bk. 0.0 0.0 -- 0.0 -- 0.0 0.0 --Minority Interest 0.0 0.0 -- 0.0 -- 0.0 0.0 --Share of Associate Company 0.0 0.0 -- 0.0 -- 0.0 0.0 --Reported Profit After Tax 104.9 80.7 30.0% 147.8 -29.0% 443.8 280.3 58.3%PAT Margin 2.7% 2.4% -- 3.2% -- 2.9% 2.2% --Diluted EPS (` ) 2.7 2.1 29.8% 3.8 -28.9% 11.4 8.3 38.5%

Source: Company, SKP research



Standalone Financials

Exhibit: Balance Sheet

Particulars FY14 FY15 FY16E FY17E Particulars FY14 FY15 FY16E FY17E

Total Income 12,577.9 15,410.5 18,342.2 21,663.7 Share Capital 77.7 77.7 77.7 77.7

Growth (%) 19.8% 22.5% 19.0% 18.1% Reserve & Surplus 2,127.4 2,462.4 2,956.0 3,633.3

Expenditure 11,761.5 14,448.0 17,128.0 20,121.4 Shareholders Funds 2,205.1 2,540.1 3,033.7 3,711.0

Material Cost 1,984.3 1,348.9 1,467.4 1,733.1 Total Debt 1,294.0 1,408.3 1,561.9 1,714.7

Pur of Traded Goods 5,791.2 8,504.0 10,198.2 11,958.4 Deferred Tax (Net) 275.0 274.2 274.2 274.2

Employee Cost 822.9 953.6 1,135.0 1,340.6 Other Long Term Liab 178.1 191.3 227.7 268.9

Storage & Spare Parts 231.7 248.3 293.5 325.0 Total Liabilities 3,952.2 4,413.9 5,097.4 5,968.9

Power & Fuel & Othr Exp. 1,647.2 1,776.3 2,109.3 2,491.3

Other Expenses 1,284.2 1,617.0 1,924.6 2,273.1 Net Block inc. Capital WIP 2185.2 2367.1 2915.8 3070.5

EBITDA 816.4 962.5 1,214.1 1,542.3 Investments 587.7 507.2 687.2 687.2

Depreciation 220.6 222.7 201.4 245.3 Non-Current Asset - 25.1 29.9 35.3

EBIT 595.8 739.8 1,012.8 1,297.1 Inventories 857.45 1272.6 1283.952 1733.096

Other Income 27.4 78.3 51.4 60.7 Sundry Debtors 2,130.2 2,534.7 2,934.7 3,466.2

Interest Expense 183.0 163.1 183.5 201.5 Cash & Bank Balance 326.73 145.8 52.8 114.0

Profit Before Tax (PBT) 440.2 655.1 880.6 1,156.3 Other Current Assets 20.6 25.8 30.7 43.3

Income Tax 159.9 211.3 293.5 385.4 Loans & Advances 1047.44 1376.6 1559.084 1841.415

Profit After Tax (PAT) 280.3 443.8 587.1 770.9 Current Liabilities & Prov 3,203.0 3,841.0 4,396.7 5,022.1

Growth (%) -11.3% 58.3% 32.3% 31.3% Net Current Assets 1,179.4 1,514.5 1,464.6 2,175.9

Diluted EPS 7.2 11.4 15.1 19.8 Total Assets 3,952.2 4,413.9 5,097.4 5,968.9

Exhibit: Cash Flow

StatementExhibit: Ratio Analysis

Particulars FY14 FY15E FY16E FY17E Particulars FY14 FY15 FY16E FY17E

Profit Before Tax (PBT) 440.2 655.1 880.6 1,156.3 Earning Ratios (%)

Depreciation 220.6 222.7 201.4 245.3 EBT Margin (%) 3.5% 4.3% 4.8% 5.3%

Interest Provided 183.0 163.1 183.5 201.5 PAT Margins (%) 2.2% 2.9% 3.2% 3.6%

Chg. in Working Capital 55.1 (605.4) (11.6) (614.3) ROCE (%) 17.0% 18.7% 22.0% 23.9%

Direct Taxes Paid (132.6) (208.4) (293.5) (385.4) ROE (%) 12.7% 17.5% 19.4% 20.8%

Other Charges (2.1) (43.1) - - Per Share Data (INR)

Operating Cash Flows 764.3 184.1 960.4 603.3 Diluted EPS 7.2 11.4 15.1 19.8

Capital Expenditure (353.7) (440.7) (750.0) (400.0) Cash EPS (CEPS) 12.9 17.2 20.3 26.2

Investments (632.4) (2,267.6) (180.0) - BVPS 56.8 65.4 78.1 95.5

Others 139.8 2,403.4 - - Valuation Ratios (x)

Investing Cash Flows (846.3) (304.9) (930.0) (400.0) P/E 43.7 27.6 20.8 15.9

Changes in Equity 485.4 - - - Price/BVPS 5.5 4.8 4.0 3.3

Inc / (Dec) in Debt (30.4) 103.7 153.6 152.8 EV/Sales 1.0 0.9 0.7 0.6

Dividend Paid (inc tax) (48.0) (67.7) (93.5) (93.5) EV/EBITDA 16.2 14.0 11.3 9.0

Interest Paid (182.0) (162.3) (183.5) (201.5) EB/EBIT 22.2 18.2 13.6 10.7

Financing Cash Flows 156.4 (60.1) (123.4) (142.1) Balance Sheet Ratios

Chg. in Cash & Cash Eqv 74.4 (180.9) (93.0) 61.2 Debt - Equity 0.6 0.6 0.5 0.5

Opening Cash Balance 252.3 326.7 145.8 52.8 Current Ratio 1.4 1.4 1.3 1.4

Closing Cash Balance 326.7 145.8 52.8 114.0 Fixed Asset Turn. Ratios 5.8 6.5 7.9 7.1

Figures in INR Million

Source: Company Data, SKP Research

Exhibit: Income Statement Figures in INR Million Figures in INR Million



Notes:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg,

Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities.

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