CRISIL lowers fair value to Rs 68 for Somany Ceramics

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CRISIL lowers fair value to Rs 68 for Somany Ceramics

CRISIL Research has come out with its report on Somany Ceramics. The research firm has maintained the fundamental grade of 4/5 to the company in its February 01, 2012 report.

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CRISIL Research has come out with its report on Somany Ceramics . The research firm has maintained the fundamental grade of 4/5 to the company in its February 01, 2012 report.

Somany Ceramics Ltd's (Somany's) Q3FY12 results were below CRISIL Research's expectations. While revenues were in line, earnings were lower than expected. Increase in raw material, power and fuel costs and higher contribution from the low margin trading segment led to the decline in EBITDA margin. Given the expected slowdown in the end-user industries (real estate and infrastructure), rising raw material costs and limited ability to pass on the price rise, we expect margins to remain under pressure for the next three-six months. While we maintain our revenue estimates, earnings estimates have been revised downwards due to revision in margins. However, we remain positive on Somany's growth prospects given its established brand and strong distribution network and maintain the fundamental grade of 4/5.

Q3FY12 result analysis
• Revenues grew 21.3% y-o-y (4.7% q-o-q) to Rs 2,175 mn. While the trading segment registered 46% growth, the manufacturing segment's revenues grew 15%.

• EBITDA margins declined 144 bps y-o-y (down 50 bps q-o-q) to 8% due to higher gas prices and increase in raw material prices such as yellow colour and zirconium. Increased contribution from the low margin trading segment (45% vs. 41% in Q3FY11) also impacted margins.

• PAT de-grew by 9% y-o-y (down 18% q-o-q) to Rs 47 mn as revenue growth was offset by the decline in EBITDA margins. EPS was at Rs 1.4 vs. Rs 1.5 in Q3FY11.

Key development: Installs digital printers at its manufacturing units
To enhance focus on value-added products, Somany has invested Rs 90 mn to install two digital printers at its Kadi (already commissioned) and Kassar (to come on-stream by March 2012) units. With the advantages of digital technology over traditional methods (likes printing different designs on tiles), these installations will help increase realisations and aid margin expansion. We expect EBITDA margins to be boosted by ~30-40 bps in FY13 due to this.

Earnings estimates - revised downwards
Given the increase in raw material, power and fuel costs and difficulty in passing on the rise, we lower EBITDA margins estimates by ~50 bps for FY12 and FY13, respectively. Accordingly, earning estimates have been lowered by 15% and 8% for FY12 and FY13, respectively.

Valuation: Current market price has strong upside
We continue to use the discounted cash flow method to value Somany. In line with the revision in earnings, we lower our fair value to Rs 68 per share from Rs 72. Given the current market price, our valuation grade is 5/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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