Somany Ceramics Limited (SOMC), India’s second-largest tiles player with a 7% market share (14% in the organised tile industry) has substantially transformed its product mix from commoditised ceramic tiles to high-margin vitrified tiles and value-added products over the last four years, leading to continued improvement in its revenues and EBITDA margins. Volume growth ahead would be supported by production ramp-ups at own/JV capacities and a favourable GST rate of 18%. Margin improvement would continue with focus on product innovation, a higher share of value-added products, rising contribution from the sanitaryware & faucetware (S&F) segment, and increased penetration among brand-conscious customers. We expect SOMC to post a 13%/18% revenue/EBITDA CAGR and a 129bps expansion in consolidated EBITDA margins over FY17-FY20E. Initiate coverage with ADD and March ‘19 TP of Rs 910 set at a 30x TTM EPS of Rs 30.32.
High-margin tiles to drive revenue growth, margin improvement: SOMC’s tiles business posted a 15% revenue CAGR over FY12-FY17 as it moved away from lowmargin and commoditised ceramic tiles (39% of FY17 revenues vs. 67% in FY12) and increased the share of higher-margin value-added products, including vitrified tiles (53% in FY17 vs. 30% in FY12). It also ramped up its manufacturing capacity from 24.5msm to 49.5msm via expansion and JVs over the last five years. Going forward, we expect SOMC to post a tile volume/revenue CAGR of 12%/11% over FY17-FY20E with contribution from vitrified tiles increasing from 53% to 59% during this period. Contribution from sanitary-ware & faucet-ware to increase gradually: While SOMC has been present in S&F since FY08, it contributed 8% to FY17 revenues (34% revenue CAGR over FY10-FY17) as the company increased focus on this segment only over the last 3-4 years.