Wednesday, October 22, 2014

Somany Ceramics - Expensive, Yet Worth A Look


First of all, let me take this opportunity to wish every reader, a Very Happy Diwali, and a Prosperous New Year ahead.


Somany Ceramics has established its presence as a leading and formidable force in the Indian tiles sector. Since 1969, the brand has endeavoured to adorn homes with delight, exuberance and vivaciousness resounding with the quality, strength and life of its products. The company has manufacturing plants in Kadi, Gujarat and Kassar, Haryana and other joint venture plants, generating a production capacity of 41 million sq mts annually. The company is a complete solutions provider in terms of décor solutions with widest product selection categories – Ceramic wall and floor, polished vitrified tiles, glazed vitrified tiles, digital tiles & sanitaryware and bath fittings as well as tile laying solution.

Along with being considered the epitome of quality and durability in India, it also has its presence in international markets. Brand Somany has established itself as an unchallenged leader of innovation and design in Europe to the Middle East and from Asia to Africa.

A brief look at the tremendous client tele of the company:
https://www.somanyceramics.com/our-client/

The company is, and will be facing stiff competition in the sector, and is currently, the third largest player in organized tiles market. Kajaria Ceramics is probably the largest listed player in the sector. The new venture by Cera Sanitaryware to enter into tiles segment, will also be part of competition faced by the company.
Inspite of such competition, the company is growing at a tremendous pace and is likely to continue, as this is one of the sector, which will be benefitted the most, when a country is moving from being a developing nation to becoming a developed nation. Hence the available competition should not hamper the growth as far as names like Somany are concerned. The smaller and probably less popular faces, might feel the heat, hence I am not looking much into smaller names in this segment, in spite of the expensiveness in larger players including Somany Ceramics.

Few Initiatives By Modi Government that would help the company grow even better:
1) Swatch Bharat Abhiyaan.
2) Development of 100 Smart Cities.
3) Mission of Housing For All by 2022.

A look at company's excellent Debt Management:



Recently, the management made their intentions clear that they won't be adding any debt soon, which is also positive.

This was one of the factor, which drove 2 big institution to buy heavy stakes in the company.
However, the same move led to tremendous increase in stock price over past 1 year.

Out of the total dealer network of more than 1700 dealers across India, the company added around 40 dealers in the past quarter itself.

Apart from that, the company also added about 10 showrooms across India. Both the numbers are likely to increase in near future.

The company recently bought 26% stakes in Sonec Sanitaryware, which is a large company with a capacity of about 3 lakh pieces per year. The company is expected to increase their stakes to 51% in the company. Also the company is looking to expand its current capacity to 55 million sq mts by Mar'15.
Sanitaryware and Fittings is still operating at a very small level, and contributing to about 9-10% of total revenues. The good thing is to see that the sales of Sanitaryware jumped 83% yoy, this quarter. The percentage of revenues coming from this segment, is expected to be at same levels for some years.

Talking about the numbers, the company is growing at a cagr of 18.5% annually in sales in past 5 years, which is pretty good considering the amount of competition in the industry, and it is expected to grow at an equal or even better pace in coming years, with above factors.
Looking at recent Q2 FY'15 performance, the company reported sales growth of 22% and net profit growth of 68%. For the half year ending Sep'14, the company reported sales growth of 24% and net profit growth of 54% compared to half year ending Sep'13. The numbers looks pretty impressive, especially when the company is investing a lot in expansion and brand building.
As per management, irrespective of whether its a good year or bad year, the second half of fiscal is always better than the first half. So, the awesome results in first half is just an indicator of what is to come in second half of this fiscal.

Currently, Kajaria Ceramic and Somany Ceramics, both are trading around same valuation. However, margin expansion in Somany Ceramics later would be interesting as the P/E ratio will come down significantly, from current levels, which is around 37 or so.
In terms of market cap, Kajaria is trading almost 4 times to that of Somany, but they currently have about 4 times the NPM as that of Somany. So, it will be very interesting to see, what happens when margin expansion takes place in Somany, after so much of expansion and brand building.

Looking at all the above data, the company looks very strong fundamentally. The expensive valuation currently is justified and is likely to improve further, as future look very promising.

The only negative, would be the current hike in gas pricing, which is still moderate, when compared to what was decided earlier. However, in the long run, the company will get over these things, by price rise, and other factors. Hence for long term, it won't be a big problem.

No targets and no action will be recommended here. This is just a case of company, which one can study and take his/her actions accordingly.

Happy Investing!!!!