Innovative products and strong exports
Moneylife Digital Team
We had written about Somany Ceramics in Street Beat (9 September 2010). The share has declined from Rs50.51 along with the markets and is now quoting at around Rs39 and has become an even more attractive buy for the long term.
The company’s product basket comprises a wide range of wall and floor tiles, imported tiles, sanitary-ware products, bathroom fittings and faucets. The Indian ceramic tiles industry is highly fragmented (branded products account for around 50% of sales). The company has emerged as the second-largest tiles manufacture in the Indian ceramic tiles industry in terms of capacity with a share of about 11% of the branded market in 2010-11. Its products are marketed across India through an extensive distribution network of dealers, sub-dealers, showrooms and sales to builders. The Delhi-based company’s two manufacturing units in Kadi (Gujarat) and Kassar (Haryana) have a combined annual tile-making capacity of 19.15 million sq metres. It has received the BIS (Bureau of Indian Standards) certification for the products manufactured at the Kassar unit, the first company in the Indian tiles industry to receive the certification. It has received patents for one of its R&D processes—VC shield technology, making it the only tiles company in India to be granted a patent in advanced tiles technology.
In October 2011, Somany Ceramics entered into a memorandum of understanding (MoU) with Vintage Tiles Pvt Ltd (VTPL) and its promoters to acquire a 26% equity stake in VTPL. VTPL is setting up a new plant to manufacture about 7,500 square meters of polished vitrified tiles per day at Morbi (Gujarat). This alliance will allow Somany to market the output of VTPL.
The company’s sales for FY10-11 were Rs715 crore against Rs540 crore while net profit was Rs23 crore against Rs20 crore. The dividend declared for FY10-11 was 35%, up from 30%. According to the company, the pressure on profit margins is likely to remain due to increase in raw materials, energy, manpower and interest and competitive pressures due to continuing creation/expansion of capacities. 
According to the equity research firm, CRISIL, Somany Ceramics Ltd’s Q2 FY11-12 revenues exceeded CRISIL Research’s expectations on higher growth. EBITDA (earnings before interest, tax, depreciation and amortisation) margins were significantly below expectations due to increase in raw material costs and limited ability to pass on the rise to end-users. After factoring in the higher expected growth in the traded (aided by acquisition of Vintage) and value-added products, CRISIL has raised its revenue estimates. Margins and earnings estimates, however, have been lowered after factoring in higher raw material costs. CRISIL remains positive on Somany’s growth prospects, given its strong brand and distribution network; it maintained Somany’s fundamental grade at 4/5. This indicates potential for further appreciation in share prices over the long term.
Sales for the September 2011 quarter aggregated Rs208 crore compared to Rs163 crore while net profit was Rs5.75 crore compared to Rs5.48 crore.
Over the past five quarters, Somany Ceramics average growth in revenues and operating profit was 31% and 16%, respectively. Its average operating margin is 9% and return on net worth is 23%. Its market-cap to revenues is 0.15, while its market-cap to operating profit is 1.81 times. The stock is a very attractive buy at the current market price of Rs39.