SOMANY CERAMICS FY16
Somany Ceramics’ (SOMC) FY16 annual report highlights a year
of weak demand, reflecting in a 5-year low revenue growth of
11% to INR17b. EBITDA margin expanded 130bp to 8.3% on gross
margin expansion; however, it remained lower than industry
leader Kajaria Ceramics (KJCL). Cash conversion cycle increased
from 31 days in FY15 to 43 days in FY16 mainly due to rise in
receivable days to 67 (FY15: 61 days). Further, high capex at
INR1.4b led to FCF (post interest) remaining negative at -INR1b.
Over the last three years, FCF (post interest) has remained
negative, which SOMC has funded primarily by diluting equity
and raising borrowings. Despite the rising capital intensity, SOMC
continues to deliver healthy return ratios, with 22% RoCE and
19% RoE. We believe SOMC’s RoCE is partly cushioned by its
associate-based manufacturing tie-up strategy.
Sluggish demand dampens growth; margins expand:
During
FY16, weak demand led to a 5-year low revenue growth of
11% to INR17b. EBITDA margin expanded 130bp to 8.3% on
gross margin expansion; however, it remained lower than KJCL
due to (a) lower realizations on account of inferior product mix
and low brand premium, and (b) higher raw material cost due
to its business model that involves associate-based
manufacturing tie-ups.
A
NNUAL
R
EPORT
T
HREADBARE
The
ART
of annual report analysis
Associate based manufacturing
tie up result in margins
remaining low.
Debt of associates at INR1.3b
might get consolidated under
IND AS.
3 March 2017
Rising working capital requirement put
pressure on earnings to cash flow conversion.
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
M.Cap. (INR b)/ (USD b)
SOMC
634
42.38
714/355
26.8/0.4
Earnings to cash conversion weak; working capital
requirements rise:
Earnings-to-cash conversion stayed weak
at 59% due to high working capital needs. Cash conversion
cycle stretched from 31 days in FY15 to 43 days in FY16 mainly
due to rise in receivable days to 67 (FY15: 61 days).
FCF remains negative due to high capex; dilution and debt
support growth:
High capex at INR1.4b led to FCF post interest
remaining negative at -INR1b. Over the last three years, FCF
post interest has remained negative, which SOMC has funded
primarily by diluting equity and raising debt.
Debt of associates might get consolidated under IND-AS:
Debt in associates was high at INR1,280.9m in FY15. We note
that under IND-AS, these associates might get consolidated on
the basis of actual control.
Return ratios remained healthy:
SOMC continues to deliver
healthy return ratios, with 22% RoCE and 19% RoE. We believe
SOMC’s RoCE is partially cushioned by its associate-based
manufacturing tie-up strategy.
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Dec-16
51.5
13.8
2.4
32.3
Sep-16
51.5
13.9
2.1
32.4
Jun-16
51.5
14.6
1.8
32.1
Note: FII Includes depository receipts
Auditor’s name
Lodha & Co.
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operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.
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|
Somany Ceramics FY16
ART #1
ACCOUNTING / AUDITING MATTERS
Sluggish demand dampens growth; margins remain lower than KJCL
SOMC’s revenue grew just 11% (v/s 20%+ in the last four years) to INR17b due
to a marked slowdown in overall demand, increased competitive pressure,
mass-scale dumping from China, and record-low new launches in housing.
Growth in manufactured goods was -0.4% (FY15: -1.6%), whereas growth in
traded goods was 19% (FY15: 43%).
Sales of ceramic tiles (41% revenue contribution) remained flat, PVT tiles (35%
contribution) grew 18%, and GVT (16.8% contribution) grew 23%.
We note that SOMC’s margins (8.3% EBITDA margin and 3.8% PAT margin) are
lower than the industry leader, KJCL’s (19.2% EBITDA margin and 9.5% PAT
margin). We believe this is due to the following:
KJCL’s higher realization (of ~5-6%) due to brand premium.
Lower revenue contribution of PVT and GVT – these premium products
account for 52% of revenue for SOMC against 59% for KJCL.
Higher raw material cost at 59.1% for SOMC v/s 35% for KJCL due to higher
proportion of traded goods. We believe part of this is on account of the
difference in SOMC and KJCL’s business models with respect to
manufacturing tie-ups. SOMC’s manufacturing tie-ups are through
associates (where it holds 26% stake), while KJCL’s are through subsidiaries.
We believe operating through subsidiaries leads to higher margins and
profitability.
We note that 65% of SOMC’s purchases are from related parties (mainly
associates).
Exhibit 1: Lower realization and higher RM cost drag SOMC’s margins (INR m)
Particulars
Net Revenue (Operations)
Raw Materials Consumed
Gross Margin
Operating and Administrative Expenses
Personnel Cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT (Before Exceptional Items)
Exceptional Items
PBT
Tax
PAT
Minority interest
PAT after minority interest
FY15
15,431
9,385
6,046
3,957
1,014
1,076
266
810
205
604
77
681
-
681
222
459
5
464
Somany
%
FY16
100.0
17,177
60.8
10,149
39.2
7,028
25.6
4,367
6.6
1,232
7.0
1,429
1.7
283
5.2
1,146
1.3
225
3.9
922
0.5
91
4.4
1,012
-
(44)
4.4
968
1.4
312
3.0
656
0
3.0
(9)
647
%
100.0
59.1
40.9
25.4
7.2
8.3
1.6
6.7
1.3
5.4
0.5
5.9
(0.3)
5.6
1.8
3.8
(0)
3.8
FY15
21,869
8,334
13,535
7,921
2,073
3,541
559
2,983
294
2,689
72
2,761
58
2,703
854
1,849
93
1,756
Kajaria
%
FY16
100.0
24,185
38.1
8,464
61.9
15,721
36.2
8,561
9.5
2,527
16.2
4,634
2.6
726
13.6
3,907
1.3
368
12.3
3,539
0.3
38
12.6
3,577
0.3
-
12.4
3,577
3.9
1,237
8.5
2,340
0.4
8.0
48
2,292
%
100.0
35.0
65.0
35.4
10.4
19.2
3.0
16.2
1.5
14.6
0.2
14.8
-
14.8
5.1
9.7
0.2
9.5
Source: Company Annual Report, MOSL
3 March 2017
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Somany Ceramics FY16
Exhibit 2: Revenue growth decelerates
Sales
PAT
30%
20%
20%
-19%
22%
73%
43%
11%
22%
5%
FY12
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Exhibit 3: SOMC’s revenue mix
% Manufactured
% Trading
Exhibit 4: KJCL’s revenue mix
% Manufactured
% Trading
44%
49%
52%
53%
55%
37%
24%
20%
17%
10%
56%
FY12
51%
FY13
48%
FY14
47%
FY15
45%
FY16
63%
76%
80%
83%
90%
FY12
FY13
FY14
FY15
FY16
Source: Company, MOSL
Source: Company Annual Report, MOSL
Exhibit 5: SOMC’s revenue mix- low margin ceramic tiles has
higher share
Exhibit 6: KJCL’s revenue mix – high share from superior
margin GVT+PVT products
GVT, 23
GVT, 17
Others, 7
Ceramic tiles,
41
Others, 3
Ceramic tiles,
38
PVT, 35
Source: Company Annual Report, MOSL
PVT, 36
Source: Company Annual Report, MOSL
3 March 2017
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Somany Ceramics FY16
Exhibit 7: SOMC purchases 65% of stock in trade from associates, resulting in lower GP
Particulars
Commander Vitrified Private Limited (Associate)
Acer Granito Private Limited (Associate)
Vintage Tiles Private Limited (Associate)
Vicon Ceramic Private Limited (Associate)
Vidres India Ceramics Private Limited
Ishiv India Solutions Pvt. Ltd.
Yogi Cerachem Private Limited
Wolkem India Limited
Total Purchase of goods from related parties
Purchases of Stock-in-Trade
% of goods purchased from related parties
FY15
1,893
940
1,013
475
167
12
7
2
4,510
7,743
58%
FY16
1,701
1,567
1,035
662
144
15
11
2
5,137
7,866
65%
Source: Company Annual Report, MOSL
Cash conversion weak with rising working capital requirements
Earnings to cash flow conversion remains weak at 59% (FY15: 43%). This is
mainly on account of higher working capital requirement.
Exhibit 8: Earnings to cash flow remains low for second consecutive year
125%
101%
Earnings to cash conversion
107%
59%
Earnings to cash conversion
remains low at 59%
FY12
FY13
FY14
43%
FY15
FY16
Source: Company Annual Report,, MOSL
Receivables have grown 22% to INR3.1b (FY15: INR2.6b), but revenue grew just
11%, resulting in an increase in receivable days to 67 (FY15: 61 days). KJCL’s
receivable days stood at just 41 days. The management has indicated that the
credit period has gone up for the entire system, including dealers.
SOMC’s cash conversion cycle has remained superior to KJCL’s at 43 days v/s 84
days, primarily on account of lower inventory.
Exhibit 9: Cash conversion cycle continues to deteriorate, but better than KJCL’s
Particulars
Inventory Days
Receivable Days
Advance from customer
Advance to supplier
Payable Days
Cash conversion cycle (Days)
FY12
72
58
2
-
80
48
FY13
71
61
2
-
95
35
SOMC
FY14
42
62
2
-
83
19
FY15
53
61
2
-
81
31
FY16
50
67
2
-
72
43
FY12
105
37
-
17
100
60
KJCL
FY13
FY14
FY15
FY16
111
85
133
166
33
33
35
41
2
2
2
2
10
14
-
-
84
67
106
121
68
62
60
84
Source: Company Annual Report,, MOSL
3 March 2017
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Somany Ceramics FY16
FCF remains negative due to continued capex
Free cash flows post interest remained negative (-INR988m; FY15: -INR464.4m)
due to continued capex of INR1.4b (highest in the last five years), of which
INR843m was for the Kassar plant (for GVT tiles).
Capacity utilization for all plants (including associates / subsidiaries) has been in
the range of 80-100%, justifying the increase in capex to achieve growth.
For FY17, the management has guided a capex of INR400m-450m due to
implementation of SAP, trebling of capacity at the sanitary ware plant, and
routine capex of INR100m-150m.
Return ratios have remained healthy despite high capex, with RoCE at 22%
(FY15: 21%). However, we highlight that a significant part of manufacturing is
done through associates (outsourcing model), which are consolidated using
equity method – fixed assets are not consolidated; this reduces capital
employed and increases return ratios.
Continued capex leads to
negative FCF post interest
rd
for 3 consecutive year
Exhibit 10: Continued capex leads to negative FCF (INR m)
Particulars
PBT
Add/Less: Non-cash adjustments
Add/Less: Non-operating adjustments
Less: Direct Taxes Paid
Operating Profit Before Working Capital Changes
Trade & Other Receivable
Inventories
Trade Payable
Working capital changes
Cash Generated from Operations after Tax
Less: Financial Cost paid
Free Cash Flow from Operations post Interest
Less: Capital Expenditure
Cash Flows after Capex & Investments
FY12
363.8
190.3
201.1
(110.3)
644.9
(78.9)
(17.5)
271.0
174.6
819.5
(205.0)
614.5
(344.0)
270.5
FY13
478.2
194.6
188.4
(155.2)
706.1
(349.1)
(199.3)
549.5
1.1
707.1
(202.2)
504.9
(377.0)
127.9
FY14
435.2
225.7
178.1
(134.1)
705.0
(509.0)
298.8
243.7
33.5
738.5
(184.2)
554.3
(589.4)
(35.1)
FY15
FY16
681.0
967.9
259.1
281.6
171.8
189.4
(215.5) (240.6)
896.4
1,198.3
(657.4) (643.6)
(458.3)
13.6
467.4
27.7
(648.3) (602.4)
248.0
596.0
(204.6) (220.5)
43.4
375.5
(507.8) (1,363.6)
(464.4) (988.0)
Source: Company Annual Report,, MOSL
Exhibit 11: Capacity utilization remains high
Tiles
Own Plants
Kassar
Kadi
Associate/ subsidiaries plants
Vintage Tiles Pvt. Ltd.
Commander Vitrified Pvt. Ltd.
Vicon Ceramic Pvt. Ltd.
Amora Tiles Pvt. Ltd.
Acer Granito Pvt. Ltd.
Somany Fine Vitrified Pvt. Ltd.
Capacity
(MSM p.a)
17.1
8.4
Capacity
utilization
97%
85%
3.0
4.8
4.0
4.6
5.1
4.3
94%
87%
93%
69%
82%
100%
Source: Company Annual Report,, MOSL
3 March 2017
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Somany Ceramics FY16
Exhibit 12: Return ratios healthy
22%
23%
17%
15%
FY13
FY14
FY15
FY16
ROE
ROCE
21%
22%
19%
19%
Source: Company Annual Report,, MOSL
Dilution and debt supports growth
During FY14-16, 58% of funds were utilized for capex, which may be the future
growth driver, and 14% of funds were utilized to pay borrowing costs.
Cash flow from operations remained muted on rising working capital
investments, contributing 38% to total funds. Further, issue of capital via QIP
route contributed 41% of sources.
SOMC’s debt adjusted for creditors for capex increased to INR2,549m; debt-
equity stood at 0.6x (FY15: INR1,940m; D/E of 0.8x). Borrowing cost remained
stable at 10.4% (FY15: 10.8%).
Debt-equity ratio fell due to issue of shares worth INR1,200m via QIP route in
FY16. SOMC had also raised INR500m in FY14.
Debt in associates was high at INR1,280.9m in FY15.
Under IND-AS, these associates might get consolidated on the basis of actual
control.
Exhibit 14: …supporting capex expansion
Dividend, 5%
Finance cost,
14%
Exhibit 13:
CFO contributed 57% to sources of funds in FY14-16…
Borrowings
(net), 17%
Other income,
2%
Cash, 3%
Issue of capital,
41%
CFO, 38%
Investments,
22%
Capex, 58%
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
3 March 2017
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Somany Ceramics FY16
Exhibit 15: Adjusted debt increases (INR m)
Borrowings(adjusted)
1.4
1.1
0.8
0.8
0.6
D/E
Exhibit 16: Adjusted debt increases (INR m)
Particulars
Borrowings(reported)
Creditors for capex
Borrowings(adjusted)
FY12
1,666
42
1,708
FY13
1,624
20
1,644
FY14
1,707
18
1,725
FY15
1,921
19
1,940
FY16
2,443
106
2,549
Source: Company Annual Report, MOSL
1,708
FY12
1,644
FY13
1,725
FY14
1,940
FY15
2,549
FY16
Source: Company Annual Report, MOSL
Exhibit 17: Borrowing cost stable
Borrowings(adjusted)
12.5%
12.4%
10.8%
Finance cost
Exhibit 18: Fund raising in the past five years (INR m)
Particulars
QIP
FY12
-
FY13
-
FY14
500
FY15
-
FY16
1,200
10.4%
Source: Company Annual Report,, MOSL
1,644
FY13
1,725
FY14
1,940
FY15
2,549
FY16
Source: Company Annual Report,, MOSL
Exhibit 19: Debt in associates high (INR m)
Associate
Vintage Tiles Private
Commander Vitrified Private
Acer Granito Private
Vicon Ceramic Private
Total
FY15
270.1
388.0
510.0
112.8
1,280.9
FY16
DNA
274.6
407.6
71.9
DNA
Source: ROC, MOSL
3 March 2017
7

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Somany Ceramics FY16
ART #2
GOVERNANCE MATTERS
Directors are regular in attending board meetings
SOMC is regular in calling board meetings as per the prescribed law. Four board
meetings were held in FY16.
All directors have attended at least 50% of board meetings.
Exhibit 20: Directors are regular in attending board meetings
Name
Mr. Shreekant Somany
Mr. Abhishek Somany
Mr. R. K. Daga
Mr. G. L. Sultania
Mr. Siddharath Bindra
Mrs. Anjana Somany
Mr. Salil Singhal
Mr. Ravinder Nath
Dr. Y. K. Alagh
Mr. Narayan Anand
Category
Promoter
Promoter
Independent
Non-executive & Non independent
Independent
Promoter
Independent
Independent
Independent
Non-executive, Non independent
No. of board meetings
attended
4
4
4
4
3
3
2
2
2
2
Source: Company Annual Report, MOSL
Managerial remuneration at 9% of PBT
Managerial remuneration increased 28% YoY to INR86m 9% of PBT
(FY15:INR67m, 10% of PBT).
Exhibit 21: Managerial remuneration remains high (INR m)
Particulars
Remuneration
PBT
% PBT
FY15
67
681
10%
FY16
86
968
9%
Source: Company Annual Report, MOSL
Auditor lack rotation
Lodha & Co, a mid-sized audit firm has remained SOMC’s statutory auditor for
more than 15 years. Amongst BSE-500 companies, Lodha & Co was also the
statutory auditor for JK Tyres, JK Lakshmi Cement, ONGC, JSW Energy, Jindal
Steel, Central Bank and Sunteck Reality.
The Companies Act (2013) requires mandatory rotation of auditors for listed
entities after serving a consecutive tenure of 10 years. The Act further provides a
three-year period (from April 1, 2014) to comply with this requirement, which
will need the company to rotate their auditors.
Statutory auditors to be
mandatorily changed post
FY17 in accordance with the
new Companies Act
3 March 2017
8

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Somany Ceramics FY16
NOTES
3 March 2017
9

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Somany Ceramics FY16
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Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412
Pending Regulatory inspections against Motilal Oswal Securities Limited:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry and
adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have requested
to SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.
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indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research
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For Hong Kong:
This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures
Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412)
has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of
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these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting
Research Analysis in Hong Kong.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is
not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in
the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This
document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be
engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by
the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal
Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and
therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
Motilal Oswal Securities Ltd
3 March 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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