Company Update

December 27, 2018

Rating Matrix
Rating : Buy
Somany Ceramics (SOMCER) | 324
Target : | 410
Target Period : 12-18 months
Potential Upside : 26% Multiple triggers for margin revival…
We anticipate Somany’s sales volumes will improve in H2FY19 as
What’s Changed? operational disruption such as trucker’s strike, Kerala flood, software
Target Changed from | 375 to | 410 related issues & credit control measures are behind us. Additionally, 3.5
EPS FY19E Changed from | 12.8 to | 9.4
million square metre (msm) GVT capacity addition in Andhra Pradesh will
EPS FY20E Changed from | 18.5 to | 20.5
further aid volume growth for the company from FY20E. We expect
Rating Unchanged
Somany’s sales volume to grow 11.3% in FY20E. Furthermore, with the
company taking price hikes across the product portfolio, an increase in
Key Financials share of value-added products, expected fall in gas prices & higher
(| Crore) FY17 FY18 FY19E FY20E revenue contribution from high-margin bathware division, we believe
Net Sales 1,727.8 1,708.2 1,730.8 2,054.8
EBITDA margins have bottomed out at 6.7% in Q2FY19 and could
EBITDA 230.6 181.4 131.5 205.5
improve to 10.0% in FY20E. With an anticipated improvement in financial
Net Profit 112.1 77.5 39.8 86.8
EPS (|) 26.4 18.3 9.4 20.5 performance & sharp valuation discount to Kajaria (~40%), we believe
currently Somany is very attractively priced.
Valuation Summary Poised for double-digit volume growth in FY20E…
(x) FY17 FY18 FY19E FY20E Operational turbulence caused by truckers’ strike, Kerala floods, etc, took
P/E 12.3 17.7 34.5 15.8 a toll on Somany’s performance leading to dismal volume growth and
Target P/E 15.5 22.4 43.6 20.0 financial performance in H1FY19. However, with these issues now settled,
EV / EBITDA 7.5 9.8 13.2 8.6 we believe the worst is behind for the company and volume growth
P/BV 2.6 2.4 2.2 2.0 should pick up in H2FY19E and FY20E. The 3.5 MSM GVT capacity
RoNW (%) 21.4 13.3 6.5 12.7
addition in Andhra Pradesh (expected to be commissioned in February,
RoCE (%) 18.3 12.2 7.6 12.0
2019) will further aid volume growth vis-à-vis increase in share of value-
added products. Additionally, strict credit control measures incorporated
Stock Data by the company have made it structurally strong. Thus, we anticipate
Particular Amount (| crore) double-digit volume growth in FY20E and expect revenues to grow at
Market Capitalization 1,373
9.7% CAGR to | 2054.8 crore in FY18-20E.
Total Debt 540
Cash 14 EBITDA margin bottoms out at 6.7%; could improve to 10.0%in FY20E…
EV 1,899 Somany took price hikes across its product portfolio to the tune of 2.0-
52 week H/L (|) 974 / 271 2.5% for tiles and 5-6% for sanitaryware & faucets in Q3FY19. Secondly,
Equity capital 8.5 Andhra GVT capacity addition will help the company increase share of
Face value |2
value-added products in its portfolio (~21% currently). Thirdly, gas prices
(currently ~| 40/SCM) are expected to fall in Q4FY19E following the
Price Movement recent sharp fall in crude oil prices. All these factors are set to place it on
a margin revival trajectory. Additionally, Somany aims to achieve
1,000 revenues of | 350 crore by FY21E (implying CAGR of 32.3%). The revenue
12,000
800 contribution from high-margin bathware division should also act as a
10,000 600 trigger for margin improvement. Hence, we believe EBITDA margins have
8,000 400 bottomed out at 6.7% in Q2FY19 and could improve to 10.0% in FY20E.
6,000 200 Expect improvement in financial performance; maintain BUY…
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Somany is trading at 15.8x FY20E EPS, which is at ~40% discount to

Kajaria’s current valuation. In our view, the current valuation discount for
Nifty (L.H.S) Price (R.H.S)
Somany has widened (~15% historically) on account of its
underperformance following operational disruption such as software
related issues and credit control measures. Going ahead, we expect
Research Analysts Somany’s financial performance to improve with a steady improvement
in demand and sharp recovery in EBITDA margin. The improvement in
Deepak Purswani, CFA
deepak.purswani@icicisecurities.com
financial performance should narrow down the valuation gap between
Somany and Kajaria. Hence, we maintain our BUY recommendation on
Harsh Pathak Somany with a target price of | 410/share (20x FY20E EPS).
harsh.pathak@icicisecurities.com

ICICI Securities Ltd | Retail Equity Research

Financial summary

Exhibit 1: Profit and loss statement Exhibit 2: Cash flow statement

(Year-end March) FY17 FY18 FY19E FY20E (Year-end March) FY17 FY18 FY19E FY20E
Net Sales 1,727.8 1,708.2 1,730.8 2,054.8 Profit after Tax 112.1 77.5 39.8 86.8
Other Income 17.2 18.1 19.9 21.9 Depreciation 31.3 41.3 45.1 48.8
Total Revenue 1,745.0 1,726.3 1,750.7 2,076.7 Interest Paid 39.0 39.9 46.6 46.6
Raw Material Expense 469.0 455.7 467.3 546.6 Cash Flow before WC changes 172.2 146.6 113.2 162.8
Purchase of Traded Goods 236.8 289.4 320.2 380.1 Net Increase in Current Assets (188.4) (122.5) (12.6) (150.3)
(Increase)/Decrease in Inventories 1.2 (38.2) (69.2) (82.2) Net Increase in Current Liabilities (34.4) 79.8 (4.0) 57.4
Employee benefit expenses 192.2 217.5 242.3 287.7 Net CF from Operating Activities (50.7) 103.9 96.6 69.9
Other Expenses 277.1 253.7 245.8 291.8 (Purchase)/Sale of Fixed Assets 74.1 (132.0) (19.0) (60.0)
Total Operating Expenditure 1,497.2 1,526.9 1,599.3 1,849.3 Intangible assets and CWIP (46.7) 15.4 (0.0) -
EBITDA 230.6 181.4 131.5 205.5 LT liability, provision, MI and DTL 84.6 16.8 3.6 5.6
Interest 39.0 39.9 46.6 46.6 Investments (8.8) 8.7 - -
Depreciation 31.3 41.3 45.1 48.8 Profit in Joint Venture (2.9) (1.6) (1.6) (2.5)
PBT 180.6 122.8 64.7 137.4 Net CF from Investing Activities 117.5 (74.7) 3.0 (34.9)
Total Tax 61.5 39.3 23.3 48.1 Proceeds from LT Borrowings 253.6 42.7 73.7 -
PAT before MI 115.0 79.1 41.4 89.3 Dividend and Dividend Tax (13.8) (13.8) (7.1) (15.4)
Minority Interest 5.3 3.6 3.6 5.6 Interest Paid (39.0) (39.9) (46.6) (46.6)
PAT after MI 109.7 75.5 37.8 83.7 Net CF from Financing Activities 200.9 (11.0) 20.0 (62.0)
Profit from Associates 2.4 2.0 2.0 3.2
PAT 112.1 77.5 39.8 86.8 Net Cash flow 278.8 18.2 119.6 (27.1)
YoY growth 73.3% -30.9% -48.6% 118.2% Opening Cash/ Cash Equivalent 18.3 24.0 13.6 133.2
EPS (Diluted) 26.4 18.3 9.4 20.5 Closing Cash/ Cash Equivalent 24.0 13.6 133.2 106.1
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 3: Balance sheet Exhibit 4: Key ratios

(Year-end March) FY17 FY18 FY19E FY20E (Year-end March) FY17 FY18 FY19E FY20E
Liabilities Per Share Data
Share Capital 8.5 8.5 8.5 8.5 EPS 26.4 18.3 9.4 20.5
Reserves & Surplus 515.7 572.2 604.9 676.4 Cash EPS 33.8 28.0 20.0 32.0
Total Shareholders funds 524.2 580.7 613.4 684.8 BV 123.6 137.0 144.7 161.5
Secured Loan 191.7 234.6 452.7 452.7 Revenue per Share 407.5 402.9 408.2 484.6
Unsecured Loan 305.3 305.0 160.7 160.7 Dividend per share 2.7 2.7 1.4 3.0
Total Debt 497.0 539.6 613.4 613.4 Operating Ratios
Deferred Tax Liability 47.4 52.4 52.4 52.4 EBITDA / Total Operating Income 13.3 10.6 7.6 10.0
Minority Interest 83.4 95.9 99.6 105.2 PAT / Total Operating Income 6.5 4.5 2.3 4.2
Other Long Term Liabilities 26.1 25.1 25.1 25.1 Inventory Days 47 55 55 54
Long Term Provisions 4.4 4.8 4.8 4.8 Debtor Days 90 108 108 108
Liability side total 1,183 1,299 1,409 1,486 Creditor Days 35 50 47 46
Assets Return Ratios
Gross Block 554.3 695.3 714.3 774.3 RoE 21.4 13.3 6.5 12.7
Net Block 522.1 636.1 610.0 621.2 RoCE 18.3 12.2 7.6 12.0
Capital WIP 52.2 27.9 27.9 27.9 RoIC 20.2 12.3 7.6 12.7
Non-current Investments - - - - Valuation Ratios
Long-term loans and advances 0.3 0.3 0.3 0.3 EV / EBITDA 7.5 9.8 13.2 8.6
Inventories 220.8 259.7 263.2 306.8 P/E 12.3 17.7 34.5 15.8
Sundry Debtors 426.8 503.7 512.1 608.0 EV / Net Sales 1.0 1.0 1.0 0.9
Loans and Advances 6.0 8.5 8.7 10.3 Market Cap / Sales 0.8 0.8 0.8 0.7
Other Current Assets 44.5 48.6 49.2 58.4 Price to Book Value 2.6 2.4 2.2 2.0
Cash 24.0 13.6 133.2 106.1 Turnover Ratios
Total Current Assets 840.7 948.3 1,080.5 1,203.7 Asset turnover 1.5 1.3 1.2 1.4
Creditors 163.7 233.2 222.9 259.0 Gross Block Turnover 3.1 2.4 2.4 2.6
Provisions 1.2 0.7 5.5 6.6 Solvency Ratios
Other Current Liabilities 95.9 106.8 108.2 128.4 Net Debt / Equity 0.7 0.7 0.6 0.6
Total Current Liabilities 260.8 340.6 336.6 393.9 Current Ratio 2.7 2.4 2.5 2.5
Net Current Assets 579.9 607.7 743.9 809.8 Debt / EBITDA 2.2 3.0 4.7 3.0
Assets side total 1,183 1,298 1,409 1,486 Quick Ratio 1.8 1.6 1.7 1.7
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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RATING RATIONALE
ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research
assigns ratings to its stocks according to their notional target price vs. current market price and then
categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and
the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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ANALYST CERTIFICATION
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