Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Somany Ceramics Ltd (SCL; a part of the Somany group).

The rating continues to reflect group’s strong business risk profile supported by strong brand presence in the tile industry in the organised segment and diversified product portfolio.

SCL reported revenue growth of ~27% in fiscal 2022, to Rs. 2094 crore in fiscal 2022 against Rs. 1650 crore in fiscal 2021. This growth is driven by both volume growth and improved price realization owing to multiple price hike undertaken by SCL during last one year. The revenue is expected to improve by over CAGR of 12-15% driven by capacity enhancement, healthy demand from real estate industry, diversification in product mix. Further, the capacity expansion of 11 SQM in Kassar, Gujarat Plant and southern plant has successfully been commissioned during July, 2023. Consequently, total installed capacity has improved to ~74 MSM per year in fiscal 2023 from ~63 MSM per year during last fiscal. Though, timely ramp-up of enhanced capacities remains key monitorable. Operating margins of the company has declined to 9.98% in FY22 from 10-12% in past fiscals, due to increase in the raw material prices, rising fuel cost and freight cost etc. Sustenance of improved sales growth along with improvement in profitability levels over the medium term remain a key rating sensitivity factor.

The ratings continue to reflect the Somany group's established market position in the domestic tile industry, its well-diversified geographical reach and customer base, and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition and cyclicality in the real estate segment, and fluctuations in prices of raw material and natural gas.

Key Rating Drivers & Detailed Description

Strengths:

Established market position in the domestic tiles industry, backed by strong brand and distribution network

The group is a leading player in the Indian tiles industry, with annual capacity of about 74 MSM. Over the years, the management has established several brands, including Somany, Somany Vitro, Somany Duragres, Somany VC and Somany French Collection. These brands cater to various price ranges and enjoy strong recall. Revenue was Rs 2,093 crore in fiscal 2022, and sales in the first quarter of fiscal 2023 were Rs 559 crore.

Diversified geographical and customer base

The group caters to both dealers and institutional sellers. The latter, however, comprises only 30-35% of overall sales, thereby ensuring lower pressure on working capital management. Additionally, in the retail segment, the distribution network includes about 10,000 touch points across India, with about 2305 active dealers and 404 showrooms. The group plans to add 100-150 dealers every year. Presence in northern India remains strong, which accounted for over 44% of total revenue in fiscal 2022; the western and southern regions accounted for around 9% and 26%, respectively.

Healthy financial risk profile due to efficient working capital management and asset-light model

Total outside liabilities to adjusted networth ratio was estimated to be strong at 1.1 times as on March 31, 2022, supported by high accretion to reserves, efficient working capital management and asset-light model. Gross current assets reduced to 120 days from 143 days as on March 31, 2021, due to improvement in receivables to 42 days from 51 days, and channel financing facility offered to customers and distributors. Debt protection metrics were robust, with interest coverage and net cash accrual to adjusted debt ratios of 7.2 times and 30%, respectively, in fiscal 2022.

Despite planned debt-funded capital expenditure (capex) of Rs 170 crore in Somany Max Pvt Ltd, which would be funded through bank loan of around Rs 60 crore (rest through internal accrual), financial risk profile is expected to improve owing to sustained profitability and high accrual.

Weaknesses:

Exposure to intense competition and cyclicality in the real estate segment

The ceramic tiles industry is intensely competitive with many unorganised players. However, with closure of ceramic units running on coal gasifiers, and implementation of GST and Real Estate (Regulation and Development) Act, 2016, market share of organised players has expanded recently.

Despite being a leading player, the Somany group has to compete with other reputed brands such as Kajaria Ceramics Ltd, H & R Johnson (India) (a division of Prism Cement Ltd), Asian Granito India Ltd, and Orient Bell Ltd (rated ‘CRISIL A/Stable/CRISIL A1’). Hence, the ability to pass on any increase in raw material cost remains a key rating sensitivity factor. Also, any moderation in demand from real estate entities results in pricing pressure and lower offtake.

Vulnerability to fluctuations in raw material and natural gas prices

Raw materials comprise 45-50% of total operating cost, while gas and power costs account for 20-25%. Hence, even a slight variation in input prices can drastically impact profitability. In fiscal 2022, gas prices rose by about 70% following rise in crude rates, freight cost went up 15%, and raw material prices increased by about 10%. All these factors led to fluctuations in the operating margin of the group. The group undertook multiple price hikes in the fiscal, in line with industry trend. Improvement in profitability to 10-11% would be a key credit metrics over the medium term.

About the Group

SCL was incorporated in 1968, as Somany Pilkington’s Ltd (SPL), promoted by Mr H L Somany in collaboration with the UK-based Pilkington’s Tiles Plc (PTP). The Somany family purchased PTP’s stake in SPL in 1971 and the name was changed to the current one. SCL is listed on the Bombay Stock Exchange and National Stock Exchange. Mr Shreekant Somany is the chairman and managing director, and Mr Abhishek Somany, the Managing Director.

SCL manufactures ceramic tiles and glazed vitrified tiles, and trades in polished vitrified tiles, along with sanitary ware and bathroom fittings. SCL group has a combined tile manufacturing capacity of 73 MSM p.a. SCL group has two of its own manufacturing units at Kadi (Gujarat) and Kassar (Haryana); seven ancillary units of associates / subsidiaries and arrangements with other manufacturers. Own manufacturing accounts for approximately 50% of the total production, remaining is contributed by JVs and arrangement with other manufacturers. The company sells products under brands such as Somany, Somany French Collection, Somany Vitro, Somany Duragres, Somany VC, Somany Signature, Somany Glosstra, and Somany Slip Shield.

Majority-owned subsidiaries, ATPL and ACPL, manufacture ceramic wall glazed tiles, while SFVPL manufactures vitrified floor tiles. AGPL, in which SCL has a 26% stake, manufactures soluble salt and double charge vitrified tiles. All these subsidiaries/joint ventures have plants in Morbi (Gujarat). The plant under SSCPL (60% stake held by SCL) also commenced production on March 27, 2019, at Andhra Pradesh, and manufactures glazed vitrified tiles. In May 2018, SCL also acquired 51% stake in SBFPL, which manufactures and sells bath fittings such as faucets and showers.

Sudha Somany Ceramics Private Limited (SSCPL) is engaged in manufacturing of glazed vitrified tiles with installed capacity of 3.5 Million Square per Meter (MSM) per annum.

Somany Max Private Limited (SMPL) is subsidiary company of Somany ceramics with approx. 80% (approx.). SMPL is in the process of setting up a manufacturing facility for larges tiles/slab

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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