Somany Ceramics Q4FY15: Outperforming on operating and financial leverage, 'Hold' says IndiaNivesh

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Somany Ceramics Sensex
IndiaNivesh Research IndiaNivesh Securities Private Limited
601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800
First Cut Analysis
May 19, 2015 Somany Ceramics Ltd.
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.
Daljeet S. Kohli
Head of Research
Tel: +91 22 66188826
daljeet.kohli@indianivesh.in
Prerna Jhunjhunwala
Research Analyst
Tel: +91 22 66188848
prerna.jhunjhunwala@indianivesh.in
CMP : Rs.410
Rating : HOLD
Target : Rs.457
Rating : HOLD
Target : Rs.457
Current Previous
STOCK INFO
BSE 531548
NSE SOMANYCERA
Index S&P BSE Small Cap
Bloomberg SOMC IN
Reuters SOCE.BO
Sector Ceramic Products
Face Value (Rs) 2
Equity Capital (Rs mn) 78
Mkt Cap (Rs mn) 15,919
52w H/L (Rs) (Adj.) 500/193
3m Avg Daily Volume (BSE + NSE) 36,405
SHAREHOLDING PATTERN %
(as on Mar. 2015)
Promoters 56.2
FIIs 5.8
DIIs 3.1
Public & Others 34.9
Source: BSE
STOCK PERFORMANCE (%) 1m 3m 12m
SOMANY CERAMICS -9 12 107
SENSEX -3 -6 15
SOMANY CERAMICS v/s SENSEX
Source: Capitaline, IndiaNivesh Research
Source: Capitaline, IndiaNivesh Research
Outperforming on operating and financial leverage; Maintain
HOLD
Rs Mn Q4FY15 Q3FY15 Q4FY14 QoQ (%) YoY (%)
INSPL
Estimate
Variance
(%)
Net Sales 4,556 3,712 4,076 22.7 11.8 4314 5.6
EBIDTA 253 206 258 23.2 -1.8 270 -6.3
PAT 148 110 112 34.1 32.2 125 18.5
EPS 3.8 2.8 2.9 34.1 32.2 3.2 18.5
Somany Ceramics declared results that were better than our estimates.
 Standalone net sales of the company grew by 11.8% yoy to reach Rs 4556 mn
(INSPL est: Rs 4314 mn) against Rs 4076 mn in Q4FY14. This was driven by
5.9% yoy volume growth and balance by average realisation growth. Volume
sales for stood at 12.6 million square meters (msm) in Q4FY15 against 11.9
msm in Q4Y14. Volume growth is in-line with our expectations as most of the
capacities are operating near optimum levels. Share of Joint venture
companies in the revenue mix increased to 39.7% in Q4FY15 from 35.1% in
Q4FY14. During the quarter, the company began commercial production of
2.4 msm in Kadi, which is own capacity.
Source: Company, IndiaNivesh Research
Particulars Q4FY15 Q3FY15 Q4FY14 QoQ (%) YoY (%) FY15 FY14 % Chg
Sales Volume (Mn Sq. Mtrs) 12.6 10.2 11.9 23.8 5.9 42.3 37.9 11.6
Own 5.6 4.2 5.9 33.0 -5.1 18.60 19.40 -4.1
JV 4.4 4.0 3.6 10.8 22.2 14.50 6.60 119.7
Outsourced 2.6 2.0 2.4 30.0 8.3 9.20 11.90 -22.7
Sales (Rs Mn) 4753 3860 4296 23.1 10.6 15984 13254 20.6
Own 1787 1410 1963 26.7 -9.0 6235 6436 -3.1
JV 1888 1650 1508 14.4 25.2 6113 3000 103.8
Outsourced 1078 800 825 34.8 30.7 3636 3818 -4.8
Avg. Realisation (Rs/Sq.Mtr) 377 379 361 ‐0.5 4.5 378 350 8.1
Own 319 335 333 -4.7 -4.1 335.2 331.8 1.0
JV 429 416 419 3.2 2.4 421.6 454.5 -7.3
Outsourced 415 400 344 3.7 20.6 395.2 320.8 23.2
Revenue Mix (%) Bps Chg
Own 37.6 36.5 45.7 107 -810 39.0 48.6 -955
JV 39.7 42.7 35.1 -302 462 38.2 22.6 1561
Outsourced 22.7 20.7 19.2 196 348 22.7 28.8 -606
Bps Chg
Source: Company, IndiaNivesh Research
 EBITDA de-grew marginally 1.8% yoy at Rs 253 mn in Q4FY15 (INSPL est: 270
mn) against Rs 258 mn in Q4FY14. EBITDA margin was under pressure at 5.6%
in Q4FY15 against 6.3% in Q4FY14 owing to higher share of JV products in
revenue mix. Staff cost and other expenditure increased at relatively higher
rate of 14.4% yoy and 16% yoy; thereby putting pressure on margins. Lower
power and fuel cost (10.2% of sales in Q4FY15 vs. 11% of sales in Q4FY14)
cushioned the EBITDA performance, which grew by a meagre 3.2% yoy.
 PAT stood at Rs 148 mn in Q4FY15 (INSPL est: 125 mn) against Rs 112 mn in
Q4FY14, signifying growth of 32.2% yoy. This is mainly on account of financial
and operating leverage arising from asset light model of adding capacities
through joint venture companies. As expected, lower than proportionate
growth in depreciation and interest cost have led to PAT margin expansion.
Also, other operating income and other income growth of 161% yoy and 17.1%

2. IndiaNivesh Research Somany Ceramics Ltd.|First Cut Analysis May 19, 2015 | 2
First Cut Analysis (contd...)
yoy aided margin expansion. Effective tax rate was lower at 25.8% in Q4FY15
against 39.9% in Q4FY14. Adjusting for higher other income and other income,
PAT stood at Rs 94 mn in Q4FY15 against Rs 83 mn in Q4FY14, a growth of
13.9% yoy.
For FY15, net sales grew 22% yoy to reach Rs 15313 mn against Rs 12556 mn in
FY14. This was led by volume growth of 11.6% and average realisation growth of
8.1%. EBITDA grew 11.6% yoy to reach Rs 865 mn against Rs 775 mn in FY14. EBITDA
margin contracted 52 bps yoy to reach 5.7% in FY15 against 6.2% in FY14 led by
higher share of lower margin JV sales in revenue mix (38.2% in FY15 against 22.6%
in FY14). PAT grew 58.3% yoy to reach Rs 444 mn in FY15 against Rs 280 mn in FY14.
PAT margin expanded 66 bps to reach 2.9% in FY15 from 2.2% in FY14. Adjusting for
other operating income and other income, adj. PAT stood at Rs 268 mn in FY15
against Rs 212 mn in FY14, growth of 26.6% yoy. PBT margin improved 77 bps yoy
against management guidance of 50bps yoy improvement, which is a key positive.
The capacity of the company increased to ~52 msm in FY15 from 44.6 msm in FY14.
Other developments
 The company is planning Brownfield capacity expansion of 4 msm at its
Haryana plant, which is likely to commence production in FY16E. We would
like further clarity on timeline and capex costto incorporate it in our estimates.
 The company has received notice from sellers of gas (Gail and IOC) worth Rs
241.5 mn in lieu of under drawn gas quantity as part of long term gas supply
agreements. The total under drawn quantities of RLNG is equivalent to Rs
609 mn for CY2014. The company is representing the sellers to reduce the
amount demanded, which is pending resolution. The management is of the
opinion, that it may be able to use the under drawn quantities in future due
to additional capacities coming under operation in Kasar. Hence, it has not
been provided in financials by the management. In our opinion, Rs 609 mn is
a significant amount for the company considering its FY15 PAT of Rs 444 mn.
We would view it as a contingent liability till a resolution is finalised, and it
would remain an overhang for the stock.
Valuation
At CMP of Rs 410, the stock trades at PE of 27.4x and 20.6x its FY16E and FY17E
earnings of Rs 15 and Rs 19.9 per share respectively. The company has outperformed
its guidance of 20% topline growth and 50 bps improvement in PBT margin. It is
likely to be one of the beneficiaries of Swachh Bharat Mission of the government,
which increases its revenue visibility. Its asset light strategy of investing in joint
venture companies is likely to improve the bottomline. We expect the company
ROE to improve going forward due to improving profitability. We would revise our
estimates, if required, post the conference call with management. Till then, we
maintain our positive stance on the company with HOLD rating and target price of
Rs 457 (valuing the company at 23x FY17E earnings).

3. IndiaNivesh Research Somany Ceramics Ltd.|First Cut Analysis May 19, 2015 | 3
First Cut Analysis (contd...)
Financial Performance
Rs in mn Q4FY15 Q3 FY15 Q4FY14 QoQ (%) YoY (%) FY15 FY14 Chg (%)
Net sales 4,556 3,712 4,076 22.7 11.8 15,313 12,556 22.0
Raw Materials 3,096 2,369 2,726 30.7 13.6 9,853 7,776 26.7
Power and Fuel 463 441 449 5.1 3.2 1,776 1,647 7.8
Staff cost 232 242 203 ‐4.0 14.4 954 823 15.9
Other expenditure 511 455 441 12.4 16.0 1,865 1,535 21.5
Operating Expenses 4,302 3,506 3,818 22.7 12.7 14,448 11,780 22.6
EBITDA 253 206 258 23.2 ‐1.8 865 775 11.6
EBITDA Margin (%) 5.6% 5.5% 6.3% 5.7% 6.2%
Other Operating Income 36 37 14 ‐3.8 161.0 97 41 136.7
Other Income 18 25 15 ‐29.4 17.1 78 27 185.8
Depreciation 60 56 56 6.0 6.6 223 221 1.0
Profit bef. Int. & Tax 247 211 231 16.8 7.0 818 623 31.3
Interest & finance ch. 48 41 45 15.5 6.5 163 183 ‐10.9
Profit before tax 199 170 186 17.2 7.2 655 440 48.8
PBT Margin (%) 4.4 4.6 4.6 4.3 3.5
Total tax expenses 52 60 74 ‐14.0 ‐30.6 211 160 32.1
PAT 148 110 112 34.1 32.2 444 280 58.3
Adj. PAT 94 48 83 96.5 13.9 268 212 26.6
Effective tax rate 25.8% 35.2% 39.9% 32.3% 36.3%
PAT Margins (%) 3.2% 3.0% 2.7% 2.9% 2.2%
EPS- Diluted 3.8 2.8 2.9 34.1 32.2 11.4 7.2 58.3
Source: Company, IndiaNivesh Research

4. IndiaNivesh Research Somany Ceramics Ltd.|First Cut Analysis May 19, 2015 | 4
First Cut Analysis (contd...)
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.
IndiaNivesh Securities Private Limited
601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.
Tel: (022) 66188800 / Fax: (022) 66188899
e-mail: research@indianivesh.in | Website: www.indianivesh.in
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accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this report: Daljeet S Kohli, Amar Maurya, Abhishek Jain, Yogesh Hotwani, Prerna Jhunjhunwala, Kaushal Patel, Rahul Koli, Tushar Manudhane & Dharmesh Kant.
Following table contains the disclosure of interest in order to adhere to utmost transparency in the matter:
INSPL, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictoryto the recommendations expressed
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Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
HOLD. We expect this stock to deliver -15% to +15% returns over the next 12 months.
SELL. We expect this stock to deliver <-15% returns over the next 12 months.
Our target prices are on a 12-month horizon basis.
Other definitions
NR = Not Rated. The investment rating and target price, if any, have been arrived at due to certain circumstances not in control of INSPL
CS = Coverage Suspended. INSPL has suspended coverage of this company.
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rating/target.
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NM = Not Meaningful. The information is not meaningful and is therefore excluded.
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Please refer to the important 'Stock Holding Disclosure' report on the IndiaNivesh website (investment
Research Section -
http://www.indianivesh.in/Admin/Upload/635615016831250000_Stock%20Holding%20Disclosure%20list%20as%20on%20February%2028%202015.pdflink).
Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks.
INSPL and its affiliates may have investment positions in the stocks recommended in this report.
Please refer to the important 'Stock Holding Disclosure' report on the IndiaNivesh website (investment
Research Section -
http://www.indianivesh.in/Admin/Upload/635615016831250000_Stock%20Holding%20Disclosure%20list%20as%20on%20February%2028%202015.pdflink).
Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks.
INSPL and its affiliates may have investment positions in the stocks recommended in this report.