| Somany Ceramics Limited | ||||||
| Ratings placed on 'Watch Developing' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has placed its 'CRISIL AA-/CRISIL A1+' ratings on the bank facilities of Somany Ceramics Limited (SCL; a part of the Somany group) on 'Rating Watch with Developing Implications'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SCL, its joint ventures and associate companies -- Amora Tiles Pvt Ltd (ATPL), Somany Fine Vitrified Pvt Ltd (SFVPL), Somany Sanitary Ware Pvt Ltd (SSWPL), Amora Ceramics Pvt Ltd (ACPL), Acer Granito Pvt Ltd (AGPL), Vicon Ceramic Pvt Ltd (VCPL), Vintage Tiles Pvt Ltd (VTPL), Somany Bath Fittings Pvt Ltd (SBFPL), and Sudha Somany Ceramics Pvt Ltd (SSCPL). This is because SCL has investments in all these entities, and purchases finished material to market under its own brand, via long-term tie-ups with all these players. All the entities are collectively referred to as the Somany group. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position in the domestic tiles industry, backed by a strong brand and distribution network The Somany group is a leading player in the Indian tiles industry, with annual capacity of over 52 million square metre (MSM) per annum. Over the years, the group's management has established several brands, Somany, Somany Vitro, Somany Duragres, Somany VC, and Somany French Collection. These brands cater to various price ranges, and enjoy a strong recall. The group is currently focussing on the sanitary ware and bath ware segments, and drew revenue of Rs 120.4 crore and Rs 67.6 crore, respectively, from these segments, in fiscal 2019, as against Rs 96.2 crore and Rs 55.8 crore in fiscal 2018, respectively. It has nearly 10,000 touch points across India, with about 1,800 active dealers and 324 showrooms/experience centres. The group has also expanded its reach to the Tier-II and III cities, fuelled by rapid urbanisation and enhanced branding and marketing activities. * Well-diversified geographical and customer base Clientele includes dealers and institutional sellers, with the latter accounting for 30-35% of overall sales, thus restricting any stretch in the working capital cycle. In the retail segment, the group sells tiles to about 1,800 active dealers, and plans to add 100-150 dealers every year, to reduce customer concentration risk. Hence, the group is not susceptible to risks related to stretched working capital cycle. * Healthy financial risk profile, marked by efficient working capital management and asset-light model Capital structure is healthy, with total outside liabilities to adjusted networth (TOL/ANW) ratio at 1.4 times as on March 31, 2019. This is because of healthy accretion to reserves, efficient working capital management, and focus on asset-light expansion. Gross current assets reduced to 161 days as on March 31, 2019, from 173 days a year before, as receivables dropped to 89 days from 105 days over the same period, with enhanced discipline in collection. Debt protection metrics were also healthy, with interest coverage and net cash accrual to adjusted debt ratios at 3.6 times and 15%, respectively, in fiscal 2019. Repayment of existing debt and absence of any large capital expenditure plans should strengthen the financial risk profile in the medium term. Weaknesses * Exposure to intense competition and to cyclicality in the real estate segment The ceramic tiles industry is intensely competitive, and dominated by the unorganised entities. However, with recent changes in the industry, such as closure of ceramic units running on coal gasifiers, and implementation of the Goods and Services Tax (GST) and Real Estate (Regulation and Development) Act, 2016 (RERA), the market share of organised players has expanded. Although the Somany group is one of the leading players in the ceramic tiles industry in India, it also faces significant competition from 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 A2+'). Intense competition restricts profitability, given the delay in passing on cost hikes to customers. Further, any moderation in demand from real estate companies results in pricing pressure and lower offtake. Thus, the group reported flat revenue of Rs 1,713.9 crore in fiscal 2019 owing to muted demand in the wake of government reforms such as demonetisation, GST and RERA. * Vulnerability to fluctuations in prices of raw material and natural gas Power and fuel cost forms 15-25% of SCL's operating income. In fiscals 2018 and 2019, increase in gas price, following the sharp increase in crude oil prices, and flat realisations have led to a dip in profit for the Somany group. However, the decline in gas prices, starting from the last quarter of fiscal 2019, should continue and have a positive impact on margin of tile manufacturers. Liquidity: Strong Liquidity should remain strong. Out of Rs 120.00 crore raised through qualified institutions placement of equity shares in December 2015, the company has only utilised Rs 18.50 crore (including issue expenses of Rs 3.07 crore) and the balance Rs 101.50 crore has been temporarily invested in debt instruments/funds. This should act as a buffer to manage any planned investments in joint ventures or own capex, as and when required. Expected improvement in scale, along with moderate operating margin should ensure adequate net cash accrual for servicing of debt and covering working capital and modular capex requirement. Cash accrual of Rs 100-115 crore expected in fiscals 2020 and 2021, should comfortably cover the yearly maturing debt of around Rs 64 crore. Bank limit utilisation averaged around 83% during the 15 months ended June 30, 2019. Unencumbered cash and bank balance was Rs 31.2 crore as on March 31, 2019. Rating sensitivity factors Upward factor * Significant growth in revenue by more than 25% and profitability by 300 basis points * Prudent working capital management, leading to drop in receivables and debt levels Downward factor * Any major capex and increasing, working capital requirement * Significantly low cash accrual and profitability reduction by 150 basis points, weakening the financial risk profile |
| About the Group |
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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. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||
Annexure - List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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