India Strategy | Get
| April
please !
Thematic
on track
2017
The Big Leap
to a formal economy
Volume 2.1
Volume 1
Ground Reality
Tiles
Sandeep Gupta
(S.Gupta@MotilalOswal.com); +91 22 3982 5544
Somil Shah
(Somil.Shah@MotilalOswal.com); +91 22 3312 4975
Mehul Parikh
(Mehul.Parikh@MotilalOswal.com); +91 22 3010 2492

The Big Leap | Tiles
Contents: The Big Leap: Tiles
Huge opportunity, but challenges too................................................................................... 3
Indian tiles industry – Third largest producer globally .......................................................... 5
Organized market share has been gradually rising ................................................................ 8
GST & demonitization– will it change industry dynamics? .................................................. 10
Kajaria – India’s largest tiles company ................................................................................ 15
Somany Ceramics – outsourcing model worked wonders ................................................... 16
Asian Granito – Chasing higher market share ..................................................................... 17
Prism Cement – Pioneer of ceranmic tiles in India .............................................................. 18
Tiles manufacturing Process ............................................................................................... 19
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
28 April 2017
2

The Big Leap | Tiles
The Big Leap: Tiles
Huge opportunity, but challenges too
Lower GST rates - the key catalyst
India is set to see a major overhaul in the trade structure in favor of the organized
sector (Refer our inaugural edition of “The
Big Leap”
series). Although the
government’s initiatives (demonetization, GST, etc.) are in the right direction, we
continue believing that the shift will be prompt for some sectors, gradual for
others and may remain challenging for a few.
In this edition, we will focus on the INR260b Indian tiles industry. We chose to
look at the tiles industry from the trade shift perspective, given that it is highly
fragmented and has presence of numerous unorganized players (accounting for
51% of value and 60% of volume of the industry). Our ground research and
channel checks suggest that the changes in administrative procedures under the
GST using technology platform are unlikely to accelerate the shift trade toward
formal trade in the tiles sector over the medium term. However, a reduction in
indirect taxes (from the current ~25-28% to 18%) could be a key catalyst to
accelerate shift toward formal trade.
Organized market share rising…opportunity size still huge
Tiles industry remains highly fragmented. Over the years, high indirect tax
incidence, liberal tax administration/monitoring and a short B2C supply chain
have led the industry to remain dominated by unorganized players, which
account for 51% of value and 60% of volume for the industry.
However, we note that rising per capita income, aspirational buying, brand
awareness and product innovation have led to a gradual increase in value
market share of organized players from 40% in FY08 to 49% now. Furthermore,
the outsourcing model has helped organized players to ramp-up their
businesses faster with minimal investments.
Administrative policy changes unlikely to bring cheers to the sector
Over past few years, the Indian government has been taking a number of
initiatives to curb the shadow economy and shift trade from unorganized to
organized. The government plans to move in this direction by bringing in new
administrative procedures using technological platforms and altering tax rates
under the GST. This will present investors with opportunities to take advantage
of the shift in favor of organized names.
We believe that the tile industry with short B2C supply chain can continue
operating end-to-end in a parallel economy and that the changes in
administrative procedures are unlikely to accelerate the shift to organized trade
in this industry.
28 April 2017
3

The Big Leap | Tiles
Lower effective tax rate can be a driver for the big shift
Indirect tax incidence of ~25-28% for the tiles industry leads to a price
differential of 15%-20% between organized and unorganized players. As a result,
unorganized players are able to attract price-sensitive Indian consumers with
their low-cost offerings.
While the GST rate for the tiles Industry is still not made public, it is expected to
be either at 18% or 28%. Our discussions with various sector participants and
experts suggest that the potential reduction in the GST rate to 18% could aid the
shift away from unorganized trade, with the price gap between organized and
unorganized players lowering to a mere 5-10%.
However, if the GST rate is fixed at 28% (not materially different from current
rates), we believe the industry would miss a much-needed trigger in the form of
a lower effective tax rate to accelerate the shift to formal trade over the
medium term.
Exhibit 2: …reduced to 51% in FY16
Exhibit 1: Unorganized value market share at 60%in FY08..
Organized,
40%
Organized,
49%
Unorganized,
51%
Unorganized
, 60%
Source: Industry, MOSL
Source: Industry, MOSL
Exhibit 3: Narrowing of price differential under GST: Illustrative pricing summary pre and post GST
Current Regime
Organized Player
Particulars
RM cost + margin (A)
100.0
Excise (Cenvat not available) / GST (cenvat available) (B)
12.5
Cost for the dealer C = (A) + (B - if CENVAT not
available)
112.5
Margin (5%)
5.6
VAT/ GST
14.8
Gross Price
132.9
Other Costs
Additional branding cost (1-2%)
1-2
Additional cost to manage trade channels (8-10%)
-
Price to the consumer
133.9-134.9
GST Regime @ 18%
Organized Player
100.0
18.0
100.0
5.0
18.9
123.9
1-2
0
124.9-125.9
GST Regime @28%
Organized Player
100.0
28.0
100.0
5.0
29.4
134.4
1-2
0
135.4-136.4
Unorganized
player
100.0
0.0
100.0
5.0
0.0
105.0
8.5-10.5
113.4-115.5
Source: MOSL
28 April 2017
4

The Big Leap | Tiles
Indian tiles industry – Third largest producer globally
India is the third largest producer and consumer of tiles in the world. In terms of
volumes, the country’s tiles industry grew at a CAGR (CY08-16) of 9.5% to 763m sq.mt,
outpacing global growth of 5.5%. However, recent slowdown in real estate has led to a
subdued growth over the last two years.
In terms of value, the Indian tiles industry is estimated to have grown at a higher
CAGR of 16% (CY08-16), led by product improvisation and innovation.
Morbi, a small industrial town near Rajkot, is the second largest tiles manufacturing
cluster in the world. Around 60% of tiles manufacturing in India happens at Morbi.
India – third largest tiles market globally
India is the third largest producer and consumer of tiles in the world. As at FY16,
Indian tiles industry volumes are estimated at 763m sq.mt., with a market size
of INR260b.
In volume terms, global tiles production CAGR stood at 5.5% over CY08-16. Over
the same period, the Indian tiles industry grew at a healthy CAGR of 9.5%,
overtaking China’s 8.1% and Brazil’s 4.4%. However, slowdown in the real estate
sector has impacted growth recent years.
This rapid pace of growth in the Indian tile industry can be ascribed to: (a)
increasing urbanization, (b) real estate sector boom, (c) rising per capita income
and (d) product improvisation.
Further, to protect the domestic tile industry, the government has imposed anti-
dumping duty on tile imports from China, which were priced 30-50% cheaper.
Exhibit 4: Indian tiles industry growth (9.5%) higher than global growth (5.5%) (bn sq. mt.)
China
Others
9.5
0.6
10.5
0.6
India
11.0
0.7
Brazil
10.6
0.7
Indian tiles industry growth
superior to global peers
12.1
0.8
12.2
0.8
8.4
0.4
8.5
0.5
2.8
CY08
3.0
CY09
3.5
CY10
4.0
CY11
4.3
CY12
4.6
CY13
4.9
CY14
4.9
CY15
Source: Ceramic world review, MOSL
Exhibit 5: Indian tiles industry – volume CAGR of 9.5%
Indian Tiles Industry (MSM)
22.6
625
681
718
756
763
Growth (%) RHS
403
494
557
12.8
12.2
9.0
5.4
CY13
5.3
CY14
0.9
CY15
CY08
CY09
CY10
CY11
CY12
Source: Ceramic world review, MOSL
26 April 2017
5

The Big Leap | Tiles
Exhibit 6: Share of urban population rising
Urban population (in m)
Rurual population (in m)
Exhibit 7: Real estate market – CAGR of 14%
Market size of real estate in India (USD b)
121
66.8
126
742
285
FY01
72%
833
69%
50.1
53.3
55.6
28%
377
FY11
31%
FY08
FY09
FY10
FY11
FY13
FY15
Source: CENCUS,MOSL
Source: KPMG, MOSL
Exhibit 8: Growth in per capita income (INR)
Real Income
57,660
64,664
72,054
77,647
83,565
32,819
39,267
44,431
50,625
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: CEIC, MOSL
Change in product mix, focus on innovation drive value growth
Product improvement and
innovation drives value
growth higher than volume
growth for tiles industry
Our discussion with sector experts suggest that in value terms, the Indian tiles
industry grew at a CAGR (CY08-16) of 16% to INR260b, with organized players
growing at 20% and unorganized players at 13%.
Product improvisation (greater focus on high-end tiles – PVT and GVT) and
innovation have led to value growth outpacing volume growth over CY08-16.
Exhibit 9: Structural shift toward better-value products (%)
Ceramic, 44
PVT, 44
Ceramic, 53
PVT, 39
FY10
FY16
GVT, 12
GVT, 8
Source: Industry, MOSL
28 April 2017
6

The Big Leap | Tiles
Morbi – the largest tiles manufacturing cluster in India
60% of Indian tiles
manufacturing happens in
Morbi
Morbi, a small industrial town near Rajkot, is home to more than 600 tile
manufacturing units, and is also the second largest tile manufacturing cluster in
the world. Furthermore, 100+ units are under construction at Morbi. Around
60% of tiles manufacturing in India happens at Morbi.
Access to key raw materials (clay, red and black soil, minerals, coal, frits and
glazes), availability of dedicated gas lines from Gujarat State Petroleum
Corporation and strategic location (close proximity to port, making it low-cost
transport hub and facilitation for exports/ imports) have been the key drivers of
the development of this location.
Morbi’s cumulative industrial investments for the sector amount to more than
INR80b, providing direct/indirect employment to 0.6m people.
Exhibit 10: Indian tiles industry clustered at Morbi (~60% of production)
Source: ICCTAS, MOSL
28 April 2017
7

The Big Leap | Tiles
Organized market share has been gradually rising
The tiles industry in India has for long remained fragmented and dominated by
unorganized players. Unorganized trade in the sector is estimated at 60% by volume
and 51% by value as of FY16.
Tax arbitrage of ~25-28% between unorganized and organized players has primarily
led to a product price differential of 15-20% between these two segments.
Over FY08-16, organized players have been able to increase their value market share
from 40% to 49%, driven by rising per capita income, aspirational buying, brand
awareness and product innovation.
Further, the outsourcing model has helped organized players to ramp-up faster, with
minimal investment in terms of time and capital.
Unorganized players – significant participants in fragmented industry
The tiles industry in India is highly fragmented, with small- and mid-sized players
accounting for a significant production market share. The industry has for long
remained dominated by unorganized players.
As at end-FY16, unorganized players accounted for ~51% of value and ~60% of
volumes of the industry.
Exhibit 11: Significant presence of unorganized players
Unorganized sector
accounts for 51% of the
industry
Particulars
Turnover (INR b)
Production (MSM)
Share in Volume
Share in Value
Key players
Organized
131
305
40%
49%
Kajaria, Somany, HR Johnson
Unorganized
129
458
60%
51%
Morbi based players
Source: Company, industry data, MOSL
We believe that high indirect tax incidence, liberal tax administration
/monitoring and a short B2C supply chain (wherein end-consumers do not
demand invoices as they cannot claim this as expense) have been among the
key reasons for significant existence of unorganized players.
Tax arbitrage – the key price differentiator
Current price differential of
15-20% mainly attributed to
tax arbitrage
The country’s tiles industry is levied with indirect taxes of ~25-28%, comprising
of 12.5% excise (tax on manufacturing), 12.5-14.5% VAT (tax on sale of goods)
and other local taxes.
Players operating in the unorganized market usually skirt indirect taxes, the
benefit of which is usually passed on (either partially or wholly) to consumers to
offer an enhanced value proposition. This increases competitiveness of
unorganized players.
Further, there is high manual intervention/discretion in the current indirect tax
administration, which provides an opportunity for businesses to fare any
objections which arise on opening of a tax scrutiny.
Our discussions with various sector participants/dealers indicate that the price
difference between organized and unorganized players is generally in the range
of 15-20%, which can primarily be attributed to tax arbitrage.
28 April 2017
8

The Big Leap | Tiles
Exhibit 12: Sidestepping indirect tax leads to a big price differential
Particulars
RM cost + margin
Excise @ 12.5%
Cost for the dealer
Margin @ 5%
VAT on goods @ 12.5%
Other costs
Additional branding cost (1-2%)
Additional cost to manage trade channels (8-10%)
Price to the consumer
Organized Player
100
12.5
112.5
5.6
14.8
1-2
-
133.9-134.9
Unorganized Players
100
0
100
5
-
8.5-10.5
113.4-115.5
Source: MOSL
Market share of organized players has been gradually rising
Volume market share of
organized players has
increased to 49% in FY16
(FY08: 40%)
We note that organized players have grown (in volume terms) at a CAGR (over
CY08-16) of 14% v/s 7% for unorganized players.
Higher growth of organized players is mainly due to (a) increased disposable
income, (b) brand aspirational buying, (c) product innovation and (d) brand
awareness led by higher ad spends.
Further, the outsourcing model has helped organized players to grow faster, as
they are able to increase capacities without investing time or capital.
Consequently, the value market share of organized players increased from 40%
in FY08 to 49% in FY16.
Exhibit 14: …reduced to 51% in FY16
Exhibit 13: Unorganized value market share at 60%in FY08..
Organized,
40 %
Organized,
49%
Unorganized
, 51%
Unorganized
, 60 %
Source: Industry, MOSL
Source: Industry, MOSL
FY16
Market
Revenues
Share (%)
27.0
10.4%
24.5
9.4%
18.0
6.9%
9.6
3.7%
8.6
3.3%
7.6
2.9%
7.6
2.9%
6.5
2.5%
6.0
2.3%
4.5
1.7%
1.2
0.5%
8.0
3.1%
131
50.4%
260
Source: Industry, MOSL
Exhibit 15: Indian tiles industry dominated by three national brands (INR b)
Company
Kajaria Ceramics
Prism Cement (TBK division)*
Somany Ceramics
Asian Granito
Nitco Tiles
RAK Ceramics*
Orient Bell Ceramics
Varmora*
Simpolo*
Sun Heart*
Murudeshwar Ceramics
Others (Swastic, Marbomax, Bell Granito etc)*
Unorganized players*
Total
*estimated
Highly fragmented industry
with unorganized players
contribute 51%
28 April 2017
9

The Big Leap | Tiles
GST & demonitization– will it change industry dynamics?
The Indian government has taken various initiatives (e.g. demonetization and GST) to
shift trade to the formal economy.
Our discussion with sector participants indicates that the administrative/procedural
changes under the GST are unlikely to lead to a shift toward organized trade in the
tiles industry.
However, lowering of indirect tax incidence under the GST to 18% or less (from ~25-
28% currently) can be a significant trigger to drive trade toward the formal economy,
with the product pricing gap between organized and unorganized players reducing to
~5-10% (from 15-20% currently).
GST and demonetization – the big drivers to shift trade to formal economy
India is set to see a major overhaul in the trade structure in favor of the
organized (formal) segment, with the government taking a number of initiatives
to curb the shadow economy.
Demonetization of high-value currency notes has created fear among
unorganized players as transactions in this space were mostly cash-based and
unaccounted. Even in the recent Budget announcement, cash transactions of
INR0.2m or more have been prohibited.
Also, with GST implementation nearing reality, the organized segment is well
poised to confront the high presence of unorganized (informal) players.
We believe this will present opportunities to take advantage of the shift in favor
of organized names. However, our discussions with experts and sector
participants highlight that the shift will be prompt for some sectors, gradual for
others and challenging for a few.
our discussions with experts
and sector participants
highlight that the shift will
be prompt for some
sectors, gradual for others
and challenging for a few.
Will the drivers be effective for the tiles industry too?
As discussed in our previous report (click
here for detailed note),
to analyze the
pace of the shift (to organized) for each sector, one has to carefully consider the
administrative/procedure changes and the tax rates decided under the GST.
We believe the following measures can potentially accelerate the shift toward
formal trade: (a) reducing threshold limit for exemption from indirect taxes, (b)
tracking flow of GST credit in the entire value chain by using technology
platforms, (c) ensuring availability of seamless input credit and (d) reducing
overall effective tax rates.
28 April 2017
10

The Big Leap | Tiles
Measures that could lead to shift to organized trade
Better
Enforcement
Reduction in threshold limits
Through technology-enabled platform
Through availability of input credit
Reduction in overall effective tax rate
Better
Compliance
Source: MOSL
To estimate the pace of shift to formal economy for each sector, one needs to
look at: (a) supply chain the sector works with, (b) operational nuances of
players in the unorganized segment and (c) how government initiatives will
change the way in which unorganized segment players operate.
Exhibit 16: Critical determinants of shift to organized trade
Source: MOSL
Modalities of circumventing indirect taxes in tiles industry
Under recording of
purchases/ sales facilitates
unorganized trade in the
industry
Unorganized players in the tiles industry operate primarily through modalities of
under-reporting/under-recording of purchases and sales (of raw
material/finished goods) and maneuvering thresholds for circumventing indirect
taxes.
Raw materials used in the tiles industry are easily available in the unorganized
markets. As a result, the whole chain (right from procurement of raw materials
to selling to end-consumer) remains outside organized trade.
28 April 2017
11

The Big Leap | Tiles
Short B2C supply chain may continue to be unorganized under GST
To determine the probability of shift in trade from unorganized to organized, it
is imperative to understand the supply chain in which the entity operates. We
note that any break in the organized chain leads to the beginning of
unorganized trade. We believe that in the GST regime, a conversion to organized
in the B2B chain will be relatively easy than in the B2C chain.
We believe the shift to organized trade in short B2C chains (where
manufacturers/service providers source raw materials/inputs from unorganized
market, and continue supplying in unorganized manner throughout the supply
chain) will be difficult.
This is primarily due to the fact that only businesses can register on the GST
network and claim the benefit of input credit. End-consumers will not have any
direct benefits for being part of the organized chain. Also, most consumers
usually are indifferent to choosing between organized and unorganized players;
the focus is more on pricing.
Tiles: Escape from administrative and technology platform likely
Under the GST, the government intends to employ technology to track end-to-
end credit flow in the value chain. Bilateral validation of invoices, online
integration of data and big data analytics will go a long way in addressing the
loopholes in tax administration.
The IT portal can capture data even if at least one participant in the value chain
sells goods through the organized chain (and hence is a part of the GSTN).
However, in industries like tiles, it is possible for all participants in the value
chain to stay outside formal trade and thus escape from data capture by
technology platform.
The tiles industry has a short B2C supply chain, wherein raw materials (primarily
clay, gas, coal, electricity, minerals, etc.) are sourced by the manufacturer and
finished goods are sold to end-consumers/builders via dealers and distributors.
Thus, the end-to-end chain can easily remain outside the GST ambit.
The key inputs required for the manufacture of raw tiles are:
Clay:
It is available in abundance and can be easily sourced from the
unorganized market. The unorganized players procure clay without paying
indirect taxes, thereby remaining outside the tax net.
Power:
Electricity can either be sourced from organized channels (as done
currently through state electricity boards) by managing the input/output
ratio or is generated captively (through DG sets, which entail additional
cost).
Fuel:
Most tiles manufacturing units have the provision of using piped gas
directly or generating it captively via coal-gasification plants. Coal used for
gasification can be procured from the unorganized channel.
it is possible for all
participants to stay outside
formal trade and thus
escape from data capture
by technology platform
End-to-end chain can easily
remain outside the GST
ambit.
28 April 2017
12

The Big Leap | Tiles
Exhibit 17: Short supply chain of the tiles industry
Clay
Power
Fuel
Can be sourced
from
unorganized
players
Input output
ratio adjusted or
Input output
ratio adjusted, or
Sourced from
unorganized
players
Captivity
generated
Manufacturer
Distributor
Dealer
End Consumer/ Builder
Lower effective tax rates can be a big trigger for the shift
18% GST rate will reduce
the price differential to 5-
10%
As discussed earlier, indirect tax incidence (which is in the range of ~25-28%)
leads to price differential of 15%-20% between organized and unorganized
players.
While GST rates applicable for the tiles industry are yet to be made public, we
believe that they are likely to be either at 18% or 28%.
Our discussions with various sector participants and experts suggest that a
potential reduction in GST rates to 18% for the tiles sector can be very beneficial
for organized players.
This will primarily be on account of a reduction in the pricing gap between
organized and organized players to 5-10% (from current 15-20%) as organized
players pass on the benefit of lower duties to consumers.
However, if GST rates are fixed at 28% for the tiles industry (not materially
different from the current rates), then the current slow pace of shift to
organized trade may continue, lacking an additional thrust.
28 April 2017
13

The Big Leap | Tiles
Exhibit 18: Narrowing of price differential under GST: Illustrative pricing summary pre and post GST
Current Regime
Particulars
RM cost + margin (A)
Excise (Cenvat not available) / GST (cenvat available)
(B)
Cost for the dealer C = (A) + (B - if CENVAT not
available)
Margin (5%)
VAT/ GST
Gross Price
Other Costs
Additional branding cost(1-2%)
Additional cost to manage trade channels (8-10%)
Price to the consumer
Organized Player
100.0
12.5
112.5
5.6
14.8
132.9
1-2
-
133.9-134.9
GST Regime @ 18%
Organized Player
100.0
18.0
100.0
5.0
18.9
123.9
1-2
0.0
124.9-125.9
GST Regime @28%
Organized Player
100.0
28.0
100.0
5.0
29.4
134.4
1-2
0.0
135.4-136.4
Unorganized
player
100.0
0.0
100.0
5.0
0.0
105.0
8.5-10.5
113.4-115.5
Source: MOSL
Outsourcing model to work wonders if trade shifts to organized
We believe that the outsourcing model has worked very well until now in
growing organized trade in the tiles industry. We believe that if there is
accelerated shift to organized trade, then large companies having strong brand
presence will grow faster and the current unorganized players may continue to
function as contract manufacturers.
Organized players benefit as capital employed is much lower than greenfield
expansion and the gestation period is negligible. Outsourcing results in an asset
light model, which boosts return ratios despite slightly lower margins.
This model is also beneficial to unorganized players as they sell on cost plus
basis, eliminating risks and earning fixed RoE.
28 April 2017
14

The Big Leap | Tiles
Kajaria – India’s largest tiles company
Kajaria Ceramics (KJCL) was incorporated in 1985 by Mr Ashok Kajaria in
technical collaboration with the world’s second largest tiles manufacturer,
Todagres, SA.
KJCL is India’s largest tiles company with a market share of 10.4% (share of 20%
in the organized market, up from ~14 in FY11). Over FY08-16, it reported
revenue CAGR of 22% and PAT CAGR of 42%.
Focus on brand building, product launches, innovations and large distribution
network have been the key drivers of growth.
KJCL’s EBITDA margin of 19% is higher than peers, mainly due to pricing
premium of ~5-6% led by its strong brand equity, aggressive ad spends of ~2.5%
of revenue, higher proportion of manufactured goods at 90%, and 66% of
volumes being high-margin vitrified tiles.
Like peers in the industry, KJCL also follows an outsourcing-based model,
whereby it forms JVs with Morbi-based entities as against the practice of
forming associates by peers. KJCL’s revenue mix is skewed toward
manufacturing (owing to JV model) at 90%, which is a higher-margin business.
This proportion is far higher than peers.
Exhibit 20: Revenue mix skewed toward manufacturing
Manufactured
Trading
Exhibit 19: Revenue mix skewed toward vitrified tiles (FY16)
Others, 3
GVT, 23
Ceramic
tiles, 38
37%
24%
20%
17%
10%
63%
PVT, 36
FY12
Source: Company, MOSL
76%
80%
83%
90%
FY13
FY14
FY15
FY16
Source: Company, MOSL
FY11
9,533
29.6
1,489
15.6
606
69
27.1
23.1
1.3
5,166
1,594
(72)
FY12
13,130
37.7
2,064
15.7
809
33
31.9
30.9
1.0
5,737
909
184
FY13
15,833
20.6
2,455
15.5
1,045
29
31.8
31.6
0.9
7,173
976
(533)
FY14
18,363
16.0
FY16
24,185
10.6
21.8
2,858
3,484
4,634
15.6
15.9
19.2
24.2
1,242
1,756
2,292
19
41
31
41
28.6
29.1
28.1
32.3
33.9
35.4
0.4
0.3
0.3
8,157
10,571
13,113
1,661
1,803
2,713
139
(843)
49
28
Source: Capital line, MOSL
FY15
21,869
19.1
Exhibit 21: Financial snapshot (INR m)
Kajaria Ceramics
Sales
YoY Change (%)
8YR CAGR (%)
EBITDA
Margin (%)
8YR CAGR (%)
PAT
YoY Change (%)
8YR CAGR (%)
ROE
ROCE
D/E
Capital Employed
Cash Flow - FCO
Cash Flow - FCF
Trailing P/E
FY08
5,005
16.3
819
16.4
150
85
10.1
12.8
2.2
4,922
46
(20)
FY09
6,649
32.8
949
14.3
89
(41)
5.6
14.5
2.0
4,872
255
134
FY10
7,355
10.6
1,149
15.6
359
303
20.4
20.0
1.4
4,522
1,077
607
28 April 2017
15

The Big Leap | Tiles
Somany Ceramics – outsourcing model worked wonders
Set up in 1968 by Mr Hira Lal Somany, Somany Ceramics (SOMC) was formed in
technical collaboration with Pilkington’s Tile Holding (UK) and was named as
‘Somany Pilkington Limited’. Later in 2007, it was renamed as Somany Ceramics
Limited. SOMC started business by setting up a plant to manufacture 0.52msm
ceramic tiles at Kassar, Haryana in 1970.
SOMC is India’s third largest tiles company with a market share of 6.9% (14% of
organized share). Over FY08-16, it reported revenue CAGR of 23% and PAT CAGR
of 41%.
Comprehensive product range, innovative products, aggressive brand spends,
extensive distribution network and outsourcing model have been the major
drivers of growth.
SOMC’s main focus was growth via the outsourcing model, where
manufacturing was outsourced to smaller players and the company
concentrated on marketing/distribution. The outsourcing model resulted in
attaining PAT growth on an asset light model, boosting return ratios. We believe
that the low margins of SOMC are because of its outsourcing model (associate-
based) where it holds a 26% stake, but this model is effective in generating high
PAT growth.
Exhibit 23: Revenue mix skewed toward trading
% Manufactured
% Trading
Exhibit 22: Revenue mix skewed toward vitrified tiles (FY16)
GVT, 17
Others, 7
Ceramic
tiles, 41
44%
49%
52%
53%
55%
56%
PVT, 35
Source: Company, MOSL
51%
FY13
48%
FY14
47%
FY15
45%
FY16
FY12
Source: Company, MOSL
FY10
5,423
21.5
558
10.3
204
133
27.6
20.0
2.0
2,447
414
(48)
FY11
7,199
32.8
677
9.4
239
17
25.6
19.0
1.7
2,971
235
(111)
FY12
8,790
22.1
741
8.4
251
5
21.9
18.8
1.3
3,090
786
476
FY13
10,539
19.9
857
8.1
320
27
23.4
21.2
1.1
3,322
707
330
FY14
12,648
20.0
814
6.4
289
(10)
14.1
16.6
0.8
4,195
739
149
FY15
15,431
22.0
1,076
7.0
464
61
19.1
20.0
0.7
4,771
248
(260)
FY16
17,177
11.3
22.8
1,385
8.1
18.1
647
39
42
19.1
20.4
0.6
7,154
596
(768)
36
Exhibit 24: Financial snapshot (INR m)
Somany Ceramics
Sales
YoY Change (%)
8YR CAGR (%)
EBITDA
Margin (%)
8YR CAGR (%)
PAT
YoY Change (%)
8YR CAGR (%)
ROE
ROCE
D/E
Capital Employed
Cash Flow - FCO
Cash Flow - FCF
Trailing P/E
FY08
3,311
19.4
365
11.0
38
53
6.8
13.0
2.5
2,008
257
(12)
FY09
4,463
34.8
423
9.5
88
129
14.3
15.0
2.1
2,024
391
310
Source: Capital line, MOSL
28 April 2017
16

The Big Leap | Tiles
Asian Granito – Chasing higher market share
Asian Granito Ltd. (Asian) was established in the year 2000. It is India’s fastest-
growing wall/ceramic wall and floor tiles company. Asian is among the top four
ceramic tile brands in India, with a share of 3.7% in the organized tile market.
Over FY08-16, it reported revenue CAGR of 17%. However, PAT almost remained
flat over the same period due to high interest and depreciation.
The company has a strong distribution network of 4,000 dealers and sub-
dealers. It sells its products under three brand names: Asian Granito, AGL and
Bonzer7.
The company exports to 50 countries. It plans to increase its export destinations
and also make further inroads into the US.
The company is focusing on increasing its share of retail customers from 35% in
FY16.
Exhibit 25: Revenue mix skewed toward ceramic tiles (FY 16)
GVT, 14%
Marbles, 16%
Others, 8%
PVT, 31%
Ceramics, 30%
Source: Company, MOSL
Exhibit 26: Financial Snapshot (INR m)
Asian Granito
Sales
YoY Change (%)
8YR CAGR (%)
EBITDA
Margin (%)
8YR CAGR (%)
PAT
YoY Change (%)
8YR CAGR (%)
ROE
ROCE
D/E
Capital Employed
Cash Flow - FCO
Cash Flow - FCF
Trailing P/E
FY08
2,275
27.0
535
23.5
296
28
24.8
26.9
0.4
2,321
209
(405)
FY09
3,320
45.9
531
16.0
250
(16)
14.4
18.1
0.6
2,993
35
(534)
FY10
4,055
22.2
463
11.4
190
(24)
9.6
11.2
0.7
3,435
387
(55)
FY11
4,804
18.5
581
12.1
201
6
9.3
11.2
0.6
3,738
249
28
FY12
6,238
29.9
667
10.7
181
(10)
7.8
11.7
0.8
4,396
23
(148)
FY13
7,084
13.6
698
9.9
171
(5)
6.5
9.7
1.0
5,228
192
61
FY14
7,752
9.4
632
8.1
121
(29)
4.9
8.3
0.8
5,115
350
53
FY15
8,460
9.1
596
7.0
148
22
4.7
8.5
0.6
4,738
1,042
668
FY16
9,939
17.5
20.2
903
9.1
6.8
243
64
(2.5)
7.3
10.7
0.9
7,446
207
(2,016)
33
Source: Capital line, MOSL
28 April 2017
17

The Big Leap | Tiles
Prism Cement – Pioneer of ceranmic tiles in India
Prism cement has two major segments with cement contributing 36% and TBK
division (HR Johnson) contributing 41% of revenue.
HR Johnson was incorporated in 1958 with offering wide range of tiles, sanitary
ware, bath fittings, modular kitchens and construction chemicals.
The company has 10 manufacturing plants (including JV’s) with capacity of
~58mn m
2
pa and is ably supported by distribution network of ~1000 dealers
spread across the country.
The company operates through asset light business model as its six JV’s account
for ~70% of overall capacity with 4 JV’s in Gujarat and 2 JV’s in A.P.
HRJ enjoys the reputation of being the only entity in India to offer end-to-end
solutions of tiles, sanitary ware, bath fittings, kitchens, and engineered marble &
quartz. All the products are sold under 4 strong brands, viz. Johnson, Johnson
Marbonite, Johnson Porselano and Johnson Endura.
HRJ has addressed power and fuel issues in southern operations by installing 3
coal gasifies in AP Plants and winning bids for onshore micro gas wells. It has
completed pipeline connectivity for its Karnataka unit.
HRJ margins have been impacted and are lower than industry due to lower
utilization for its own manufacturing.
Exhibit 27: Financial snapshot (INR m)
HR Johnson - TBK division of Prism Cements
Sales
YoY Change (%)
6YR CAGR (%)
EBITDA
Margin (%)
6YR CAGR (%)
ROCE
Capital Employed
FY11
14,725
24.0
1,640
11%
15%
8,106
FY12
17,111
16.2
1,184
7%
8%
9,875
FY13
17,653
3.2
890
5%
3%
11,282
FY14
18,988
7.6
1,863
10%
11%
11,504
FY15
22,099
16.4
746
3%
2%
12,149
FY16
22,932
3.8
11.6
640
3%
-15.25
1%
10,770
Source: Capital line, MOSL
Exhibit 28: Financial snapshot (INR m)
Prism Cements
Sales
YoY Change (%)
8YR CAGR (%)
EBITDA
Margin (%)
8YR CAGR (%)
PAT
YoY Change (%)
8YR CAGR (%)
ROE
ROCE
D/E
Capital Employed
Cash Flow - FCO
Cash Flow - FCF
Trailing P/E
FY08
8,763
0.1
3,323
37.9
2,390
24
38.6
51.3
-
6,168
2,424
1,714
FY09
6,474
(0.3)
1,595
24.6
921
(61)
18.3
30.3
-
7,045
1,005
(275)
FY10
28,749
3.4
5,200
18.1
2,598
182
26.1
30.3
0.5
22,382
3,716
(2,432)
FY11
34,474
0.2
3,783
11.0
1,050
(60)
8.1
10.6
0.9
27,839
2,884
(1,940)
FY12
45,962
0.3
3,119
6.8
(184)
(118)
NM
5.8
1.2
29,835
2,667
(289)
FY13
48,206
0.0
3,116
6.5
(625)
239
NM
4.7
1.5
33,745
2,599
(772)
FY14
50,266
0.0
1,847
3.7
(862)
38
NM
0.3
1.8
33,820
566
(1,463)
FY15
56,544
0.1
3,538
6.3
26
(103)
NM
6.8
2.1
35,403
1,986
291
FY16
56,216
(0.0)
26.2
3,850
6.8
1.9
33
26
(41.5)
NM
6.5
2.1
35,801
4,379
2,390
NM
Source: Capital line, MOSL
28 April 2017
18

The Big Leap | Tiles
Tiles manufacturing Process
Crushing and Grinding of raw materials
Slurry is dried and put on conveyor belts
Shaping of tiles in pressing machines
Removing moisture using driers
Coke gasification plant
Kiln firing
Polishing
Designing and roll out of final product
28 April 2017
19

THEMATIC/STRATEGY RESEARCH GALLERY

The Big Leap | Tiles
NOTES
28 April 2017
21

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22