Ceramics Sector - April 2014

Sector Report
April 9, 2014
Ceramic Tiles
Riding on consumerism
Kajaria Ceramics Ltd.

Previous
Current
Global ceramic tiles is likely to reach 18,154.1 msm by CY18, signifying a CAGR of 8.9%
over CY12-CY18, as per industry. If we assume that the Indian ceramic tiles sector will
continue its current 14% CAGR till CY18, the Indian ceramic tiles sector is likely to
reach 1495.9 msm, 2.2x its current size. In our opinion, the current consumption CAGR
of 14% is sustainable owing to by favourable demographic profile of India, increasing
preference of Indian consumers for tiles in home improvement and likely recovery in
real estate and construction sector. Branding, increasing capacity and wider distribution
network is likely to add economic moat to companies, which is witnessing rising
competition from domestic and international players. This is likely to result in organised
segment growing at a higher pace than unorganised segment, which is currently
distributed in 1:1 ratio. We like Kajaria Ltd for its strong brand recognition, higher RoE
and efficient distribution network. We also like Somany Ceramics Ltd for its improving
RoCE, positive free cash flow and thrust on improving its brand identity.
CMP : Rs.368
Rating : HOLD
Rating : NR
Target : Rs.416
Target : NR
(NR-Not Rated)
Somany Ceramics Ltd.

Previous
Current
CMP : Rs.172
Rating : BUY
Rating : NR
Target : Rs.205
Target : NR
Key Highlights
Third largest and amongst fastest growing tiles market - India: Indian tiles sector, despite
being the third largest tiles market, is growing at the fastest pace amongst top five
markets in the world. The growth of Indian tile sector of 14% CAGR over CY08-CY14 is
more than 2x world average CAGR of 6.9% over the same period. Per capita consumption
of tiles in India is lowest among the top five countries, providing immense potential for
growth.
(NR-Not Rated)
Favourable country demographics: The key catalysts for rising consumption of tiles are
second largest and young population (median age of 25.5 years in 2010), rising disposable
income and increasing urbanisation. Consumerism is likely to fuel the demand for ceramic
products, which are discretionary in nature. Tier-2 and Tier-3 cities are likely to lead the
demand growth and urban / metro cities will add with replacement demand.
Expected recovery in real estate: As per Cushman and Wakefield, the total housing
demand is likely to be 88.78 mn units by 2017 owing to urbanisation and increasing
population. It expects 2015 to be the inflection year for commercial real estate sector,
as demand is likely to surpass supply due to expected improvement in economy. It
estimates Hotel inventory to increase by over 65% by 2017 and approximately 22 mn sq
ft of new mall supply to be added to the top eight cities by 2015.
Rising competition: Lured by the demographic profile and improving prospects of
housing and construction sector, many foreign companies are entering India with a view
to leverage the opportunity. RAK Cermics, leading global player in ceramic tile sector, is
expanding and is growing at 50% over the last two years. Monalisa Tiles, the third largest
tile manufacturer in the world, is venturing into India with an initial investment of USD
25 mn and plans to open 15 stores in FY15.
Daljeet S. Kohli
Head of Research
Mobile: +91 77383 93371, 99205 94087
Tel: +91 22 66188826
daljeet.kohli@indianivesh.in
Asset Light Strategy key to grow faster with profitability: Tiles being a volume play,
expansion are inevitable. To leverage the current opportunity and tackle with surplus
capacity situation, most companies are going slow on organic expansion plans and are
eyeing to partner with unorganised sector which constitutes ~50% of the total sector.
For organised players, the cost of capacity expansion is reduced and the already available
capacity enables immediate revenue generation lowering the payback period. For
unorganised players, there is a ready market for their production as organised players
are recognised by their brands.
Prerna Jhunjhunwala
Research Analyst
Mobile: +91 77388 92065
Tel: +91 22 66188848
prerna.jhunjhunwala@indianivesh.in
Financial Overview
Company
KajariaCeramics*
SomanyCeramics
CMP Rating Target

Sales(RsMn)
EBITDA(RsMn)
PAT(RsMn)
FDEPS(Rs)
RoE(%)
P/E(x)
(Rs.)
(Rs.) FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E
368 HOLD
416 18,611 22,020 26,448 2,723 3,505 4,314 1,208 1,642 2,206 16.0 20.7 27.8 25.5 22.8 22.5 23.0 17.8 13.3
172 BUY
205 10,462 12,088 15,881 814 742 1,046 316 286 466 7.4 12.0 15.8 15.3 19.1 21.0 23.4 14.3 10.9
Source: Company, IndiaNivesh Research; *Consolidated Financials
IndiaNivesh Research
IndiaNivesh Securities Private Limited

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.
Sector Report | Riding on consumerism
| Ceramic Tiles
Ceramic Tile Sector

India among fastest growing tiles market in the world
India holds 3rd position in the world consumption of ceramic tiles. Despite this, it is
among the fastest growing tiles market with consumption CAGR of 14% over CY08CY12 against world average CAGR of 6.9% over the same period, as per Ceramics
Wolrd Review. Indian consumption of tiles reached 681 million square meters (msm)
in CY12 against 403 msm in CY08.
As per the industry, global ceramic tiles is likely to reach 18,154.1 msm by CY18,
signifying a CAGR of 8.9% over CY12-CY18. Increasing construction activity in China
and India are likely to drive the growth of global ceramic tiles sector. If we assume
that the Indian ceramic tiles sector will continue its 14% CAGR till CY18, the Indian
ceramic tiles sector is likely to reach 1495.9 msm, 2.2x its current size.
World Ceramic Tile Consumption

Mn Sq Mtr
China
Brazil
India
Iran
Indonesia
Vietnam
Saudi Arabia
Russia
USA
Mexico
Others
Total
CY08
2830
605
403
265
262
220
136
191
211
177
3073
8373
CY09
3030
645
494
295
297
240
166
139
173
163
2883
8525
CY10
3500
700
557
335
277
330
182
158
186
168
3075
9468
CY11
4000
775
625
395
312
360
203
181
194
177
3210
10432
CY12 CAGR (%)

4250
10.7%
803
7.3%
681
14.0%
375
9.1%
340
6.7%
247
2.9%
230
14.0%
213
2.8%
204
-0.8%
187
1.4%
3382
2.4%
10912
6.8%
Source: Ceramic World Review, IndiaNivesh Research
Lowest per capita tiles consumption Immense potential

for growth
India has been increasing its market share in total consumption over the last few
years. Its market share in world consumption increased from 4.8% in CY08 to 6.2%
in CY09. This is the largest gain in share after China which grew its share by 515 bps
over the same period, considering the top four countries. Despite increase in market
share, the per capita consumption of tiles is lowest for India at 0.54 sq mtr against
Chinas 3.07 sq mtr, Brazils 4 sq mtr and Irans 4.84 sq mtr. This shows that the
potential for growth in Indian tile sector is exponential, which increases its
attractiveness in global landscape. In our opinion, the market share of Indian ceramic
sector is likely to reach 8.2% in CY18.
Indias increasing market share in tile consumption
%
15
38.9
38.3
37.0
35.5
33.8
10
5
5.8
4.8
6.0
5.9
6.2
0
CY08
CY09
Brazil
India
CY10
Iran
CY11
Indonesia
%
45
40
35
30
25
20
15
10
CY12
China (RHS)
April 9, 2014 | 2 of 39
| Ceramic Tiles
Lowest Per Capita Consumption of tiles
6
4.8
5
4.0
3.7
sq. mtr
4
3.1
3
2
1.0
0.5
0
China
Brazil
India
Iran
Indonesia
Vetnam
From deficit to surplus....

Of the top four countries, India was the only country who was net importer of
ceramic tiles till CY11. However, due to immense opportunity of growth, players
increased capacity (thereby production; 15.4% CAGR) at a higher pace than
consumption (14% CAGR) resulting in India having surplus production of tiles from
CY12. Excess capacity is likely to be used as an opportunity to export in countries
with less production which include Saudi Arabia, Russia, USA among others.
msm
China
Production
Consumption
Brazil
Production
Consumption
India
Production
Consumption
Iran
Production
Consumption
CY08
CY09
CY10
CY11
CY12
3400
2830
3600
3030
4200
3500
4800
4000
5200
4250
713
605
715
645
753
700
844
775
866
803
390
403
490
494
550
557
617
625
691
681
320
265
350
295
400
335
475
395
500
375
Fragmented industry; Organised sector market share at

50%
Indian tiles sector is a highly fragmented with unorganised players constituting 50%
of the sector. Morbi is the hub of unorganised tile manufacturers. They used to
under-report the production, thereby evading taxes and managing to sell the
products at lower prices than organised players. Moreover, imports have also been
a source of competition for the organised players. As a result, there has been stiff
competition in the tiles sector. With organised sector likely to grow at a higher rate
than the total sector, share of organised segment is likely to increase going forward.
April 9, 2014 | 3 of 39
| Ceramic Tiles
Key catalysts for rising consumption

Favorable demographic profile augurs well for
discretionary spending like ceramic tiles
As per United Nations forecast, Indias population is likely to surpass that of China
after 2020 and is likely to become the most populous country in the world. Young
population (median age of 25 yrs in 2010), rising household disposable income
(CAGR of 12.7% over 2004-2011) and lower dependency ratio (54.4% in 2010) are
the key drivers for consumption in India. Consequently, consumerism is likely to be
the key trend going forward and demand for discretionary products like tiles is likely
to increase with rising income.
China
2050
2045
2040
2035
2030
2025
2020
1.7
1.7
1.6
1.6
1.5
1.4 1.41.5
1.4
1.4
1.41.3 1.4
1.4
1.3
1.3
2015
1.1
1.3
1.3
1.2
1.1
2010
1.3
2005
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2000
Bn People
India population to be higher than China from 2020
India
Source: United Nations, IndiaNivesh Research
Lowest median age

50
46.3
44.4
45
38.2
Age (yrs)
40
35.3
35
29.6
25
25.3
20
37.7
33.3
30
40.6
36.7
28.4
23
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Brazil
China
India
US
April 9, 2014 | 4 of 39
| Ceramic Tiles
Lowest dependency ratio
(%) 70
65
60
63
50
54
51
45
48
55
66
63
61
64
55
49
48
44
40
47
43
35
30
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Brazil
China
India
US
12.7% CAGR increase in disposable household income

8,000
6671
7,000
US$ per household
6005
6,000
4913 4931
5,000
4395
4,000
2896
3,000
2,000
3290
3619
1679 1776
1,000
0
1990 1995 2004 2005 2006 2007 2008 2009 2010 2011
Source: Euromonitor International, IndiaNivesh Research
Urbanisation to fuel demand

India is in early stages of urbanisation. As per Census 2011, the urbanisation rate
improved from 27.8% in 2001 to 30% in 2011. Also, number of urban towns increased
to 7935 units in 2011 from 5161 in 2001. This signifies that there is likely to be an
increase in demand for products that are primarily considered urban, which includes
high-end ceramic tiles. High-end ceramic tiles are a discretionary range of products
which solves the dual requirement of home improvement as well as reduction in
pace of wear and tear of homes. The urbanisation rate is likely to reach 32.3% by
2021, which signifies an increase of 227 bps over the 2011-2021 periods. In our
opinion, this is likely to continue fuelling the demand for discretionary products
like ceramic tiles. This has also resulted in higher demand from Tier-2 and Tier-3
cities, which is the focus area for most tile companies.
April 9, 2014 | 5 of 39
| Ceramic Tiles
Increasing urbanisation rate
34%
32.3%
31.1%
32%
30.0%
30%
28%
28.9%
27.8%
26%
24%
2001
2006
2011
2016
2021
Source: MOSPI, IndiaNivesh Research
Rising demand from real estate

1.
Demand for housing to reach 88.78 mn units
by 2017
Housing
According to Cushman and Wakefield Research, the total housing demand in India
by 2017 is likely to be 88.78 mn units owing to rising urbanisation and increasing
population. The research also cites a study by LIC Housing Finance Ltd, which states
that improvement in housing sector has a positive impact on all building material
suppliers, architectural and interior designer spending and even financial institutions.
This signifies that growth in tiles sector is likely to continue for a foreseeable future.
Demand for housing to reach 88.78 mn units

Demand for Housing
Urban shortage in 2012
Rural shortage in 2012
Additional demand due to population growth in 2012-2017
Total demand
Units in Mn
18.78
43.67
26.33
88.78
Source: Cushman and Wakefield
2.
2015 expected to be inflection year
3.
65% increase in hotel inventory expected by
2017
Commercial Real Estate
The commercial office sector has seen deferment of supply due to slack in demand
and delays in regulatory approval. The top eight cities are likely to witness a total
supply of 143 mn sq ft over 2013-2017, according to Cushman and Wakefield. It
estimates that most of these projects are likely to be delivered in 2014 and 2015. It
expects 2015 to be the inflection year for commercial real estate sector, as demand
is likely to surpass supply due to expected improvement in economy. Most of the
commercial real estate consumes tiles signifying the potential demand growth.
Hotels
Hotel inventory is likely to increase by over 65% by 2017 and a total of around
51500 rooms are likely to be added over 2013-2017, as per Cushman and Wakefield
report. Despite the slower response, the Hospitality sector is likely to witness better
demand due to improved global economic conditions. Of the total expected supply
of hotel rooms in the next 5 years, midscale hotels are expected to see the highest
supply of 18,500 units, followed by luxury which is estimated at 10,300 units
contribute 36% and 20% to the total expected supply, while budget (9000 units)
Upscale (6800 units) and Upper Upscale (6900 units) are estimated to be contributing
approximately 44% to the total supply in the next 5 years. Barring luxury hotels,
most of the hotels use tiles for their flooring, which augurs well for the sector.
April 9, 2014 | 6 of 39
| Ceramic Tiles
Total hotel inventory supply over 2013-2017
60000
No. of Rooms
50000
6900
51500
Upper
upscale
Total
Expected
Inventory
6800
9000
40000
10300
30000
18500
20000
10000
0
Midscale
Luxury
Budget
Upscale
Source: Cushman and Wakefield
4.
22 msf of mall supply by 2015
Retail realty
Cushman & Wakefield Research estimates that the top eight Indian cities have a
total mall stock of approximately 66 million square feet (msf) in 2012. The mall
supply has been facing delays due to variety of reasons including developers facing
cash flow issues, leasing transactions taking longer time-frames, etc. It estimates
approximately 22 mn sq ft of new mall supply to be added to the top eight cities by
2015.
April 9, 2014 | 7 of 39
| Ceramic Tiles
Changing business dynamics

Focus on Brands
Brand - Key USP of companies to differentiate
Tiles have no major entry barriers. Product quality and designs also does not provide
much resistance to competition. Hence branding is the only unique selling point for
the companies to improve their recall in the minds of consumers. With rising
disposable income, consumers increasingly prefer branded products. Companies
such as Kajaria Ceramics and Somany Ceramics are increasing their expenditure on
advertising and sales promotion to create a better brand recall. Kajaria Ceramics
have maintained their advertisement spend at 1.7% of net sales over the last 5
years and Somany Ceramics Ltd have increased their advertisement spend to 1.5%
of net sales in FY13 from 0.9% in FY09.
Advertisement spend across major players
% of sales
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
FY09
Kajaria
FY10
Somany
FY11
Nitco
FY12
Orient Bell
FY13
Asian Granito
Source: Capitaline, Company, IndiaNivesh Research
Volume key driver for growth

With consumption of 681 msm against production of 691 msm, India turned net
exporter of ceramic tiles in CY2012. Due to favourable demographic profile and
expected improvement in prospects of housing and construction sector, more and
more players are entering India. Rising competition and surplus capacity is likely to
keep growth in average realisation of companies into pressure. Changing product
mix shifting towards glazed and polished vitrified tiles and digital tiles are likely to
provide cushion to the average realisation. In our opinion, volume is likely to be the
key growth driver for growth of companies.
Asset Light Strategy key to grow faster with profitability

Tiles being a volume play, expansion are inevitable. Greenfield and Brownfield
expansion would require investment in capex and time period for the capacity to
establish and begin production. To leverage the current opportunity and tackle with
surplus capacity situation, most companies are going slow on organic expansion
plans and are eyeing to partner with unorganised sector which constitutes ~50% of
the total sector. For organised players, the cost of capacity expansion is reduced
and the already available capacity enables immediate revenue generation lowering
the payback period. Also most of the unorganised players are based at Morbi, which
is near to consumer market, reducing logistics cost. For unorganised players, there
is a ready market for their production as organised players are recognised by their
brands.
April 9, 2014 | 8 of 39
| Ceramic Tiles
Key JV details
Acquirer company
Target company
Period
Kajaria Ceramics
Soriso Ceramics
Feb-11
Somany Ceramics
Vintage Tiles
Oct-11
H & R Johnson
Small Tiles
Nov-11
Kajaria Ceramics
Jaxx Vitrified
Jan-12
Nitco Tiles
New Vardhman Vitrified Pvt Ltd Mar-12
Kajaria Ceramics
Vennar Ceramics
Apr-12
Somany Ceramics
Commander Vitrified
Apr-12
Kajaria Ceramics
Cosa Ceramics
Oct-12
Somany Ceramics
Amora Tiles Private Ltd.
Aug-13
Somany Ceramics
Vicon Ceramics Private Ltd.
Aug-13
Somany Ceramics
Acer Granito Private Ltd
Aug-13
Source: Company, IndiaNivesh Research
Effective cost of
Capacity Equity
Cost
acquisition
(msm) stake (%) (Rs Mn) (Rs per sq. meter)
2.3
51
56.2
47.9
2.7
26
50.0
71.2
2.3
50
140.0
121.7
3.1
51
62.6
39.6
8.0
51
204.0
50.0
2.3
51
136.5
116.4
2.7
26
32.5
46.3
2.7
51
116.1
84.3
2.5
51
100.0
80.0
2.1
26
50.0
91.6
2.1
26
51.1
93.6
Product
Floor Tiles
Polished Vitrified Tiles
Glazed Floor Tiles
Vitrified and wall tiles
Value added wall tiles
Polished / Glazed Vitrified Tiles
Double-charge polished vitrified tiles
Ceramic Wall Tiles
Industrial Vitrified Tiles
Ban on coal based gasifier plants in Morbi; structurally

positive for organised segment
Gujarat Pollution Control Board banned the use of coal-based gasifiers in Morbi in
October 2013 and ordered to run the plants on Liquefied Natural Gas (LNG). This is
likely to reduce the competitiveness of the unorganised players as usage of LNG is
likely to increase their cost by ~30%-35%. This ban may bring the unorganised and
organised players to a level-playing field. This may force the unorganised players to
tie-up with organised players as it would enable higher capacity utilisation and sales
growth. Simultaneously it would reduce the need for organised players to go for
Greenfield / Brownfield expansion. This is likely to create a structurally positive
environment for the tile industry in entirety, and organised segment is likely to
benefit in particular. In our opinion, the organised segment is likely to grow at a
higher pace than industry, increasing their share going forward.
Key Risks
Rising competition
Lured by the demographic profile and improving prospects of housing and
construction sector, many foreign companies are entering India with a view to
leverage the opportunity. RAK Cermics, leading global player in ceramic tile sector,
is expanding and is growing at 50% over the last two years. Monalisa Tiles, the third
largest tile manufacturer in the world, is venturing into India with an initial
investment of USD 25 mn and plans to open 15 stores in FY15. Thus, rising
competition is not likely to allow significant improvement in profitability going
forward.
Rising power and fuel cost hindrance to accelerate

expansion
Power and fuel is the key cost for manufacturing tiles accounting for more than
12% of total sales of the companies. Rising issues on availability of gas and increasing
unit power cost is leading to higher cost for the domestic companies. Companies
are shifting their focus on improving their revenue mix towards value added products
to mitigate this risk.
April 9, 2014 | 9 of 39
| Ceramic Tiles
Valuation
Organised segment is likely to grow at a higher rate than the entire sector, gaining
market share in the total tile sector. It is following asset light strategy of entering
into JV with unorganised players and thereby increasing growth and improving its
profitability. However, going forward we expect the RoE to remain under pressure
as equity multiplier (from higher profits and equity infusion) is likely to act as a
dampener. This is likely to reverse from FY16E when the RoE is likely to increase,
though marginally.
Indian companies growing at higher rate than

global peers; higher growth opportunities
command higher valuation
As tile companies are not asset heavy and have low debt on their books, we would
be evaluating them on P/E basis. Due to their outsourcing strategy, P/BV would also
not be the correct measure to evaluate them. Indian tile companies (excluding Asian
Granito) are growing at average CAGR of 25% over FY13-FY16E period against global
peer average of 16.9% in the same period. The average RoE of Indian tile company
(excluding Asian Granito) is likely to be 20.9% and 21.7% in FY15E and FY16E against
global peers average of 32% and 32.4% respectively. India being the third largest
tiles market in the world and also growing at CAGR 14% provides immense growth
potential for organised segment. Indian tile companies are trading at average PE of
16.1x and 12.1x its FY15E and FY16E earnings. We are of the opinion that tile
companies will re-rate further when their RoEs start improving. This is likely to
happen only when the capacity utilisation of companies improves and equity infused
is fully utilised for operational purpose, which is likely to happen in FY16E. However,
earnings growth would enable the companies to maintain their current valuations.
We like Kajaria Ltd for its strong brand recognition, higher RoEs and efficient
distribution network. We also like Somany Ceramics Ltd for its improving RoCE,
positive free cash flow and thrust on improving its brand identity.
Relative Valuation
Particulars
Indian Tile Companies
Kajaria Ceramics
Somany Ceramics
Asian Granito #^
Average
Average (Excl. Asian Granito)
Global Tile Companies
RAK Ceramics UAE *#^
Saudi Ceramic *^
Dynasty Ceramic *^
AL-ANWAR CERAMIC *^
Topps Tiles @^
Average
Indian Sanitaryware Companies
HSIL ^
Cera Sanitaryware ^
Average
RoE (%)
P/E
EV/EBITDA
FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E
Sales CAGR (%)

FY13-16E
EPS CAGR (%)

FY13-16E
18.0
22.6
5.4
15.3
20.3
25.0
24.9
-2.6
15.8
25.0
32.5
23.0
6.8
20.8
27.8
25.5
15.3
5.1
15.3
20.4
22.8
19.1
5.6
15.8
20.9
22.5 25.9
21.0 18.8
N.A.
3.6
21.7 16.1
21.7 22.3
23.0
23.4
4.4
16.9
23.2
4.7
19.5
11.8
10.3
15.6
27.2
16.9
12.3
8.7
5.8
11.8
7.3
7.6
21.9
47.5
22.7
N.A
26.1
N.A.
20.7
49.6
23.5
N.A.
31.2
N.A.
19.4
52.7
24.0
N.A.
32.0
N.A. 10.7
17.0 16.8
56.0 16.7
24.1 18.2
N.A. 24.4
32.4 17.4
12.8
26.3
13.1
18.4
19.6
15.8
8.2
29.0
18.6
4.7
23.7
14.2
7.4
23.9
15.7
11.5 10.9
24.8 23.5
18.1 17.2
19.2
22.5
20.9
17.8
14.3
3.8
12.0
16.1
13.3 12.3
10.9
8.4
N.A.
3.9
12.1
8.2
12.1 10.4
11.2
9.5
3.9
8.2
10.3
9.1
7.0
3.7
6.6
8.0
7.1
5.7
N.A.
6.4
6.4
9.2
7.5
15.4
15.8
14.8
19.1
14.9
14.1
14.5
13.7
14.8
12.9
N.A. 10.3
12.0 12.8
12.4 12.1
11.8 13.9
11.9 16.0
12.0 13.0
8.5
7.5
12.1
11.5
11.1
11.9
11.0
11.2
10.5
9.7
10.0
9.8
N.A.
9.2
9.2
8.7
9.0
9.0
11.0
18.1
14.5
7.6
6.6
14.2 13.8
10.9 10.2
7.6
12.6
10.1
6.1
10.3
8.2
4.8
8.3
6.6
Source: Bloomberg, IndiaNivesh Research

* December year ending, @ September year ending
# FY13-FY15E estimates
^ Bloomberg Estimates
April 9, 2014 | 10 of 39
Initiating Coverage
April 9, 2014
Kajaria Ceramics Ltd.
Value added products through JVs to ride the consumer boom

Current
Kajaria Ceramics Ltd (KCL) is the largest manufacturer of branded tiles in India with a
market share of 10% in Indian tiles sector and 18% market share in organised tiles
sector. Kajaria, its flagship brand, is amongst the strongest brand in the sector. With
capacity expanding at a CAGR of 9.7% over FY13-FY16E, its FDEPS is likely to grow at
a CAGR of 25% over FY13-FY16E. Its asset light strategy is likely to stabilize asset
turnover, improve profitability, reduce debt to equity, reduce working capital days
and improve return on capital employed. We initiate coverage on the stock with a
HOLD rating and target price of Rs 416.
Previous
CMP : Rs.368
Rating : HOLD
Rating : NR
Target : Rs.416
Target : NR
(NR-Not Rated)
STOCK INFO
BSE
500233
NSE
KAJARIACER
Bloomberg
KJC IN
Reuters
KAJR.BO
Sector
Ceramic Products
Face Value (Rs)
2
Equity Capital (Rs mn)
151
Mkt Cap (Rs mn)
27,821
52w H/L (Rs) (Adj.)
370/177
3m Avg Daily Volume (BSE + NSE)
87,426
SHAREHOLDING PATTERN
(as on 31st Dec. 2013)
Promoters
FIIs
DIIs
Public & Others
52.1
25.6
3.8
18.5
Source: BSE
STOCK PERFORMANCE (%) 1m

KAJARIA CERAMICS
18
SENSEX
2
3m
22
8
12m
93
21
Source: Capitaline, IndiaNivesh Research
KAJARIA CERAMICS v/s SENSEX

220
200
180
160
140
120
Key Highlights
Kajaria companys USP: Kajaria is amongst the strongest tile brand in the sector and
is the key differentiator against competition. The company has been consistently
spending 1.7% of its sales on advertisement to enjoy 18% market share and have top of
the mind brand recall. We expect that it will continue spending on creating a stronger
brand to compete with rising competition.
Asset light strategy to expand capacity: KCL has been expanding its capacities significantly
by entering into joint ventures to make use of readily available capacity, reduce its payback
period and increase return on investment. Over FY09-FY13, its capacity increased at a
CAGR of 20% to reach 43.6 msm in FY13. This is likely to reach 54.1 msm in FY16E,
mainly driven by JVs, which are likely to constitute 42% of total capacity.
Shift towards value added products: KCL has been focusing on value added products
like polished / glazed vitrified tiles and digital tiles to improve its margins. Apparently,
all the JVs have also been in the area of value added products. With rising share of JVs in
total sales, the profitability of the company is likely to improve. EBITDA and PAT margins
are likely to reach 16.3% and 8.3% in FY16E from 15.1% and 6.5% in FY13.
Improving solvency: Debt to equity of the company has steadily reduced to 0.9x in FY13
from 1.3x in FY11. We expect that it to reduce further to 0.2x in FY16E. This improvement
is likely to be on account of higher sales with improving profitability, reducing working
capital days which is likely to free capital and fresh issue of equity shares and warrants.
Lower debt to equity is also likely to improve interest coverage ratio to 10.4x in FY16E
from 4.5x in FY13.
Stable RoCE of 30%, RoE reduced but healthy: Rising profitability and stable asset
turnover is likely to stabilise RoCE at 30% over the next 3 years. Reducing debt to equity
on account of lower debt, higher profits and recent equity infusion is likely to lower
equity multiplier. RoE is likely to reduce to 22.5% in FY16E from 32.5% in FY13. In our
opinion, this reduction is healthy as it is on account of lower equity multiplier (due to
asset light strategy), which may start improving with increase in debt or lower than
proportionate increase in equity.
100
80
60
Valuations
40
Kajaria Ceramics
08/03/2014
08/02/2014
08/01/2014
08/12/2013
08/11/2013
08/10/2013
08/09/2013
08/08/2013
08/07/2013
08/06/2013
08/05/2013
08/04/2013
20
Sensex
At CMP of Rs 368, the stock trades at P/E multiple of 17.8x and 13.3x its FY15E and
FY16E earnings of Rs 20.7 and Rs 27.8 per share respectively. In our opinion, the stock is
unlikely to re-rate further till its RoE improves and the further potential for upside will
emerge from earnings growth. We value the stock at PE of 15x its FY16E FDEPS of Rs 27.8
to arrive at target price of Rs 416.
Daljeet S. Kohli
Head of Research
Mobile: +91 77383 93371, 99205 94087
Tel: +91 22 66188826
Prerna Jhunjhunwala
Research Analyst
Mobile: +91 77388 92065
Tel: +91 22 66188848
Financial Performance
YE March (Rs Mn)
FY13
FY14E
FY15E
FY16E
Net Sales EBITDA

16109
2435
18611
2723
22020
3505
26448
4314
PAT
1045
1208
1642
2206
FDEPS(Rs) RoCE(%) RoE(%)

14.2
30.8
32.5
16.0
28.9
25.5
20.7
28.9
22.8
27.8
30.3
22.5
P/E(x) EV/EBITDA(x)
25.9
12.3
23.0
11.2
17.8
9.1
13.3
7.1

Kajaria Ceramics Ltd. | Value added products through JVs to ride the consumer boom
|Ceramic Tiles
Company Background
Kajaria Ceramics Ltd is the largest player of branded tiles in India with a market
share of 10% in Indian tiles sector and 18% market share in organised tiles sector. It
is in the business of manufacturing, branding and selling of almost all segments of
tiles namely, ceramic tiles, polished vitrified tiles, glazed vitrified tiles and digital
tiles for floor and wall applications. The company has been expanding its
manufacturing capacity organically as well as inorganically. Its current capacity stands
at 45.2 mn square meters (msm) of tiles manufactured at 7 plants spread across
the country (including joint venture capacities).
Kajaria is a strong brand in the tiles sector which is distributed through an extensive
distribution of dealers, sub dealers and showrooms. It also markets international
tile brands, bath ware and wooden flooring solution which are distributed through
the Kajaria World retail chain. Though insignificant, Kajaria Ceramics also exports
its products to more than 20 countries across the world.
Product-wise capacity details (msm)

Manufacturing Capacity
Sikandrabad (Uttar Pradesh)
Gailpur (Rajasthan)
Morbi (Gujarat)
Vijayawada (Andhra Pradesh)
Total
% Share
Ceramic Tiles
3.5
15.5
4.6
2.3
25.9
57.3

2.0
3.0
8.4
0.0
13.4
29.6
Glazed Vitrified Tiles Total

2.9
8.4
3.0 21.5
0.0 13.0
0.0
2.3
5.9 45.2
13.1 100.0
% Share
18.6
47.6
28.8
5.1
100.0
Product Profile
Product
Ceramic wall and floor tiles
Glazed Vitrified Tiles
Manufacturing
locations
4
5
2
Capacity
(msm)
25.9
13.4
5.9
Price - Range
(Rs / sq. mtr)
225-1000
425-1200
600-1800
Revenue Mix (%)

FY13
44%
39%
15%
April 9, 2014 | 12 of 39
|Ceramic Tiles
Investment Rationale
In a sweet spot to leverage the leadership position
Indian tiles sector has been growing at a CAGR of 14% over CY08-CY12 to reach 681
msm in CY12. As per the industry, the sector is likely to continue its growth rate
owing to low per capita consumption, favourable demographic profile of the country
and likely improvement in the construction sector. In FY13, Kajaria Ceramics was
the second largest player in the organised segment with H&R Johnson being the
largest player in the sector. However, in 9mFY14 the company gained leadership
position with net sales of Rs 13554.9 mn against H&R Johnsons net sales of
Rs 12674.2 mn. Kajaria, being the largest player in the organised segment and having
strong positioning, is in a sweet spot to leverage the increasing pie of the sector.
Market Share (FY13)
Others
19.9%
H&R Johnson
19.1%
Orient Bell
Ceramics
6.5%
Kajaria Ceramics
18.1%
RAK Ceramics
8.3%
Asian Granito
7.4%
Nitco Tiles
9.2%
Somany Ceramics
11.6%
Source: Company; IndiaNivesh Research
Focus on asset-light model; JV is the preferred route

Greenfield expansions are turning expensive due to rising land prices, rising power
and fuel cost and gas shortage problems. KCL is entering into JV with unorganised
players (~50% of the industry) to take advantage of the already available capacity in
the industry. For KCL, the cost of capacity expansion is reduced and the already
available capacity enables immediate revenue generation lowering the payback
period. Also most of the unorganised players are based at Morbi, which is near to
consumer market, reducing logistics cost. For unorganised players, there is a ready
market for their production as organised players are recognised by their brands,
resulting in higher capacity utilisation which enables better return on investment.
Going forward, Kajaria plans to enter into more JVs to increase its capacity and
thereby improve its profitability.
JV Details
JV Partners
% stake Period
Location
Soriso Ceramic
51
February, 2011
Morbi, Gujarat
Jaxx Vitrified
51
January, 2012
Vennar Ceramics
51
April, 2012
Morbi, Gujarat
Vijaywada,
Andhra
Pradesh
Capacity
2.30 MSM further
expanded to 4.60 MSM
3.10 msm (brand new
plant)
2.30 msm (brand new plant
with digital printing
machine)
Cosa Ceramics
51
October, 2012
Morbi, Gujarat
2.70 MSM (brand new

plant)
Product
Floor tiles (60x60 cms)
Polished vitrified tiles
(60x60 cms)
Value added wall
tiles (30x45 cms and
30x60 cms)
Double-charge
polished vitrifi ed tiles
(60x60 cms)
Cost of Acquisition
(Rs Mn)
Effective Cost
(Rs per msm)
56.2
47.9
62.6
39.6
136.5
116.4
116.1
84.3
April 9, 2014 | 13 of 39
|Ceramic Tiles
Capacity additions to continue; likely to reach 54.1 msm

by FY16E
As tile manufacturing is a volume play, expansions are inevitable. KCL has been
continuously expanding its manufacturing capacity to reach 45.2 msm in Q3FY14
from 21 msm in FY09. There are no major entry and exit barriers in the tile business.
Hence, companies would have to continue expanding faster than industry to gain
market share and ensure dominance amongst peers. The company has been adding
capacities both, organically and inorganically, to gain leadership position in the sector.
Planned capex of Rs 4000 mn; funding via

internal accruals and equity infusion
KCL has planned capex of Rs 4000 mn over FY14E-FY15E mainly to increase capacity,
convert ceramic capacity to vitrified products, set up sanitaryware plant, enter new
JVs and general maintenance capex. In JVs, the company is increasing capacities via
Jaxx and Cosa expansion (4.5 msm and 3 msm respectively) and acquisition made
by Jazz (51% subsidiary) (2.6 msm) altogether at the cost of Rs 1555 mn. It is also
converting some of its existing capacities to vitrified tiles at the cost of Rs 500 mn.
The total capex of Rs 4000 mn is being by funded by fresh equity infusion and warrant
for a total value of Rs 1500 mn and the rest is likely to be funded by internal accruals.
Going forward, its capacity is likely to reach 54.1 msm (including JV capacity) by
FY16E, which signifies a CAGR of 14.4% over FY09-FY16E. The company is primarily
expanding via joint venture route which is likely to gain share in the total capacity.
The key point to note is that we have not assumed any new JV (other than publicly
announced). As per the management, it is constantly looking to enter into more
JVs, which may augment the operational capacity at faster pace.
Capacity increase at a CAGR of 14.4% over FY09-FY16E
35
28.3
Mn Sq. Meters
30
25
28.3
28.3
29.9
31.3
31.3
FY15E
FY16E
23.4
21
20
15
10
5
0
FY09
FY10
FY11
FY12
Own
FY13
FY14E
JV
Revenue mix shifting towards value-added products

KCL is focusing on value added-products including polished vitrified tiles, glazed
vitrified tiles, and digital tiles. All of the JVs entered by the company have been
under the high-end products, which provide better margins. Even in own capacity,
the company has expanded in vitrified segment. These value-added products have
higher margin as compared to basic ceramic tiles. It provides cushion to the company
in scenarios of rising cost structure, especially power and fuel. With rising share of
JVs in the revenue mix, the share of value-added portfolio is likely to increase further.
April 9, 2014 | 14 of 39
Product-wise revenue mix (FY13)
|Ceramic Tiles
Rising share of JV in revenues imply swing towards value-added products
Others, 2%
100%
Glazed Vitrified
Tiles, 15%
90%
80%
Ceramic
Tiles, 44%
27.2
34.9
70%
60%
20.7
18.8
16.7
4.6
17.8
28.9
31.1
37.1
60.5
55.0
50.3
50.2
46.2
FY13
FY14E
FY15E
FY16E
50%
Polished
Vitrified
Tiles, 39%
40%
30%
20%
10%
0%
FY12
Own
JV
Outsource
Highest spend on advertisement create strong brand

positioning
Highest and consistent spend on advertisment
led to strong brand Kajaria
With rising aspirations of growing middle-class population, improving demand from

Tier-2 and Tier-3 cities and increasing usage of tile in home improvement, branded
players have started getting an edge over the unbranded players. KCL has been
selling the products under the flagship brand of Kajaria. It also sells sanitaryware
under the brand name of Vitra, which are imported products. The company has
been investing 1.7% of its revenues in advertisements and sales promotions to
improve its visibility. With increasing revenues, advertisement cost also grew at a
CAGR of 24% over FY09-FY13 period. We believe advertisement spend per unit is
likely to increase further to maintain its leadership position and improve its market
share. However, it is not likely to increase at same pace of revenues, providing
cushion to margins.
Advertisemet spend of Kajaria highest among peers
% of sales
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1.7
1.7
FY09
Kajaria
FY10
Somany
1.7
FY11
Nitco
1.7
FY12
Orient Bell
1.7
FY13
Asian Granito
Source: Capitaline, Company, IndiaNivesh Research
April 9, 2014 | 15 of 39
|Ceramic Tiles
Advertisement and selling cost per unit likely to increase

RsRs
perper
msmunit
6.5
6.6
6.4
6.2
6.0
6.0
5.8
5.8
FY13
FY14E
5.8
5.6
5.5
5.5
FY11
FY12
5.4
5.2
5.0
4.8
FY15E
FY16E
Strengthening distribution network

Most efficient distribution network; highest
revenue per dealer
Individuals contribute 70% to the sales of the company for whom primary source is
network of dealers and showrooms. To ensure appropriate availability of products,
the company has been continuously expanding its distribution network. KCL products
are made available across the country through an extensive distribution network
of dealers, subdealers and showrooms (which are mainly franchisee). The company
has expanded its distribution network from 350 dealers in 2001 to ~825 dealers in
2013. The imported tiles are marketed through the Kajaria World retail chain, which
is also majorly operated via franchise route. KCL has the most efficient dealer
network in the sector with FY13 revenue per dealer at Rs 32.1 mn aganist H&R
Johnsons Rs 15.3 mn and Somanys Rs 10.5 mn.
Highest revenue per dealer (FY13)
Rs
35
32.1
30
25
20
15.3
15
10.5
8.5
10
5
1.9
0
Kajaria
Somany*
H&R Johnson
Nitco
Orient Bell
Source: Company annual reports, IndiaNivesh Research

*considered active dealers
April 9, 2014 | 16 of 39
|Ceramic Tiles
Distribution Model
Kajaria distribution mix

Indivudals
Corporate
(70% of revenue)
(30% of revenue)
Dealers / Subdealers
Showrooms
Major clientele include

Buidlers, hospitals, IT,
Hotels, Retails among
others
Distribution Network
Showroom / Dealer
Offerings
A stand alone shop that gives dedicated space to all tile verticals.
A stand alone shop that gives 2000 sq. ft. + dedicated space to high end tiles made
or imported by the company.
A shop where a dealer gives dedicated space for display of Ceramic Wall & Floor
Tiles without keeping any other ceramic tile brands.
A shop in shop concept where dealer gives a dedicated space to Polished Vitrified or
Glazed Vitrified Tile verticals without keeping any other vitrified tile brands.
Multi brand dealers

April 9, 2014 | 17 of 39
|Ceramic Tiles
Financial Performance FDEPS likely to

grow at CAGR of 25%
Revenue likely to grow at a CAGR of 18% over FY13-FY16E
Higher capacity and better realisation lead to
revenue CAGR of 18% over FY13-FY16E
The net sales of KCL reached Rs 16108.8 mn in FY13 from Rs 9523.1 mn in FY11,
signifying a CAGR of 30.1%. This was driven by volume CAGR of 23.9% over the
same period, reaching 45.6 msm in FY13 from 29.7 msm in FY11. Going forward,
net sales of the company is likely to reach Rs 26447.8 mn in FY16E, signifying a
CAGR of 18% over FY13-FY16E period. The lower projected CAGR growth as
compared to historical CAGR can be attributed to two factors, viz. 1. Base effect
and 2. No new capacity assumed for FY16E. In our opinion, the growth rate will be
higher if the company announces another JV or expansion plan, which it may
announce to maintain its leadership position and market share. The projected 18%
CAGR is likely to be driven by 9.8% volume growth and 7.5% average realisation
growth. Despite rising competition, average realisation growth of 7.5% is higher
than historical 5% CAGR, owing to changing revenue mix and shift to value added
products.
Volume CAGR of 9.8% over FY13-FY16E
Average realisation to grow at 7.5% CAGR over FY13-FY16E
70
500
60.4
50.6
45.6
50
30
10.1
39.8
40
29.7
10.3
10.6
8.2
13.6
350
19.2
15.0
9.4
10
20.3
27.1
26.9
401.8
400
11.1
10.6
20
26.9
438.2
450
54.8
Rs per msm
Mn square meters
60
329.9
FY11
FY12
353.2
367.8
291.0
250
200
150
30.0
29.2
300
320.5
100
50
FY11
FY12
Own
FY13
FY14E
JVs Outsourced/Imports
FY15E
FY16E
FY10
FY13
FY14E
FY15E
FY16E
JV likely to contribute 37.1% to sales in FY16E
26,448
Rs Mn
25000
22,020
18,611
20000
16,109
13,115
15000
10000
9,523
5000
0
FY11
FY12
FY13
FY14E
FY15E
Own
JVs
Outsourced/Imports
FY16E
April 9, 2014 | 18 of 39
|Ceramic Tiles
Shift toward high-end products lead to improving margins

EBITDA of KCL stood at Rs 2435.4 mn in FY13 against Rs 1477 mn in FY11, CAGR of
28.4%. However, EBITDA margin almost remained flat around 15-15.5% over the
period. This is on account of more than proportionate increase in power and fuel
cost which zoomed to 19% of net sales in FY13 as compared to 9.8% in FY11.
However, cost optimisation strategies and operating leverage aided the company
to maintain its margins. KCL has been focusing on value-added products to improve
its sales and market positioning. Consequently, all the expansions and JVs in the
last 2-3 years have been in value-added segment. Also, the share of outsourced
products, which is low margin business, is likely to decrease to 16.7% in FY16E from
45.8% in FY11. These strategies are likely to improve its EBITDA margin to 16.3% in
FY16E from 15.1% in FY13. EBITDA is likely to grow at a CAGR of 21% over FY13FY16E period reaching Rs 4314.4 mn.
Operating cost structure
100
Raw material and power - key costs
% of Sales
80
9.8
16.1
19.0
19.8
21.6
23.6
56.4
49.6
46.5
45.8
44.0
42.7
FY11
Raw Material
FY12
60
40
20
0
FY13
FY14E
Power and Fuel
Adv and Selling
FY15E
FY16E
Employee
Administration
Operating Exps
EBITDA margin improve 120 bps over FY13-FY16E

5000
16.3%
4500
4000
15.5%
15.5%
14.6%
3000
15.0%
2500
14.5%
4,314
2000
3,505
1500
1000
500
16.5%
16.0%
15.1%
3500
Rs Mn
15.9%
15.6%
17.0%
1,477
2,047
2,435
14.0%
13.5%
2,723
13.0%
12.5%
12.0%
FY11
FY12
EBITDA
FY13
FY14E
FY15E
FY16E
EBITDA Margin (%)
Debt to equity to decline to 0.2x in FY16E; interest coverage

to increase to 10.4x
Debt to equity of the company has steadily reduced to 0.9x in FY13 from 1.3x in
FY11. This is mainly on account of increasing profits in absolute terms and thrust on
debt reduction. Going forward, we expect the debt to equity to reduce to 0.2x in
FY16E. This improvement is likely to be on account of higher sales with improving
April 9, 2014 | 19 of 39
|Ceramic Tiles
profitability, reducing working capital days which is likely to free capital and fresh
issue of equity shares and warrants. Lower debt to equity is also likely to improve
interest coverage ratio to 10.4x in FY16E from 4.5x in FY13.
Improving solvency position
1.4
1.3
10.0
Debt to equity likely to reduce to 0.2x, interest

coverage increase to 10.4
times (x)
1.0
1.0
0.8
0.6
4.0
12.0
3.5
8.0
6.4
0.9
4.5
5.2
0.4
6.0
4.0
0.5
2.0
0.3
0.2
times (x)
1.2
10.4
0.2
0.0
0.0
FY11
FY12
FY13
FY14E
Debt to Equity
FY15E
FY16E
Interest Coverage (RHS)
Working capital days reduce to 41.2 days

12.3
12.2
13
11.7
50
12
11
40
In Days
11.3
9.7
10
30
8.2
20
30.0
35.6
44.8
44.5
42.7
9
41.2
10
6
FY11
FY12
NWC Days
FY13
FY14E
FY15E
As % of Sales
60
FY16E
NWC as % to sales (RHS)
PAT margin to increase to 8.3%, FDEPS CAGR of 25%, PAT

CAGR of 28%
Profit after tax of KCL increased to Rs 1045.1 mn in FY13 from Rs 606.2 mn in FY11,
CAGR of 31.3%. This was almost in line with sales CAGR of 30%. However, going
forward, operating leverage is likely to show a significant positive impact on
bottomline. Net profit is likely to reach Rs 2206.1 mn in FY16E growing at a CAGR of
28.3% over FY13-16E period. Lower than proportionate increase in fixed costs like
depreciation and interest and higher EBITDA margin is likely to yield 185 bps
expansion in PAT margin. PAT margin is likely to reach 8.3% in FY16E from 6.5% in
FY13. Consequently, FDEPS is also likely to grow at a CAGR of 25% to reach Rs 27.8
in FY16E from Rs 14.2 in FY13. FDEPS CAGR is lower than PAT CAGR of 28.3% due to
issuance of new shares and warrants (which is likely to be converted in FY15E) worth
Rs 1500 mn.
April 9, 2014 | 20 of 39
|Ceramic Tiles
PAT CAGR of 28.3% over FY13-16E

%
Rs Mn
8.3
2500
7.5
2000
6.4
6.2
6.5
9
8
6.5
7
6
1500
5
2,206
1000
1,642
500
606
809
1,045
1,208
2
1
0
FY11
FY12
FY13
PAT
FY14E
FY15E
FY16E
PAT Margin
FDEPS CAGR of 25% over FY13-FY16E

Rs
30
34.4
33.4
35
29.2
29.2
30
25
25
20
20
15
20.7
10
5
27.8
12.5
FDEPS CAGR of 25%; PAT CAGR of 28.3%
8.2
11.0
14.2
%
15
10
16.0
0
FY11
FY12
FY13
FDEPS
FY14E
FY15E
FDEPS Growth (RHS)
FY16E
Return ratios under pressure, though healthy

Stable RoCE; RoE lower on account of lower
equity multiplier
Rising profitability and stable asset turnover is likely to improve RoCE, though
marginally. RoCE which improved from 23.3% in FY11 to 30.8% in FY13 is likely to
reach 30.3% in FY16E. Reducing debt to equity on account of lower debt, higher
profits and recent equity infusion is likely to lower equity multiplier. RoE is likely to
reduce to 22.5% in FY16E from 32.5% in FY13 and 27.2% in FY09. In our opinion,
this reduction is not unhealthy as it is on account of lower equity multiplier (due to
asset light strategy), which may start improving with increase in debt or lower than
proportionate increase in equity.
April 9, 2014 | 21 of 39
|Ceramic Tiles
RoCE stable, healthy RoE

34%
32%
30%
28%
26%
24%
22%
20%
18%
27.2%
32.1%
32.5%
31.5%
30.8%
28.9%
25.5%
28.9%
22.8%
30.3%
22.5%
23.3%
FY11
FY12
FY13
FY14E
RoCE
RoE
FY15E
FY16E
Key Risks
Demand slowdown
Tiles are discretionary products; the purchase of which can be postponed for future.
Low consumer confidence, rising unemployment or job insecurity and lower growth
of the economy may impact the demand of tiles. Also, slower recovery in real estate
and construction sector may impact the demand. This may have an adverse impact
on our revenue and profitability projections. However, the leadership position of
the company may be able to counter demand slowdown.
Rising competition
Competition in the sector is rising as India is the third largest market of ceramic
tiles in the world and simultaneously growing at 14% CAGR over CY08-12 period.
Rising competition is likely to pose a major challenge to increase sales especially
realisations. In the event of appreciating rupee, the risk of cheaper imports may
also increase. If the company is not able to increase its average realisations, our
estimates would face a downward risk.
Rising cost of power and fuel

Power and fuel is one of the major costs of KCL which has increased to 19% of sales
in FY13 from 9.8% of sales in FY11. Two major factors leading to this stupendous
rise are: 1) constant increase in the price of electricity cost and major fuel, i.e. gas
and 2) the declining share of outsourced products which are majorly traded products.
However, the company is trying to mitigate this risk via improving the share of valueadded products in the revenues. However, we envisage that power cost is likely to
be one of the main hindrances in increasing EBITDA margin, in the event of company
not being able to improve its revenue mix.
Sensitivity of change in power and fuel cost (as % os sales) on FDEPS

Power & Fuel / FDEPS 100 bps 50 bps Base Case 50 bps 100 bps
FY15E
22.6
22.1
21.6
21.1
20.6
% Change in FDEPS
-9.2
-4.6
0.0
4.6
9.2
FY16E
24.6
24.1
23.6
23.1
22.6
% Change in FDEPS
-8.2
-4.1
0.0
4.1
8.2
April 9, 2014 | 22 of 39
|Ceramic Tiles
Valuations
At CMP of Rs 368, the stock trades at P/E multiple of 17.8x and 13.3x its FY15E and
FY16E earnings of Rs 20.7 and Rs 27.8 per share respectively. Kajaria Ceramics Ltd is
the largest manufacturer of ceramic tiles in India and hence in a sweet spot to
leverage the India consumption story. Its continuous thrust on brand, increasing
capacity, efficient distribution network and focus on value added products is likely
to improve its margins. Its asset light strategy is likely to provide operating and
financial leverage, thereby providing FDEPS CAGR of 25% over FY13-FY16E, better
solvency position and stable RoCE.
Over the last 5 years, the stock has re-rated considerably wherein its 1-yr forward
PE average was 10x over FY09-FY14, while for FY14E this average stood at 13.4x. In
our opinion, the stock is unlikely to re-rate further till its RoE improves and hence
further potential for upside will emerge from earnings growth. We value the stock
at PE of 15x its FY16E FDEPS of Rs 27.8 to arrive at target price of Rs 416. We initiate
coverage on the stock with HOLD rating, providing a potential upside of 13%.
1-year forward P/E Chart
Rs
600
500
400
300
200
100
Price
5x
10x
15x
20x
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
25x
April 9, 2014 | 23 of 39
|Ceramic Tiles
Consolidated Financial statements

Balance sheet
Income statement
Y E March (Rs m)
Net sales
Growth %
Expenditure
Raw Material
Power and Fuel
Employee
Others
EBITDA
Growth %
EBITDA Margin %
Other Income
Depreciation and amortisation
EBIT
EBIT Margin %
Interest
Exceptional/Extraordinary item
PBT
PBT Margin %
Tax
Effective tax rate %
PAT
Share of Minoity Interest/Associates
Net Income
Growth%
PAT Margin %
FY 12 FY 13
13115 16109
37.7 22.8
11068 13673
6508 7485
2107 3066
1072 1364
1381 1759
2047 2435
38.6 19.0
15.6 15.1
30
41
393
446
1684 2031
12.8 12.6
485
454
0
0
1199 1577
9.1
9.8
381
499
32
32
818 1078
10
33
809 1045
33.4 29.2
6.2
6.5
FY 14E FY 15E
18611 22020
15.5 18.3
15888 18515
8519 9683
3692 4754
1719 1945
1958 2133
2723 3505
11.8 28.7
14.6 15.9
60
65
478
577
2306 2993
12.4 13.6
443
470
0
0
1863 2523
10.0 11.5
590
800
32
32
1272 1723
64
81
1208 1642
15.6 35.9
6.5
7.5
FY 16E
26448
20.1
22133
11283
6247
2215
2389
4314
23.1
16.3
71
622
3763
14.2
363
0
3400
12.9
1078
32
2322
116
2206
34.4
8.3
Y E March (Rs m)
Share Capital
Share Warrants
Reserves & Surplus
Net Worth
Minority Interest
Total debt
Net defered tax liability
Total Liabilities
Gross Fixed Assets
Less Depreciation
Capital Work in Progress
Net Fixed Assets
Investments
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balance
Loans & advances
Other Current assets
Current Liabilities & provisions
Net Current Assets
Mis Exp not written off
Total assets
FY 12 FY 13
147 147
0
0
2674 3462
2821 3609
72 275
2782 3202
644 656
6319 7742
7827 9195
2617 2995
24
78
5233 6278
1
1
3676 4197
1865 2197
1189 1436
72
55
548 504
2
5
2591 2734
1085 1463
0
0
6319 7742
FY 14E
151
250
5466
5867
339
2920
675
9801
10950
3472
20
7497
1
5355
2512
1675
41
1121
5
3052
2303
0
9801
FY 15E
159
0
8400
8559
420
2766
700
12445
13206
4050
30
9187
1
6824
2929
1960
88
1842
5
3566
3258
0
12445
FY 16E
159
0
10906
11065
536
2135
734
14470
14214
4672
30
9572
1
9074
3438
2327
739
2565
5
4177
4898
0
14470
FY 12 FY 13
11.0 14.2
16.3 20.3
38.3 49.0
FY 14E
16.0
22.3
77.6
FY 15E
20.7
27.9
107.7
FY 16E
27.8
35.6
139.2
Key ratios
Cash Flow
Y E March (Rs m)
PBT
Adjustment for:
Depreciation
Others
Changes in working capital
Tax expenses
Cash flow from operations
Capital expenditure
Free Cash Flow
Others
Cash flow from investments
Interest
Loans availed or (repaid)
Proceeds from Issue of shares (incl share
premium)
Proceeds from Minority Interest
Dividend paid (incl tax)
Cash flow from Financing
Net change in cash
Cash at the beginning of the year
Cash at the end of the year
FY 12
1199
FY 13
1577
FY 14E FY 15E FY 16E

1863 2523 3400
393
394
-355
-337
1293
-751
541
65
-687
-384
-23
446
417
-599
-483
1358
-1543
-185
42
-1501
-407
568
478
443
-295
-572
1916
-1697
219
0
-1697
-443
-282
577
470
-306
-774
2490
-2266
224
0
-2266
-470
-154
622
363
-412
-1044
2929
-1008
1921
0
-1008
-363
-631
0
0
-171
-578
28
34
62
0
170
-214
117
-27
62
36
750
0
-264
-238
-20
36
16
750
0
-277
-151
72
16
88
0
0
-277
-1271
650
88
739
Y E March
FDEPS (Rs)
Cash EPS (Rs)
BVPS
DPS (Rs)
2.5
3.0
3.0
3.0
3.0
PER (x)
P/CEPS (x)
P/BV (x)
EV/EBITDA(x)
M cap/sales (x)
33.5
22.5
9.6
14.4
2.1
25.9
18.2
7.5
12.3
1.7
23.0
16.5
4.7
11.2
1.5
17.8
13.2
3.4
9.1
1.3
13.3
10.3
2.6
7.1
1.1
ROCE
ROE
31.5
32.1
30.8
32.5
28.9
25.5
28.9
22.8
30.3
22.5
Inventory (days)
Debtors (days)
Trade Payables (days)
51.9
33.1
49.4
49.8
32.5
37.6
49.3
32.9
37.6
48.5
32.5
38.3
47.5
32.1
38.3
Total Asset Turnover (x)

Fixed Asset Turnover (x)
1.5
2.6
1.7
2.8
1.6
2.7
1.5
2.6
1.5
2.8
Debt/equity (x)
Debt/ebitda (x)
Interest Coverage (x)
Dividend Yield %
1.0
1.3
3.5
0.7
0.9
1.3
4.5
0.8
0.5
1.0
5.2
0.8
0.3
0.8
6.4
0.8
0.2
0.5
10.4
0.8
April 9, 2014 | 24 of 39
Initiating Coverage
April 9, 2014
Somany Ceramics Ltd.
Continuous capacity expansion fueling growth

Current
Somany Ceramics Ltd (SCL), the third largest player in the tiles sector, is likely to grow
at a CAGR of 22.6% over FY13-FY16 period. Higher volume growth is likely to provide
operating and financial leverage to the company resulting in net profit CAGR of 24.9%
over the same period. Focus on asset light strategy is likely to improve its RoCE to
24.7% by FY16E and the company is likely to continue generating free cash flows. We
initiate coverage on Somany Ceramics with BUY rating and a target price of Rs 205,
providing potential upside of 19.2%.
Previous
CMP : Rs.172
Rating : BUY
Rating : NR
Target : Rs.205
Target : NR
(NR-Not Rated)
STOCK INFO
BSE
531548
NSE
SOMANYCERA
Bloomberg
SOMC IN
Reuters
SOCE.BO
Sector
Ceramic Products
Face Value (Rs)
2
Equity Capital (Rs mn)
69
Mkt Cap (Rs mn)
5,934
52w H/L (Rs) (Adj.)
183.8/65.3
3m Avg Daily Volume (BSE + NSE)
90,739
SHAREHOLDING PATTERN
(as on 31st Dec. 2013)
Promoters
FIIs
DIIs
Public & Others
63.3
2.8
1.7
32.2
Source: BSE
STOCK PERFORMANCE (%) 1m

SOMANY CERAMICS
21
SENSEX
2
3m
43
8
12m
143
21
Key Highlights:
Robust demand scenario: Indian tiles sector has been growing at a CAGR of 14% over
CY08-CY12 to reach 681 msm in CY12. As per the industry, the sector is likely to continue
its growth rate owing to low per capita consumption, favourable demographic profile of
the country and likely improvement in the construction sector. SCL being the third largest
manufacturer of tiles in the country would be in a better position to leverage the
increasing pie of the sector.
Thrust on branding: SCL has been increasing its advertisement expenditure and widening
its distribution network to improve its brand visibility. Its advertisement spend has
increased to 1.5% in FY13 from 0.9% in FY09 and is likely to reach 1.7% in FY16E. Higher
value added products and better branding is likely to improve average realisation going
forward.
Asset light strategy to expand capacity: SCL is expanding capacity by entering into joint
venture with unorganised players to take advantage of readily available capacity and
leverage the opportunity. Its capacity is likely to reach 40.25 msm by FY16E from 24.45
msm in FY13, signifying 18.1% CAGR over FY13-FY16E period. This strategy is likely to
improve its RoCE to 24.7% in FY16E from 22.1% in FY13.
FDEPS CAGR of 20%: The revenue of the company is likely to increase at CAGR of 22.6%
over FY13-FY16E to reach Rs 19263.8 mn in FY16E. With rising share of JV products and
outsourced products, PAT margins are likely to be stable around 3%. FDEPS is likely to
grow at a CAGR of 20% to reach Rs 15.8 per share in FY16E.
Positive free cash flow: The company has been generating free cash flows since FY12.
Lower capex, lower working capital requirement and higher profits have lead to this
positive free cash flow. We expect the company to generate free cash flow of Rs 348.4
mn over FY13-FY16E.
SOMANY CERAMICS v/s SENSEX
Valuation
320
270
220
170
120
70
Somany Ceramics
08/03/2014
08/02/2014
08/01/2014
08/12/2013
08/11/2013
08/10/2013
08/09/2013
08/08/2013
08/07/2013
08/06/2013
08/05/2013
08/04/2013
20
Sensex
At CMP of Rs 172, the stock is trading at P/E of 14.3x and 10.9x its FY15E and FY16E
earnings of Rs 12 and Rs 15.8 per share respectively. Increasing capacities, wide
distribution network, focus on value added products and asset light strategy is likely to
improve the financial performance of the company. The company is likely to generate
positive free cash flows of Rs 348.4 mn over FY13-FY16E. The stock has been continuously
re-rating over the last 5 years. Further re-rating will likely happen when the company
breaches its FY13 RoE of 23%. Assigning 13x PE multiple to FY16E earnings, we arrive at
a fair value of Rs 205 for the company.
Daljeet S. Kohli
Head of Research
Mobile: +91 77383 93371, 99205 94087
Tel: +91 22 66188826
Prerna Jhunjhunwala
Research Analyst
Mobile: +91 77388 92065
Tel: +91 22 66188848
YE March (Rs Mn)
FY13
FY14E
FY15E
FY16E
Net Sales
10462
12088
15881
19264
EBITDA
814
742
1046
1288
PAT FDEPS(Rs) RoCE(%)

316
9.2
22.1
286
7.4
17.2
466
12.0
22.6
615
15.8
24.7
RoE(%)
23.0
15.3
19.1
21.0
P/E(x) EV/EBITDA(x)
18.8
8.4
23.4
9.5
14.3
7.0
10.9
5.7

Somany Ceramics Ltd. | Continuous capacity expansion fueling growth
|Ceramic Tiles
Company Background
The Company commenced operations in collaboration with the UK-based Pilkington
Tiles and transformed to Somany Ceramics Limited in 2007. SCL is the third largest
tile manufacturer with a market share of 6% in total tiles sector and 11.6% in
organised tiles sector. Headquartered in Noida (UttarPradesh), it is in the business
of manufacturing, branding and selling all types of tiles including ceramic, polished
/ glazed vitrified, digital among others. In FY13, its capacity stood at 24.45 mn square
meters (msm) which includes 19.15 msm owned capacity and balance through joint
venture partners. Its manufacturing facilities are spread across plants in Kadi (Gujarat
- Own), Kassar (Haryana - Own) and Morbi (Gujarat - JVs). Somany is the only
company in the Indian tile industry to have a patent for its highly abrasion resistant
tiles VC Shield.
Somany markets products pan-India through a robust 1,768-dealer network, over
6,000 subdealers, 181 showrooms and 19 stock points. In terms of clientele, 70% of
its revenue is from individuals and 30% comes from corporate clients. Its corporate
clients comprise Tata Motors, DLF, Unitech, Caf Coffee Day, JP Associates, L&T,
Shapoorji Pallonji, Prestige, Sobha Developers, and Ansal, among others. Somanys
product basket comprises ceramic wall and floor tiles, glazed and polished vitrified
tiles, internationally-branded tiles, sanitaryware and bath-ware fittings.
Revenue Mix
100%
80%
22.9
23.3
7.3
15.1
66.7
58.4
60%
40%
20%
0%
FY12
Ceramic
Polished Vitrified
Others
FY13
Glazed Vitrified
Sanitaryware & Bath Fittings
April 9, 2014 | 26 of 39
|Ceramic Tiles
Investment Rationale
Favourable industry scenario provide growth opportunity
Indian tiles sector has been growing at a CAGR of 14% over CY08-CY12 to reach 681
msm in CY12. As per the industry, the sector is likely to continue its growth rate
owing to low per capita consumption, favourable demographic profile of the country
and likely improvement in the construction sector. SCL being the third largest
manufacturer of tiles in the country would be in a better position to leverage the
increasing pie of the sector.
11.6% market share in the organised tiles sector
Others
19.9%
H&R Johnson
19.1%
Orient Bell
Ceramics
6.5%
Kajaria Ceramics
18.1%
RAK Ceramics
8.3%
Asian Granito
7.4%
Nitco Tiles
9.2%
Somany
Ceramics
11.6%
Source: Kajaria company presentataion, IndiaNivesh Research
Asset light strategy JV preferred route

Entering JV is cheaper and enable harness the
near-term opportunity
The market share of unorganised players is ~50% of total tile sector. With the growing
preference of consumers for branded products and rising power and fuel cost, they
are finding it difficult to push their sales and compete with organised players. As
compared to this, rising cost and time for setting up a Greenfield / Brownfield
capacity and rising fuel cost is a cause of concern for organised players. Hence
organised and unorganised players are partnering with each other to generate better
profitability. Somany has entered into JV with Morbi based unorganised players to
take advantage of the ready capacity available, reduce payback period and generate
better return on investment.
FA cost per msm (Rs)
Cost of own capacity
250
200
174
183
FY10
FY11
200
211
FY12
FY13
150
100
50
0
April 9, 2014 | 27 of 39
|Ceramic Tiles
JV acquisition cost details

JV Company
Vintage Tiles Private Ltd
Stake
26%
Capacity
Period
Location
(msm)
Oct-11 Morbi, Guajarat
2.65
Commander Vitrified Private Ltd.

Amora Tiles Private Ltd.
Vicon Ceramics Private Ltd.
Acer Granito Private Ltd
26%
51%
26%
26%
Apr-12
Aug-13
Aug-13
Aug-13
Morbi, Guajarat
Morbi, Guajarat
Morbi, Guajarat
Morbi, Guajarat
Acquisition
Cost
(Rs Mn)
50.0
2.65
2.45
2.10
2.10
32.5
100.0
50.0
51.1
Cost
per msm
(Rs)
72.6
Product
47.2 Polished / Glazed Vitrified Tiles

80.0
Ceramic Wall Tiles
91.6
Industrial Vitrified Tiles
93.6
The company has entered into five JVs which are located at Morbi. All the JVs entered
are for value added products including polished vitrified tiles, glazed vitrified tiles
and industrial vitrified tiles. However, the effective cost of acquisition of these JV
capacities is in the range of Rs 45 and Rs 95 per msm. This is far lower than its
current owned capacity of ~Rs 211 per msm, generating better returns on
investment. Capacity expansion through JV is likely to be the preferred route of
expansion for the company going forward.
Capacity to grow at CAGR of 18% over FY13-FY16

Share of JV in total capacity to increase to
52.3% in FY16E
Somany has been expanding its capacity since inception. Its capacity increased from
0.52 msm in 1972 to 24.45 msm in FY13. This includes own capacity of 19.15 msm
and joint venture capacity of 5.3 msm. It also has tie-ups for outsourcing production
of ~10 msm. By the end of FY14, its capacity is likely to reach 35.2 msm (excluding
outsourcing capacity) which includes own capacity of 19.15 msm and enhanced JV
capacity of 16 msm. The manufacturing of tiles is a volume oriented business and
capacity expansion is unavoidable for growth. SCLs capacity is likely to be 40.25
msm by FY16E, signifying 18.1% CAGR over FY13-FY16E period. A point to note
here is that we have not assumed any increase in capacity in FY16E either owned or
in JV. As per the management, it is continuously looking for entering into additional
JVs to counter the rising competition in the tiles sector.
Capacity to reach 40.25 msm
msm
45
40
40.3
40.3
21.1
21.1
35.2
35
30
20
24.5
16.0
19.2
21.8
2.7
16.7
19.2
19.2
19.2
19.2
19.2
19.2
FY10
FY11
FY12
Own
FY13
JV
FY14E
FY15E
FY16E
25
16.7
16.7
16.7
FY09
5.3
15
10
5
0
Revenue mix to improve in favour of high end products

Revenue of Somany has grown at a CAGR of 25.6% over FY09-FY13 period, to reach
Rs 11127.5 mn in FY13 from Rs 4462.5 mn in FY09. Vitrified (polished / glazed) tiles
and digital tiles are higher value-added products and the company is focusing on
improving its share in total revenue. The share of glazed vitrified tiles increased to
15.1% (against 7.3% in FY12) while that of polished vitrified increased to 23.3%
(against 22.9% in FY12). Sales of digital tiles have increased from 4.4% in FY12 to
19.6% in FY13. Share of high and medium end products has increased to 65% of
April 9, 2014 | 28 of 39
|Ceramic Tiles
revenue as compared to 35% in FY11. Going forward, the company plans to improve
the product mix and focus on polished and vitrified tiles with continued thrust on
digital tiles. Consequently, most of its JVs are also in value-added products. This is
visible in the revenue mix of the company wherein own and JV share has increased
to 26.2% and 44.1% in FY16E from 35.8% and 13% in FY13 respectively.
Rising share of JVs in the revenue mix
100%
14.6
80%
23.3
31.8
42.7
60%
40%
85.4
76.7
68.2
20%
57.3
42.6
35.8
35.5
30.0
26.2
1.4
13.0
17.9
34.6
44.1
56.0
51.2
46.6
35.4
29.8
0%
FY08
FY09
FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Own
JV
Outsource
Medium and High-end product share increase to 65% in FY13

100%
80%
60%
35
45
66
40%
52
47
20%
27
0%
13
FY11
FY12
High End (Rs 600 per sq.mtr and above)
FY13
Medium End (between Rs 300 and 600 per sq. mtr)

Low End (Upto Rs 300 per sq. mtr)
Increasing thrust on branding

Focus on improving brand positioning,
advertisement expenditure to increase
There are no entry or exit barriers in the tile industry and even quality difference is
also not meaningful. Brand is the key differentiator in the industry. SCL markets its
tiles under the brand names namely Somany, Durastone, Duragress, VC Shield and
Somany Express. The company has been consistently increasing its investment in
branding and spent ~1.4% of its annual sales on advertising in FY13. Over FY09-13,
the company has invested Rs 550 mn in branding through advertisements,
participation in exhibition (national and international) and through exclusive shopin-shop retail outlets. This is significantly higher than its historic expenditure, which
establishes its thrust on brand building. Advertisement cost has increased at a CAGR
of 38.7% over FY09-FY13 period to reach Rs 151.9 mn in FY13 from Rs 41 mn in
FY09. In FY11, the advertisement cost spiked due to re-branding activities undertaken
by the company. Going forward, we expect that the company is likely to increase its
advertisement spend to reach 1.7% of sales in FY16E against 1.4% in FY13, implying
CAGR of 30% over the period thereby improving its brand positioning significantly.
April 9, 2014 | 29 of 39
|Ceramic Tiles
Increasing investment in branding

600
548.4
500
Rs Mn
400
300
182.1
200
136.9
100
0
FY99-FY03
FY04-FY08
FY09-FY13
Rising advertisement expenditure

Rs Mn
350
300
1.4%
250
200
1.7%
1.7%
1.5%
1.4%
1.2%
1.1%
0.9%
332.23
150
242.76
100
50
40.5
57.4
FY09
FY10
125.0
110.5
FY11
FY12
151.9
175.21
FY13
FY14E
Advertisement Cost
FY15E
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
FY16E
As % of Sales (RHS)
Widening distribution network

The company has been constantly increasing its dealer network and enhancing its
presence across the country with focus on Tier-2 and Tier-3 cities. Demand from
Tier-1 cities is growing, but at a lower rate as the market is reaching saturation.
Tier-2 and Tier-3 cities contribute to 73% of total sales of the company. As per the
management, with improving standard of living in these cities, the demand of tiles
is expected to rise going forward. Accordingly, the company has been continuously
strengthening its distribution network. Currently, the company has 1896 dealers
(1000 active dealers) and more than 6000 sub-dealers and 213 showrooms (mainly
franchisee) spread across the country. In terms of zone-wise revenue distribution,
north and south contribute 36% and 33% while east and west contribute only 15%
and 13% in FY13 respectively, which offers a great scope of improvement in
penetration. The company exports its products to more than 25 countries including
Australia, Europe and African countries. With surplus production in India, exports
offer a significant room of potential for growth going forward.
Dealer Network growing at 16.2% CAGR over FY10-FY13

Network (In No.)
Dealers
Sub-dealers
Depots/ Stock Points
Showrooms
FY10
1125
FY11
1300
FY12
1490
FY13
1768
5000+
20
50
5000
20
68
7000+
20
127
6000
19
181
April 9, 2014 | 30 of 39

Zone-wise revenue distribution
East, 15%
|Ceramic Tiles
Geographical revenue distribution (city-wise)

100%
West, 13%
Exports, 2%
Miscellaneous
, 1%
80%
28%
27%
26%
25%
24%
69%
70%
72%
73%
73%
FY09
FY10
FY11
FY12
FY13
60%
40%
20%
South , 33%
North , 36%
0%
Tier-2 & Tier-3
Teir-1
Others
SCL to continue trading at discount to KCL

SCL is likely to grow at a CAGR of 22.6% over FY13-FY16E as compared to KCLs 18%
CAGR over the same period. However, FDEPS CAGR of SCL is likely to be 20% against
25% of KCL over FY13-FY16E. SCLs EBITDA margin at 7.8% in FY13 is far lower than
KCLs EBITDA margin of 15.1% in same period. This differential is likely to continue
going forward owing to: 1) lower share of own products in sales mix, which carry
substantially high margin than outsourced products and 2) higher selling and
distribution cost for SCL. This impacts the return ratios of the company as well which
are lower than KCL. In our opinion, SCL is likely to trade at a discount to KCL till
EBITDA differential is narrowed, either by creating a stronger brand or by improving
the revenue mix in favour of own and value added products.
SCL vs. Kajaria

Particulars
Volume (msm)
Volume Mix (%)
Own
JV
Outsourced
Avg Realisation (Rs per msm)
Sales (Rs Mn)
P&L Common Size (%)
Net Sales
Raw Material
Power and Fuel
Employee
Advertisement
Selling and Distribution
Others
Gross Profit Margin (%)
EBITDA Margin (%)
PAT (%)
FDEPS (Rs)
Balance Sheet Ratios
Working Capital Days
Debt to Equity (x)
ROE (%)
ROCE (%)
FY08
16.8
Somany Ceramics
FY10
FY13 FY16E
23.0
33.4
51.4
FY08*
20.8
Kajaria Ceramics
FY10*
FY13
25.3
45.6
FY16E
60.4
85.1
0.0
14.9
209.1
3514
66.2
0.0
33.8
233.7
5369
51.2
9.1
39.7
313.1
10462
35.4
30.8
33.8
374.7
19264
86.7
0.0
13.3
241.8
5027
78.4
0.0
21.6
291.0
7355
59.4
18.0
22.7
353.2
16109
49.8
31.8
18.4
438.2
26448
100.0
37.0
11.9
7.8
0.8
12.1
13.6
40.6
16.7
1.2
1.2
100.0
47.9
11.8
8.1
1.1
9.2
11.8
31.7
10.3
3.8
5.9
100.0
59.2
12.5
7.0
1.5
6.6
5.4
25.0
7.8
3.0
9.2
100.0
59.4
15.1
6.5
1.7
6.0
4.7
22.5
6.7
3.2
15.8
100.0
47.4
15.5
8.3
1.4
4.1
7.1
35.1
16.3
3.0
2.0
100.0
48.9
14.3
8.3
1.7
4.2
6.9
34.6
15.6
4.9
4.9
100.0
46.5
19.0
8.5
1.7
1.9
7.3
30.5
15.1
6.5
14.2
100.0
42.7
23.6
8.4
1.5
1.6
6.0
30.4
16.3
8.3
27.8
95.1
2.6
7.2
12.3
59.3
1.9
28.1
20.8
46.0
1.1
23.0
22.1
42.0
0.5
21.0
24.7
119.6
2.2
9.7
12.2
57.1
1.4
20.4
20.3
44.8
0.9
32.5
30.8
41.2
0.2
22.5
30.3
Note: *Standalone nos.

April 9, 2014 | 31 of 39
|Ceramic Tiles
Revenue CAGR of 22.6% driven by volume CAGR of 15.4%
Increasing capacity and utilisation lead to
revenue CAGR of 22.6% over FY13-YF16E
The net sales of the company reached Rs 10462.4 mn in FY13 from Rs 4420.9 mn in
FY09, CAGR of 24%. This was largely driven by volume CAGR of 13.6% over the
same period and balance by increase in average realisation. The shift towards value
added products enabled to attain 9.2% CAGR in average realisation. Going forward,
the share of value added products is likely to increase in the total revenue mix,
enabling average realisation CAGR of 6.2% over FY13-FY16E. Volume CAGR is likely
to be 15.4% over the same period owing to increasing capacities and robust demand
scenario. Consequently, revenue is likely to reach Rs 19263.8 mn in FY16E, implying
a CAGR of 22.6% over FY13-FY16E. Point to note here is that we have not assumed
any capacity addition or new JV in FY16E, which provides a potential for upside, as
the management is constantly looking for new JVs.
Volume CAGR of 15.4%
51.4
msm
50
45.1
40
28.1
30
20.1
31.4
33.4
37.4
23.0
20
10
0
FY09
FY10
FY11
FY12
Own
JV
FY13
FY14E
Outsource
FY15E
FY16E
Average realisation CAGR of 6.2%

400
350
Rs per msm
300
250
220.3
233.7
FY09
FY10
252.4
352.3
374.7
313.1
323.0
FY13
FY14E FY15E FY16E
277.0
200
150
100
50
0
FY11
FY12
April 9, 2014 | 32 of 39
|Ceramic Tiles
Revenue CAGR 22.6%

Rs Mn
21000
19,264
15,881
18000
15000
12,088
10,462
12000
8,704
7,083
9000
6000
4,421
5,369
3000
0
FY09
FY10
FY11
FY12
Own
JV
FY13
FY14E
FY15E
FY16E
Outsource
Revenue Mix tilt towards value added products though JV and own capacity
100%
80%
23.3
31.8
42.7
42.6
60%
40%
76.7
68.2
20%
57.3
56.0
35.8
35.5
30.0
26.2
13.0
17.9
34.6
44.1
51.2
46.6
35.4
29.8
FY15E
FY16E
0%
FY09
FY10
FY11
Own
FY12
FY13
FY14E
JV
Outsource
Margins likely to be stable

PBT margin to improve 30 bps over FY13FY16E
Over FY09-FY13 period, PBT margin and PAT margin increased by 141 bps and 100
bps though EBITDA margin remained under pressure declining by 171 bps. The
EBITDA of the company has increased at a CAGR of 18% over FY09-FY13 period
reaching Rs 813.8 mn in FY13 from Rs 419.5 mn in FY09. EBITDA margin declined to
7.8% in FY13 from 9.5% in FY09, on account of rising share of outsourced products
in the revenue mix thereby increasing raw material cost. However, owing to operating
and financial leverage coming into play on account of outsourced / trading revenue,
PBT margin and PAT margin improved by 141 bps and 100 bps to reach 4.5% and 3%
in FY13 from 3.1% and 2% in FY09 respectively. FY14E margins are likely to be
adversely impacted due to closure of Morbi factories for approximately a month
due to strike. Going forward, we expect that EBITDA margin is likely to decline further
to reach 6.7% in FY16E due increasing power and fuel cost. However, due to lower
than proportionate increase in fixed costs like interest and depreciation cost, PBT
margin and PAT margin are likely to improve marginally by 30 bps and 20 bps to
reach 4.7% and 3.2% in FY16E respectively.
April 9, 2014 | 33 of 39
|Ceramic Tiles
Stable margins going forward

12%
10%
10.3%
9.5%
8.6%
8%
4%
0%
4.8%
3.0%
3.8%
2%
3.3%
2.0%
FY09
7.8%
6.1%
5.7%
6%
8.1%
FY10
FY11
EBITDA margin
4.1%
4.5%
2.8%
3.0%
FY12
FY13
PBT Margin
3.5%
2.4%
6.6%
6.7%
4.4%
4.8%
2.9%
3.2%
FY14E FY15E
PAT Margin
FY16E
Return ratios healthy, ROCE to reach 24.7% in FY16E

highest ever in history
SCLs strategy of sales from JV and outsourced products resulted in higher return on
capital employed (RoCE) as well as return on equity (RoE). RoCE and RoE increased
to 22.1% and 23% in FY13 from 15.5% and 13.7% in FY09. Going forward, RoCE is
likely to increase to 24.7% in FY16E owing to stable margins and higher asset turnover
ratios. However, RoE is likely to lower to 21% in FY16E due to lower asset multiplier
ratio due to rising equity and lower asset addition. In our opinion, this is healthy as
the company is increasing its profits without significant investments in assets.
RoCE likely to reach highest ever 24.7% in FY16E
30
28.1
25.4
25
Higher asset turnover and stable margins

improve RoCE
20
21.9
20.8
15.5
19.7
19.8
24.7
23.0
22.1
15
22.6
17.2
21.0
19.1
15.3
13.7
10
FY09
FY10
FY11
FY12
RoCE
FY13
RoE
FY14E
FY12
2.8
1.7
4.4
21.9
FY13
3.0
1.8
4.2
23.0
FY15E
FY16E
DuPont Analysis of RoE

Particulars
Net Profit Margin (%)
Assets Turnover ratio (x)
Asset to Equity Ratio (x)
RoE (%)
FY09
2.0
1.4
4.8
13.7
FY10
3.8
1.3
4.9
24.7
FY11
3.3
1.6
4.8
25.4
FY14E
2.4
1.8
3.5
15.3
FY15E
2.9
2.1
3.1
19.1
FY16E
3.2
2.2
3.0
21.0
April 9, 2014 | 34 of 39
|Ceramic Tiles
Positive free cash flow to continue

SCL likely to generate free cash flow of
Rs 348.4 mn over FY14E-FY16E
The company has been generating free cash flows since FY12. Lower capex, lower
working capital requirement and higher profits have lead to this positive free cash
flow. We expect the company to generate free cash flow going forward as well.
Positive free cash flow
Rs Mn
500
400
468.3
328.9
316.8
300
175.3
200
104.0
69.2
100
0
FY09
-100
-200
FY10
-60.3
FY11
-112.9
FY12
FY13
FY14E
FY15E
FY16E
1000
70.5
59.3
800
Rs Mn
66.8
53.1
46.0
600
44.5
42.3
42.0
400
200
0
FY09
FY10
PAT
FY11
CFO
FY12
FY13
80
70
60
50
40
30
20
10
0
Days
Increasing bottomline and reducing working capital days
FY14E FY15E FY16E
Net Working Capital (RHS)
April 9, 2014 | 35 of 39
|Ceramic Tiles
Key Risks
Demand slowdown
Lower consumer confidence, rising unemployment or job insecurity and lower
growth of the economy may impact the demand of the tiles, which are discretionary
products and the purchase of which can be postponed for future. This may have an
adverse impact on our revenue and profitability projections. A 5% decrease in
volume sales is likely to decrease FDEPS by 7.2% in FY15E and 6.7% in FY16E.
Sensitivity Analysis of Volume on FDEPS

10%
5% Base Case
Volume / FDEPS
FY15E
13.7
12.9
12.0
% Change in FDEPS
6.7
7.2
0.0
FY16E
17.9
16.9
15.8
0.0
% Change in FDEPS
13.4
6.7
5%
11.1
-7.2
14.8
-6.7
10%
10.3
-7.7
13.7
-13.4
Source: IndiaNivesh Research
Rising competition
Competition in the sector is rising as India is the third largest market of ceramic
tiles in the world and simultaneously growing at 14% CAGR over CY08-12 period.
Rising competition is likely to pose a major challenge to increase sales especially
realisations. With appreciating rupee, the risk of cheaper imports may also increase.
In the event that the company is not able to increase its average realisations, our
estimates would face a downward risk. A 2% increase in average realisation is likely
to increase FDEPS by 2.9% in FY15E and 2.7% in FY16E.
Sensitivity Analysis of Average Realisation on FDEPS

4%
2% Base Case
Avg Realisation / FDEPS
FY15E
12.7
12.4
12.0
% Change in FDEPS
5.7
2.9
0.0
FY16E
16.7
16.3
15.8
0.0
% Change in FDEPS
5.4
2.7
2%
11.7
-2.9
15.4
-2.7
4%
11.3
-5.7
15.0
-5.4
External costs like power and fuel cost rise

Power and fuel is one of the major costs of SCL constituting 12.5% of sales. This is
an external cost which may get impacted by increase in power tariff and / or rise in
gas prices. However, the company is trying to mitigate this risk via improving the
share of value-added products in the revenues. However, we envisage that power
cost is likely to be one of the main hindrances in increasing EBITDA margin, in the
event of company not being able to improve its revenue mix. A 50 bps increase in
power and fuel cost is likely to reduce FY15E FDEPS by 11.4% and vice-versa.
Sensitivity Analysis of Power and Fuel Cost on FDEPS

100 bps 50 bps Base Case 50 bps 100 bps
Power & Fuel / FDEPS
FY15E
9.3
10.6
12.0
13.4
14.7
% Change in FDEPS
-12.9
-11.4
0.0
11.4
10.2
FY16E
12.5
14.2
15.8
17.5
19.2
% Change in FDEPS
-21.0
-10.5
0.0
10.5
21.0
April 9, 2014 | 36 of 39
|Ceramic Tiles
Valuations
At CMP of Rs 172, the stock is trading at P/E of 14.3x and 10.9x its FY15E and FY16E
earnings of Rs 12 and Rs 15.8 per share respectively. Being the third largest player,
the company would be in a position to leverage the Indian consumption story.
Increasing capacities, wide distribution network and focus on value added products,
is likely to increase its FDEPS at CAGR of 20% over FY13-FY16E period. The company
is likely to generate positive free cash flows of Rs 348.4 mn over FY13-FY16E. Its
RoE is likely to improve from FY16E to reach 21% against 23% in FY13 and 15.3% in
FY14E. Its asset light strategy is likely to improve its RoCE to 24.7% in FY16E with
reduced debt to equity of 0.5x.
The stock has been continuously re-rating over the last 5 years. Its average 1-yr
forward PE in last 5 years period is 6x, while the same for last 2 years and 1 year is
8.7x and 9.7x respectively. In our opinion, earnings growth will further provide the
potential upside for the stock, even though the P/E multiple remains same. Further
re-rating will likely happen when the company breaches its FY13 RoE of 23%. In our
opinion, SCL is likely to trade at a discount to KCL till EBITDA differential is narrowed,
either by creating a stronger brand or by improving the revenue mix in favour of
own and value added products. Assigning 13x PE multiple to FY16E earnings, we
arrive at a fair value of Rs 205 for the company. We initiate coverage on the stock
with a BUY rating providing a potential upside of 19.2%.
1-year forward P/E Chart
SCL
3x
6x
9x
12x
Apr-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Rs
200
180
160
140
120
100
80
60
40
20
0
15x
April 9, 2014 | 37 of 39
|Ceramic Tiles
Standalone Financial statements

Income statement
Y E March (Rs m)
Net sales
Growth %
Expenditure
Raw Material
Power and Fuel
Employee
Others
EBITDA
Growth %
EBITDA Margin %
Other Income
Depreciation and amortisation
EBIT
EBIT Margin %
Interest
Exceptional/Extraordinary item
PBT
PBT Margin %
Tax
Effective tax rate %
PAT
Growth%
PAT Margin %
Balance sheet
FY 12 FY 13
8704 10462
22.9 20.2
7996 9649
5056 6196
1092 1306
655
737
1193 1409
708
814
16.3 14.9
8.1
7.8
39
57
182
204
565
666
6.5
6.4
207
200
-2
0
357
467
4.1
4.5
109
151
31
32
248
316
5.7 27.6
2.8
3.0
FY 14E FY 15E
12088 15881
15.5 31.4
11346 14835
7300 9398
1641 2338
850 1103
1556 1996
742 1046
-8.8 40.9
6.1
6.6
62
69
225
237
579
877
4.8
5.5
152
181
0
0
427
696
3.5
4.4
141
230
33
33
286
466
-9.4 63.0
2.4
2.9
FY 16E
19264
21.3
17976
11434
2910
1243
2389
1288
23.2
6.7
75
254
1109
5.8
191
0
918
4.8
303
33
615
31.8
3.2
FY 12
359
FY 13
467
FY 14E FY 15E FY 16E

427
696
918
182
208
145
-109
784
-316
468
-38
-354
-205
-134
204
186
7
-154
710
-381
329
-15
-396
-202
-48
225
135
-258
-132
396
-292
104
17
-275
-152
-264
237
162
-619
-216
260
-191
69
19
-171
-181
155
254
170
-562
-284
496
-321
175
21
-300
-191
85
0
-28
-366
65
156
220
0
-32
-282
32
220
252
500
-55
29
150
252
403
0
-55
-81
8
403
410
0
-55
-161
35
410
445
Cash Flow
Y E March (Rs m)
PBT
Adjustment for:
Depreciation
Others
Changes in working capital
Tax expenses
Cash flow from operations
Capital expenditure
Free Cash Flow
Others
Cash flow from investments
Interest
Loans availed or (repaid)
Proceeds from Issue of shares (incl share
premium)
Dividend paid (incl tax)
Cash flow from Financing
Net change in cash
Cash at the beginning of the year
Cash at the end of the year
Y E March (Rs m)
Share Capital
Reserves & Surplus
Net Worth
Total debt
Net defered tax liability
Total Liabilities
Gross Fixed Assets
Less Depreciation
Capital Work in Progress
Net Fixed Assets
Investments
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balance
Loans & advances
Other Current assets
Current Liabilities & provisions
Net Current Assets
Mis Exp not written off
Total assets
FY 12 FY 13
69
69
1171 1439
1240 1508
1668 1619
254 262
3161 3389
3831 4036
1924 2041
33
94
1940 2089
60
92
3253 3995
985 1186
1388 1744
220 252
650 804
9
8
2091 2787
1162 1208
0
0
3161 3389
FY 14E
78
2161
2239
1355
270
3865
4387
2266
35
2156
92
4665
1354
1995
403
907
7
3049
1616
0
3865
FY 15E
78
2573
2651
1510
284
4446
4588
2503
25
2110
92
5904
1747
2581
410
1159
7
3660
2243
0
4446
FY 16E
78
3134
3211
1595
303
5109
4889
2757
45
2177
92
7001
2119
3082
445
1348
6
4161
2840
0
5109
FY 12 FY 13
7.2
9.2
12.5 15.1
35.9 43.7
FY 14E
7.4
13.2
57.6
FY 15E
12.0
18.1
68.2
FY 16E
15.8
22.4
82.7
Key ratios
Y E March
FDEPS (Rs)
Cash EPS (Rs)
BVPS
DPS (Rs)
0.8
1.2
1.2
1.2
1.2
PER (x)
P/CEPS (x)
P/BV (x)
EV/EBITDA(x)
M cap/sales (x)
23.8
13.8
4.8
9.9
0.7
18.8
11.4
3.9
8.4
0.6
23.4
13.1
3.0
9.5
0.6
14.3
9.5
2.5
7.0
0.4
10.9
7.7
2.1
5.7
0.3
ROCE
ROE
19.8
21.9
22.1
23.0
17.2
15.3
22.6
19.1
24.7
21.0
Inventory (days)
Debtors (days)
Trade Payables (days)
41.3
58.2
23.3
41.4
60.8
26.4
40.9
60.2
27.4
40.2
59.3
28.3
40.2
58.4
29.2
Total Asset Turnover (x)

Fixed Asset Turnover (x)
1.7
4.7
1.8
5.2
1.8
5.8
2.1
7.5
2.2
9.0
Debt/equity (x)
Debt/ebitda (x)
Interest Coverage (x)
Dividend Yield %
1.3
2.2
2.7
0.5
1.1
1.9
3.3
0.7
0.6
1.7
3.8
0.7
0.6
1.4
4.8
0.7
0.5
1.2
5.8
0.7
April 9, 2014 | 38 of 39
| Ceramic Tiles
Disclaimer:
The projections and the forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant
uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which
the projections are forecasts were based will not materialize or will vary significantly from actual results and such variations will likely increase over the period of
time. All the projections and forecasts described in this report have been prepared solely by authors of this report independently. All the forecasts were not
prepared with a view towards compliance with published guidelines or generally accepted accounting principles.
This report is for information purpose only and this document / material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or
subscribe to any securities, and neither this document nor anything contained therein shall form the basis of or be relied upon in connection with any contract or
commitment whatsoever. This document does not solicit any action based on material contained herein. It is for the general information of the clients of INSPL.
Though disseminated to the clients simultaneously, not all clients may receive this report at the same time. It does not constitute a personal recommendation or
take into account the particular investment objective, financial situation or needs of individual clients. Persons who may receive this document should consider and
independently evaluate whether it is suitable for its/ his/ her / their particular circumstances and if necessary seek professional / financial advice. Any such person
shall be responsible for conducting his / her/ its/ their own investigation and analysis of the information contained or referred to in this document and of evaluating
the merits and risks involved in securities forming the subject matter of this document. The price and value of the investment referred to in this document / material
and income from them may go up as well as down, and investors may realize profit / loss on their investments. Past performance is not a guide for future performance.
Actual results may differ materially from those set forth in the projection. Forward-looking statements are not predictions and may be subjected to change without
notice. INSPL accepts no liabilities for any loss or damage of any kind arising out of use of this report.
This report / document has been prepared by INSPL based upon the information available to the public and sources believed to be reliable. Though utmost care has
been taken to ensure its accuracy, no representation or warranty, express or implied is made that it is accurate. INSPL has reviewed this report and, in so far as it
includes current and historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
Following table contains the disclosure of interest in order to adhere to utmost transparency in the matter;
Disclosure of Interest Statement
1.
2.
3.
4.
Analyst ownership of the stock

Clients/Company Associates ownership of the stock
Broking relationship with company covered
Investment Banking relationship with company covered
Kajaria
Ceramics Ltd.
No
No
No
No
Somany
Ceramics Ltd.
No
No
No
No
Trading position of Clients/Company Associates may be different from the recommendation given in this report at any point of time. This information is subject to
change without any prior notice. INSPL reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless,
INSPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific
client queries.

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.
Tel: (022) 66188800 / Fax: (022) 66188899
e-mail: research@indianivesh.in | Website: www.indianivesh.in
Home
April 9, 2014 | 39 of 39

Ceramics Sector - April 2014

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Ceramics Sector - April 2014

Diunggah oleh

Hak Cipta:

Format Tersedia

Sector Report

Kajaria Ceramics Ltd.

Somany Ceramics Ltd.

CMP Rating Target

Source: Company, IndiaNivesh Research; *Consolidated Financials

IndiaNivesh Securities Private Limited

Sector Report | Riding on consumerism

Ceramic Tile Sector

World Ceramic Tile Consumption

CY12 CAGR (%)

Source: Ceramic World Review, IndiaNivesh Research

Lowest per capita tiles consumption Immense potential

Source: Ceramic World Review, IndiaNivesh Research

Sector Report | Riding on consumerism

Source: Ceramic World Review, IndiaNivesh Research

From deficit to surplus....

Source: Ceramic World Review, IndiaNivesh Research

Fragmented industry; Organised sector market share at

Sector Report | Riding on consumerism

Key catalysts for rising consumption

India population to be higher than China from 2020

Source: United Nations, IndiaNivesh Research

Lowest median age

Source: United Nations, IndiaNivesh Research

Sector Report | Riding on consumerism

Source: United Nations, IndiaNivesh Research

12.7% CAGR increase in disposable household income

US$ per household

Urbanisation to fuel demand

Sector Report | Riding on consumerism

Source: MOSPI, IndiaNivesh Research

Rising demand from real estate

Demand for housing to reach 88.78 mn units

Source: Cushman and Wakefield

Commercial Real Estate

Sector Report | Riding on consumerism

Source: Cushman and Wakefield

Sector Report | Riding on consumerism

Changing business dynamics

Source: Capitaline, Company, IndiaNivesh Research

Volume key driver for growth

Asset Light Strategy key to grow faster with profitability

Sector Report | Riding on consumerism

Ban on coal based gasifier plants in Morbi; structurally

Rising power and fuel cost hindrance to accelerate

Sector Report | Riding on consumerism

Indian companies growing at higher rate than

Sales CAGR (%)

EPS CAGR (%)

Source: Bloomberg, IndiaNivesh Research

Kajaria Ceramics Ltd.

Value added products through JVs to ride the consumer boom

(as on 31st Dec. 2013)

STOCK PERFORMANCE (%) 1m

Source: Capitaline, IndiaNivesh Research

KAJARIA CERAMICS v/s SENSEX

Source: Capitaline, IndiaNivesh Research

Net Sales EBITDA

FDEPS(Rs) RoCE(%) RoE(%)

Source: Company, IndiaNivesh Research

IndiaNivesh Securities Private Limited

Source: Company, IndiaNivesh Research

Product-wise capacity details (msm)