CRISIL retains fair value of Rs 68 to Somany Ceramics

A reputed player in the Indian tiles industry, Somany Ceramics Ltd’s (Somany’s) strength lies in its established brand name and pan-India distribution network. Focus on value-added products and the decision to postpone greenfield expansion were steps in the right direction; we expect this strategy will help reduce the balance sheet stress without restricting growth. We retain the fundamental grade of 4/5, indicating superior fundamentals relative to other listed equity securities in India. However, slowdown in the real estate industry and rising operating costs could impact future prospects.

Focus on value-added products to aid margin expansion in FY13
Somany intends to focus more on value-added products. It has been investing in the state of the art imported digital printers and polishing equipment, which offer substantial advantage over traditional printing. This will help increase realisations and aid margin expansion.

Strategic decision to hold capex; outsourced manufacturing contribution to increase
With rising interest rates and moderation in demand in FY12, Somany postponed its greenfield capacity addition of 5.5 mn sq.mt. (capex of Rs 1.1 bn). Instead it acquired 26% stake in Vintage Tiles Pvt. Ltd (VTPL) for Rs 50 mn which gives it the right to buy the entire production of 2.55 mn sq.mt. from VTPL and sell under its brand, which will augment outsourced manufacturing (trading) revenues. It has now got access to 2.55 mn sq.mt. of capacity with a much lower capital outlay. This will not only restrict the balance sheet stress but also provide an impetus to return ratios.

Slowdown in the industry, rising costs may impact future prospects
Though slowdown in the real estate industry is quite visible, majority of the players in the tiles industry remain insulated due to healthy growth in tier II and III cities. Going forward, moderation in real estate demand, particularly in tier II and III cities, might have an impact on future demand for tiles. Also, raw material, power and fuel costs have risen substantially in the past one year and any further increase will adversely impact Somany’s profitability.

Revenues to grow at a two-year CAGR of 21%, RoCE to increase
We expect revenues to register a two-year CAGR of 21% to Rs 10.5 bn in FY13 driven by growth in value-added products and trading revenues. Increase in operating costs and higher contribution from low-margin trading revenues will lower EBITDA margin by ~100 bps to 8.7% in FY12. We expect margins to increase 20 bps to 8.9% in FY13 due to higher contribution from value-added products. RoCE is expected to improve to 20.2% in FY13 from 19.6% in FY11.

Valuations – current market price has strong upside
We continue to use the discounted cash flow (DCF) method to value Somany and retain our fair value of Rs 68 per share. Given the current market price, this translates to a valuation grade of 5/5.

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.

© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"