Buy Somany Ceramics - Microsec

We rate Somany Ceramics Limited a BUY. The company was incorporated in 1969 by HL Somany as a Somany Pilkington's, which later became Somany Ceramics. The company's core business is to produce sanitary ware products. In the Indian tiles sector, Somany has achieved a clear leadership position by its innovative and futuristic approach. Somany Ceramics with the plants in Kadi (Gujarat) and Kassar (Haryana), with the production capacity of more than 19 million squares meters per annum is the producer of the highest quality of ceramic glazed tiles, vitrified tiles, sanitary ware or porcelain floor tiles. Currently, the company is planning to add thirteen new showrooms by the end of this year to increase the number to 100, including over 50 exclusive one.

Robust Growth in Business:

Despite slowdown in Real Estate Industry owing to high inflation coupled with high cost of capital, Somany Ceramics has maintained its earnings growth. The company's total Income stood at ~INR930 crores in FY12, registered a YoY growth of ~22%. CAGR growth of total income over the period of FY08-12 was registered at 27.43%. Moreover, the company has reported a YoY growth of ~11% to ~INR190 crores in the quarter ended June 2012.

Robust Growth in Profitability:

Somany Ceramics's strong and sustainable business structure coupled with strong brand and distribution network has helped the company to absorb the standing opportunity in the industry, which has boosted its topline and bottomline growth. Operating profit has grown at a CAGR of 18.91% over the period of FY08-12. Whereas, Profit After Tax (PAT) grew at a CAGR of 59.97% over the same period.

Focus on Growth via Inorganic Route:

Somany has acquired 26% stake each in Vintage Tiles Pvt. Ltd in October 2011 and Commander Vitrified Pvt. Ltd in April 2012. With these acquisitions it got access to 5.2 mn sq.mt. of capacity at a capital outlay of ~INR190 mn (including debt). This strategy enables access to capacity at lower capital requirements and thus, will improve the return ratios.

"Value -Added Products" Continue to Rise:

The contribution of higher strength and abrasion resistant quality of VC and Duragres tiles and the unique characteristic of digital tiles to the consolidated top-line increased to ~29% in Q1FY13 from ~17% in Q1FY12. We believe that despite rising cost of pressure there will be slight expansion in margin, backed by the expectation of contribution from the valueadded tiles to increase further.

Valuation

At the CMP of INR43.70, stock is trading at FY12 PE of 6x. The current valuation of 4.86x FY13E and 4.08x FY14E P/E look attractive. Hence, we recommend a BUY on the stock.

Key Concern

Any further downturn in the economy coupled with high inflation may hit the Real Estate sector further, which may hamper the company's earnings growth.

Source : Equity Bulls

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