Somany Ceramics (SOMCER)


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Somany Ceramics (SOMCER)

Result Update

CMP: | 596

Target: | 780 (31%)

Target Period: 12-18 months May 20, 2022

Higher input, gas prices impact margins…
About the stock: Somany Ceramics (SCL) is the second largest tiles manufacturers in the domestic tiles market having ~63 MSM capacity (as of Q4) and sanitaryware, faucets capacity of 1.15 million (mn) pieces, 0.65 mn pieces respectively.
 SCL’s new capacity of 11 MSM (potential to generate ~| 250-300 crore worth of additional revenue (at full capacity) to be operational from Q1FY23

Q4FY22 Results: SCL reported a weak performance.
 The topline was up 9.4% YoY at | 616.8 crore. Tiles revenues were up 9.1% YoY at | 535.8 crore with volumes down 4.5% YoY and realisations up 14% YoY. Volume was impacted by a) a production line in Kadi plant was shut during January’ 2022 due to augmentation and b) one-off disturbance in existing capacity of Kassar plant due to future planned expansion
 EBITDA was at | 50.6 crore, down ~43% YoY owing to higher input and gas prices leading to decline of 605 bps in gross margins at 29.8%. Resultant margins were at 8.2%, down 756 bps YoY.
 PAT was at | 17.2 crore, down ~43% YoY given the margin pressure

What should investors do? SCL’s share price has declined by 23% over the past five years.
 Post steep correction (~36% in the last 3 months), we believe gas price uncertainty is largely built in. Thus, we maintain BUY
Target Price and Valuation: We value SCL at | 780/share at 22x FY24 P/E (vs. | 1000 at 26x, earlier) amid gas price uncertainty and as we cut margins estimates.

BUY

Particulars
P ar ti cul ar Market Capitalization Total Debt (FY22) Cash (FY22) EV 52 week H/L (|) Equity capital Face value

Amount (| crore) 2,528 511 149 2,890
970 / 430 8.5 | 2

Shareholding pattern

Jun-21 Sep-21

Promoters 54.8 54.8

DII

17.1 17.7

FIIs

3.5 2.9

Other

24.6 24.7

Dec-21 54.8 18.0 2.5 24.8

Mar -22 54.8 18.0 2.5 24.7

Price Chart 1000 900 800 700 600 500 400 300 200 100
0

20000 16000 12000 8000 4000 0

May-19 Nov-19 May-20 Nov-20 May-21 Nov-21 May-22
ICICI Securities – Retail Equity Research

Key triggers for future price performance:
 New capacity of 11 MSM (with potential to generate revenue of ~| 250-300 crore will be operational in Q1FY23). Additionally, greenfield manufacturing facility of slab tile of ~4 MSM/annum in Gujarat is expected to commence production during Q1FY24 at capex of ~| 170 crore
 We expect 13% CAGR in tiles volume and realisations CAGR of ~2%, resulting in tiles revenues CAGR of 16% over FY22-24 to | 2490 crore
 Any respite in gas price rise

Somany (LHS)

Nifty Index

Key Risks

Key Risk: (i) Slowdown in demand; (ii) Continued high gas prices

Research Analyst
Bhupendra Tiwary, CFA [email protected]

Lokesh Kashikar lokesh [email protected]

Alternate Stock Idea: Besides SCL, we like Kajaria in the building material space.

 Quasi play on housing

 BUY with a target price of | 1165

Key Financial Summary

| crore

FY20

Net Sales

1,600.2

EBITDA

131.4

EBITDA Margin (%)

8.2

PAT

15.0

EPS (|) *

3.5

P/E (x)

168.5

EV/EBITDA (x)

22.6

RoNW (%)

2.5

RoCE (%)

6.5

s

Source: Company, ICICI Direct Research

FY21 1,641.4
190.2 11.6 57.0 13.5 44.3 14.3 8.9 11.1

FY22E 2,082.7
206.5 9.9 88.7 20.9 28.5 13.7 12.2 10.7

5 yr CAGR (FY17-22) 9.8% -6.0%
-11.1%

FY23E 2,572.4
256.1 10.0 109.2 25.8 23.1 11.2 13.2 12.7

FY24E 2,824.0
311.1 11.0 150.5 35.5 16.8 8.8 15.9 15.3

2 yr CAGR FY22-24E 16.4% 22.7%
30.3%

Result Update | Somany Ceramics
Key business highlight and outlook
 Q4FY22 performance: The performance during Q4FY22 was impacted with a) one of its production lines in Kadi (Morbi) plant being shut during January 2022 due to augmentation, b) one-off disturbance in existing capacity of Kassar plant due to future planned expansion (volume, sales impact of ~2.5 MSM, | 70-80 crore respectively), c) inability to source finished products from Morbi region due to higher freight costs, and d) significant rise in gas and paper costs. With these, SCL has reported 4% YoY decline in volumes of tiles products segment (on higher base; to 16.1 MSM) with capacity utilisation declining to 85% in Q4FY22 (vs. 95% in Q3FY22). Overall tiles production in Q4FY22 was at 12.8 MSM (own plant: 6.2 MSM, JVs: 6.6 MSM). Going forward, the management has guided for ~15-20% volume growth in FY23 to be driven by a) healthy product demand from real estate sector, b) no-major supply side constraint, and c) commencement of operation of new plants
 Margin guidance: Operating margin during Q4FY22 was under pressure on account of a) rise in gas and commodity prices, and b) loss of sales due to plant shutdown. While the management has refrained from providing any concrete margin guidance, it is likely to remain under pressure in the near term (Q1) with ongoing volatility in gas prices and increased freight and packaging cost
 Input prices: Gas prices have increased drastically over the past few quarters and remained at an elevated level currently. For the north-based Kassar plant, gas prices (linked to three month’s average of crude) is currently at ~| 58/SCM (vs. ~| 32 /SCM during Q4FY21; ~| 48 /SCM during Q4FY22) and expected to reach ~| 60-62/SCM over the next month or two. Similarly, prices for Kadi (Morbi plant) went up to ~| 68/SCM (vs. ~| 35/SCM during Q4FY21; ~| 62/SCM during Q4FY22). Also, prices for the southern plant have climbed up currently to ~| 90/SCM (vs. ~| 30/SCM during Q4FY21; ~| 90/SCM during Q4FY22). Going forward, the management expects volatility to continue over the medium term
 Price hike: SCL undertook price hikes of ~8% during Q3FY22 across its major product category in order to partially offset increase in input and gas prices. However, the company was unable to hike prices during Q4FY22 due to competitive market conditions despite rise in costs due to geopolitical issues. Lately, SCL has taken 2% price hike during April 2022-end (which is not enough as per the management considering higher cost pressure). The company may contemplate more price hikes depending on gas prices and Morbi players (undertaking price hikes)
 A&D spends: SCL has ramped-up brand building exercise with advertisement and distribution (A&D) spends reaching ~2.5% of overall sales during FY22 and likely to hover in the same level in FY23
 Sanitaryware division: In the sanitaryware division, SCL saw 8.9% YoY growth in sales value (to | 62.1 crore) in Q3FY22. The capacity utilisation in the segment has improved to 53% during Q4FY22 with better product demand (vs. 48% during Q3FY22). The management expects utilisation to reach at optimum level during FY23. Overall, the management has guided for 30-35% YoY growth during FY23 (to | 280-300 crore). The company might look for capacity expansion in FY24 post reaching 100% utilisation
 Industry update: Exports opportunity for Indian players remained muted in FY22 (at ~| 12,500 crore) due to Covid-19 disruptions, significant rise in gas prices, higher freight costs, and unavailability of containers at desired levels. However, exports from Morbi region have gained momentum in recent times largely aided by competitive price advantage with significant rise in gas costs for European and Chinese players. With these, exports from Indian manufacturers is likely to reach ~| 16,000 -19,000 crore during FY23. Morbi players also likely to increase their product prices with higher gas prices in the near term
 Expansion plans: SCL successfully commissioned its northern plant during Q4FY22 while its other two plants in western and southern region has recently started operations during May 2022 (total capacity: 11 MSM). Additionally, the company has also announced setting up of greenfield manufacturing facility of large format/ slab tile of ~4.5 MSM/annum in Gujarat, which is expected to commence production during Q4FY23
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Result Update | Somany Ceramics
(revenue potential: ~| 250 crore). The capex is expected to be ~| 170 crore mainly via internal accruals. The capacity additions are margin attractive with higher value added production
 Dealers network: SCL has built a strong distribution network consisting of 404 showrooms, 2,500+ active dealers. The company added ~200 dealers during FY22 (100 exclusive dealers; targeted mainly in the tier-II, III and IV cities as SCL’s focused area remains non-metro regions) and has guided for net addition of ~200 dealers during FY23E (50% likely to be exclusive dealers)
 Working capital: Working capital days at the end of FY22 have improved to 45 days (vs. 51 days at FY21-end) backed by better inventory and receivables management.
Post steep correction (~36% in the last 3 months), we believe gas price uncertainty is largely built in. SCL is also a quasi-play on improved scenario of real estate and expanding reach to tier 2/3 cities. Marked improvement in working capital in last 2-3 years, also bodes well for the company. We maintain BUY rating. We value it at multiple at 22x FY24E P/E (vs. 26x, earlier) to ascribe a revised target price of | 780/share (vs. | 1000, earlier), amid gas price uncertainty and lower margins possibility.

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Exhibit 1: Variance Analysis

P ar ti cul ar

Q4FY22

Net Sales

616.8

Other Income Raw Material Expense Purchase of Traded Goods Power & Fuel Employee benefit expenses Other Expenses EBITDA

1.5 127.7 140.7 137.0 66.0 67.2 50.6

EBITDA Margin (%)

8.2

Depreciation

17.1

Interest

6.4

PBT

28.7

Taxes

8.1

PAT

17.2

Source: Company, ICICI Direct Research

Q4FY21 YoY (Chg Q3FY22 QoQ (Chg

%)

%)

564.0

9.4 587.0

5.1

3.6 137.7 119.1 102.6 64.5 48.7 88.9
15.8
16.4 9.3 66.7 13.7 30.3

-59.3 -7.2 18.1
2.2 37.9 -43.1
-756 bps
3.8 -31.7 -57.1 -40.9 -43.3

4.8 141.6 136.8 153.0 66.4 61.8 62.4
10.6
15.6 7.4 44.2 10.1 32.2

-69.9 -9.8 2.8
-0.6 8.8 -18.8
-242 bps
9.5 -13.6 -35.2 -19.5 -46.7

Comments
Tiles Revenues were up 9.1% YoY at | 535.8 crore with volumes down 4.5% YoY and realisations up 14% YoY. Volume was impacted by a) a production line in Kadi plant was shut during January’22 due to augmentation and b) one-off disturbance in existing capacity of Kassar plant due to future planned expansion

Exhibit 2: Change in estimates

P ar ti cul ar s

FY21 FY22

Old

Revenue EBITDA

1641.4 2082.7 2521.3 190.2 206.5 288.9

FY23E
New 2572.4 256.1

EBITDA Margin (%)

11.6 9.9 11.5 10.0

Adjusted PAT

57.0 88.7 139.2 109.2

EPS

13.5 20.9 32.9 25.8

Source: Company, ICICI Direct Research

Change 2.0 -11.4

Old 2789.6 321.4

-150 bps 11.5

-21.5 163.4 -21.5 38.6

FY24E
New 2824.0 311.1

Change 1.2 -3.2

Comments Realign estimates

11.0 -51 bps Lower the margins to account for gas price hike

150.5 -7.9 35.5 -7.9

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(In MSM) (%)

Company Analysis

Exhibit 4: Capacity break-up (in MSM)

90.0

80.0

70.0

60.0

50.0

9.0

40.0 24.3 30.0

20.0 10.0 26.3

0.0

FY19

10.0

9.0

10.0

10.0

32.8

26.8

26.8

26.8

26.3

26.3

26.3

31.3

FY20 FY21E FY22E FY23E

Own Manufacturing JV Outsourcing

Source: Company, ICICI Direct Research

10.0 32.8
35.8 FY24E

Exhibit 5: Capacity break-up (%)

100%

15%

15%

16%

16%

14%

80%

60% 41%

43%

42%

42%

44%

40%

20% 44%

42%

42%

42%

42%

0% FY19

FY20 FY21E FY22E FY23E

Own Manufacturing JV Outsourcing

Source: Company, ICICI Direct Research

14% 44%
48% FY24E

(| crore) (| crore)

Exhibit 6: Revenue break-up (| crore)

3000

2500

2000

483

1500 302 270 309 463 913

1000 566

592

573

683

500 629

549

572

712

873

0

FY19 FY20 FY21E FY22E FY23E

Own manufacturing JV Outsourcing

Source: Company, ICICI Direct Research

536 967 987 FY24E

Exhibit 7: Revenue break-up (%) 100% 20% 19% 21% 25% 21% 80%
60% 38% 42% 39% 37% 40% 40%
20% 42% 39% 39% 38% 38%
0% FY19 FY20 FY21E FY22E FY23E Own manufacturing JV Outsourcing
Source: Company, ICICI Direct Research

22% 39% 40% FY24E

(In MSM) Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22
(In | crore) Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22

Exhibit 8: Quarterly standalone sales volumes (in MSM) 20.0

15.0

3.2 4.0

3.6 4.0 4.0

2.6

10.0 2.1

5.8 6.6 2.3 6.1 5.5 6.4

4.7

5.3

5.0

1.0

3.6

0.0 4.3 22..11 5.0 5.9 6.4 4.1 6.5 6.1 5.8

Own manufacturing JV Outsourcing
Source: Company, ICICI Direct Research

Exhibit 9: Quarterly standalone sales value

600

500

114

112 141 142

400

90

300 58

76 193 185 183 209

200 133

154 167

67 106

100

122

30 59

148 175 188 122 204 196 191

0

61

Own manufacturing JV Outsourcing
Source: Company, ICICI Direct Research

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(In MSM) (|\sq mt)

Exhibit 10: Model-wise standalone sales volumes break-up

80.0 70.0 60.0 50.0
11.8 40.0 30.0 18.6 20.0 10.0 20.8 0.0
FY19

15.0 13.5

13.9

9.6

10.8

27.8 29.5

20.4 19.7 21.5

18.9 19.4 22.5 26.4 29.8

FY20 FY21E FY22E FY23E FY24E

Own manufacturing JV Outsourcing

Source: Company, ICICI Direct Research

Exhibit 11: Average realisation break-up

1200

1000

800

333

358

257

281

287

600

400 304

291

291

317

328

200 303
0 FY19

291

296

317

331

FY20 FY21E FY22E FY23E

Own manufacturing JV Outsourcing

Source: Company, ICICI Direct Research

358 328 331 FY24E

(| crore) 163.4 131.4 190.2 206.5 256.1 311.1
(%)

Exhibit 12: Consolidated EBITDA and EBITDA margin trend 300

9.6 200

11.6 10.0

8.2

9.9

100

0

FY19

FY20

Source: Company, ICICI Direct Research

FY21

FY22E

FY23E

12.0 11.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0

Exhibit 13: Consolidated PBT, PAT margin trend

250

200

150

5.4

100

50

0

FY19

FY20

PBT
Source: Company, ICICI Direct Research

6.2
FY21 PAT

6.1 6.0

FY22

FY23E

PBT Margin

8.0 7.5
7.0
6.0
5.0
4.0
3.0 FY24E

(| crore) 92.4 46.3 35.8 15.0
101.2 57.0 126.4 88.7 154.1 109.2 212.0 150.5
(%)

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Financial summary

Exhibit 14: Profit and loss statement

(Year-end March)

FY21 FY22

Net Sales

1,641.4 2,082.7

Other Income

12.8

13.4

Total Revenue

1,663.4 2,107.9

Raw Material Expense

393.8 487.8

Purchase of Traded Goods

307.9 447.2

(Increase)/Decrease in Inventories 78.9 (14.4)

Employee benefit expenses

225.2 257.1

Other Expenses

177.4 229.3

Total Operating Expenditure

1,460.4 1,887.9

EBI T D A

190.2 206.5

Interest

40.1

29.6

Depreciation

61.6

64.0

PBT

101.2 126.4

Total Tax

22.2

33.0

PAT before MI

60.6

93.4

Minority Interest

3.6

4.7

PAT

57.0

88.7

YoY growth

280.1% 55.6%

EPS (Diluted)

13.5

20.9

Source: Company, ICICI Direct Research

FY23E 2,572.4
20.0 2,604.1
604.5 460.5 25.7 295.8 285.5 2,328.0 256.1 43.5 78.5 154.1 38.9 115.2
6.0 109.2 23.2% 25.8

| crore FY24E 2,824.0
22.0 2,857.8
663.6 505.5 42.4 324.8 310.6 2,524.7 311.1 39.2 81.9 212.0 53.5 158.5
8.0 150.5 37.8% 35.5

Exhibit 15: Cash flow statement

(Year-end March)

FY21

Profit after Tax

57.0

Depreciation

61.6

Interest Paid

40.1

Cash Flow before WC changes 168.0

Net Increase in Current Assets

169.4

Net Increase in Current Liabilities

33.4

Net CF from Op. Activities

370.8

(Purchase)/Sale of Fixed Assets

(62.6)

Others

(8.1)

Net CF from Inv. Activities

(70.7)

Proceeds/Repayment of Debt

(74.7)

Dividend and Dividend Tax

(10.2)

Interest Paid

(40.1)

Net CF from Fin. Activities

(125.0)

Net Cash flow Opening Cash/ Cash Equivalent Cl. Cash/ Cash Equivalent
Source: Company, ICICI Direct Research

129.0 20.1 149.1

FY22 88.7 64.0 29.6 173.6 (51.1) 56.2 178.7 (266.4) 41.1 (225.3) 87.8
(29.6) 58.1
(0.6) 149.1 148.6

FY23E 109.2 78.5 43.5 217.2 (134.7) 82.7 165.2 (170.0) 20.0 (150.0)
(0.0) (10.2) (43.5) (53.6)

| crore FY24E 150.5 81.9 39.2 257.6 (69.6) 41.1 229.0 (50.0) 22.0 (28.0) (50.0) (30.1) (39.2) (119.3)

(38.4) 148.6 110.2

81.7 110.2 191.9

Exhibit 16: Balance sheet (Year-end March) Liabilities Share Capital Reserves & Surplus Total Shareholders funds Secured Loan Unsecured Loan Total Debt Deferred Tax Liability Minority Interest Other Long Term Liabilities Long Term Provisions Liability side total Assets Gross Block Net Block Capital WIP Current Investments Long-term loans and advances Inventories Sundry Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Other Current Liabilities Total Current Liabilities Net Current Assets Assets side total
Source: Company, ICICI Direct Research

FY21
8.5 632.3 640.7 272.0 151.4 423.5 37.1 99.7 66.9
8.0 1,276
932.0 749.3
8.6 89.8 4.6 245.5 221.1 10.9 48.9 149.1 765.2 183.9 1.6 97.2 282.7 482.5 1,276

| crore FY22 FY23E FY24E

8.5 717.8 726.3 336.6 174.6 511.2 36.4 107.6 63.2
8.7 1,453

8.5 816.9 825.3 333.2 178.0 511.2 36.4 113.6 63.2
8.7 1,558

8.5 937.2 945.7 283.2 178.0 461.2 36.4 121.6 63.2
8.7 1,637

991.1 744.5 226.7 60.0
273.7 236.8
3.0 63.9 148.6 786.0 225.5 1.7 111.7 338.9 447.1 1,453

1,161.1 836.0 226.7 60.0 338.3 292.5 3.7 77.5 110.2 882.3 281.9 1.7 138.0 421.6 460.7 1,558

1,211.1 804.1 226.7 60.0 371.4 321.1 4.1 85.1 191.9
1,033.6 309.5 1.7 151.5 462.7 570.9 1,637

Exhibit 17: Key ratios (Year-end March) Per Share Data EPS Cash EPS BV Revenue per Share Dividend per share Operating Ratios EBITDA / Total Operating Income PAT / Total Operating Income Inventory Days Debtor Days Creditor Days Return Ratios RoE RoCE RoIC Valuation Ratios EV / EBITDA P/E EV / Net Sales Market Cap / Sales Price to Book Value Turnover Ratios Asset turnover Gross Block Turnover Solvency Ratios Net Debt / Equity Current Ratio Debt / EBITDA Quick Ratio
Source: Company, ICICI Direct Research

FY21
13.5 28.0 151.2 387.3 2.4
9.5 2.7 55 49 41
8.9 11.1 12.5
14.3 44.3 1.7 1.5 3.9
1.3 1.7
0.3 1.9 1.0 1.0

FY22 FY23E FY24E

20.9 36.0 171.4 491.4
-

25.8 44.3 194.8 607.0 2.4

35.5 54.8 223.2 666.4 5.0

8.2

11.5

9.9

0.9

3.5

4.2

48

48

48

42

42

42

40

40

40

12.2

13.2

15.9

10.7

12.7

15.3

14.0

15.3

19.8

13.7

11.2

8.8

28.5

23.1

16.8

1.4

1.1

1.0

1.2

1.0

0.9

3.5

3.1

2.7

1.4

1.7

1.7

2.1

2.2

2.3

0.4

0.4

0.2

1.7

1.7

1.7

1.5

1.3

0.7

0.9

0.9

0.9

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RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock
Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey

Head – Research
ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

[email protected]

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ANALYST CERTIFICATION
I/We, Bhupendra Tiwary, CFA, MBA, Lokesh Kashikar, MMS, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
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ICICI Securities | Retail Research

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Somany Ceramics (SOMCER)