Somany Ceramics Initiating Coverage

Transcription

1 Somany Ceramics Initiating Coverage Improving product mix to drive gradual margin expansion November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 1 of 33 Before reading this report, you must refer to the disclaimer on the last page.

2 Absolute : ADD Somany Ceramics Relative : Benchmark Initiating Note Regular Coverage 5% ATR in 16months Improving product mix to drive gradual margin expansion - initiate with ADD on rich valuations Building Materials 217 Equirus All rights reserved. Rating Information Price (Rs) 858 Target Price (Rs) 91 Target Date 31st Mar'19 Target Set On 28th Nov'17 Implied yrs of growth (DCF) 15 Fair Value (DCF) 698 Fair Value (DDM) 343 Ind Benchmark BSETCD Model Portfolio Position NA Stock Information Market Cap (Rs Mn) 36,378 Free Float (%) % 52 Wk H/L (Rs) 915/47.5 Avg Daily Volume (1yr) 56,317 Avg Daily Value (Rs Mn) 4 Equity Cap (Rs Mn) 85 Face Value (Rs) 2 Bloomberg Code SOMC IN Ownership Recent 3M 12M Promoters 51.5 %. %. % DII 2.5 % 1. % 1.6 % FII 7.4 %.2 % -9. % Public 2.5 % -1.1 % -1.6 % Price % 1M 3M 12M Absolute 3.7 % 6.8 % 62.1 % Vs Industry -.3 % -3.8 % 23.6 % Kajaria 6.4 % 4.3 % 4.3 % Asian Granito 3.9 % 13.3 % % Standalone Quarterly EPS forecast Rs/Share 1Q 2Q 3Q 4Q EPS (17A) EPS (18E) Somany Ceramics Limited (SOMC), India s second largest tiles player with a 7% market share (14% in organized tile industry) has substantially transformed its product mix from commoditized ceramic tiles to high-margin vitrified tiles and value-added products over the last four years, leading to continued improvement in its revenues and EBITDA margins. Volume growth ahead would be supported by production ramp-ups at own/jv capacities and a favorable GST rate of 18%. Margin improvement would continue with focus on product innovation, a higher share of value-added products, rising contribution from the sanitary-ware & faucet-ware (S&F) segment, and increased retail penetration among brand-conscious customers. We expect SOMC to post a 13%/18% revenue/ebitda CAGR and a 129bps expansion in consolidated EBITDA margins over FY17-FY2E. Initiate coverage with ADD and Mar 19 TP of Rs 91 set at a 3x TTM EPS of Rs High-margin tiles to drive revenue growth, margin improvement: SOMC s tiles business posted a 15% revenue CAGR over FY12-FY17 as it moved away from lowmargin and commoditized ceramic tiles (39% of FY17 revenues vs. 67% in FY12) and increased the share of higher-margin value-added products, including vitrified tiles (53% in FY17 vs. 3% in FY12). It also ramped up its manufacturing capacity from 24.5msm to 49.5msm via expansion and JVs over the last five years. Going forward, we expect SOMC to post a tile volume/revenue CAGR of 12%/11% over FY17-FY2E with contribution from vitrified tiles increasing from 53% to 59% during this period. Contribution from sanitary-ware & faucet-ware to increase gradually: While SOMC has been present in S&F since FY8, it contributed 8% to FY17 revenues (34% revenue CAGR over FY1-FY17) as the company increased focus on this segment only over the last 3-4 years. The company has recently expanded its sanitary-ware JV capacity from.3mn to 1.15mn pieces/annum. It is also considering setting up a JV for manufacturing bath fittings given similar operational dynamics as sanitary-ware, with an opportunity to capitalize on the Somany brand. We expect the S&F segment to deliver 24% revenue CAGR over FY17-FY2E and contribute 1% to FY2E revenues with margins improving due to a better margin profile of products. ROIC improvement to be led by better product mix, JV capacity addition: SOMC will continue to add capacity via JVs and taking up majority stakes in them as (a) the capital commitment is normally 1/5 th of that required for setting up an own unit, and (b) there is excess capacity available in Morbi. Also, EBITDA margins are expected to improve by 129bps as the product mix turns in favor of high-end vitrified tiles and value-added products. Due to these factors, we expect core ROIC to improve gradually over FY17-FY2E. Key risks include slower-than-expected pick-up in real estate demand and higher competition from unorganized and new branded players. Consolidated Financials Rs. Mn YE Mar FY17A FY18E FY19E FY2E Sales 18,11 18,98 22,432 26,293 EBITDA 1,915 1,93 2,54 3,118 Depreciation Interest Expense Other Income Reported PAT ,286 1,627 Recurring PAT ,286 1,627 Total Equity 5,212 5,975 7,5 8,326 Gross Debt 2,744 2,922 3,211 2,816 Cash 1, Rs Per Share FY17A FY18E FY19E FY2E Earnings Book Value Dividends FCFF P/E (x) P/B (x) EV/EBITDA (x) ROE (%) 2% 17% 2% 21% Core ROIC (%) 15% 13% 15% 16% EBITDA Margin (%) 11% 1% 11% 12% Net Margin (%) 5% 5% 6% 6% November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 2 of 33 Before reading this report, you must refer to the disclaimer on the last page.

3 Company Snapshot How we differ from Consensus EPS Sales PAT - Equirus Consensus % Diff Comment FY18E % FY19E % FY18E 18,98 18,55 2 % FY19E 22,432 21,899 2 % FY18E % FY19E 1,286 1,347-5 % Our Key Investment arguments: 1. Higher contribution from GVT & value-added products to improve margins over FY17-FY2E: SOMC s revenue mix is changing towards high-margin GVT and valueadded products, which is likely to improve its margins by 129bps over FY17-FY2E % GST rate, E-way bill implementation to be a game changer for organized players: GST rate revision to 18% is expected to boost consumer sentiments as purchase costs will come down. Additionally, a gradual shift from unbranded to branded players, due to lower price differential, would lead to better volume growth for players like SOMC. Besides, E-way Bill implementation would increase compliance costs for unorganized players. 3. Expect EBITDA/PAT CAGR of 18%/2% over FY17-FY2E due to a changing product mix and increased contribution from higher-margin products. Risk to Our View: 1. Lower level of GST compliance by Morbi-based players 2. Slower recovery in real estate demand 3. Any strain in relationship with JV partners Key Triggers Growth of the real estate sector and affordable housing GST leading to higher compliance costs for unorganized players Sensitivity to Key Variables % Change % Impact on EPS Revenues -1 % -3 % EBITDA -1 % -8 % DCF Valuations & Assumptions Rf Beta Ke Term. Growth Debt/IC in Term. Yr 6.8 % % 3. % 6. % - FY18E FY19E FY2-22E FY23-27E FY28-32E Sales Growth 4 % 19 % 13 % 12 % 4 % NOPAT Margin 6 % 6 % 7 % 8 % 8 % IC Turnover RoIC 13. % 15.1 % 18.8 % 19.7 % 19. % Years of strong growth Valuation as on date (Rs) Valuation as of Mar' Based on DCF, assuming 15 years of 4% CAGR growth and 19% average ROIC, we derive our current fair value of Rs 63 and a Mar 19 fair value of Rs 698. Company Description: SOMC was incorporated in 1968 and is currently India s third largest tiles player in value terms. It has a tile manufacturing capacity of ~5msm (own capacity ~24msm and JV capacity ~26msm) while it has outsourced capacity of 9msm. Its own plants are located in Gujarat and Haryana. The company s retail segment contributes ~65% to its total revenues and it has ~1,72 dealers and ~1, touch points. SOMC is also present in sanitary-ware (JV capacity: 1.15mn pieces/year) and bath fittings (1% outsourced). Comparable valuation Mkt Cap Price Target EPS P/E BPS P/B RoE Div Yield Company Reco. CMP Rs. Mn. Target Date FY17A FY18E FY19E FY17A FY18E FY19E FY16A FY18E FY17A FY18E FY19E FY17A FY18E Somany Ceramics ADD , st Mar' % 17 % 2 %.3 %.4 % Kajaria Tiles REDUCE , st Mar' % 21 % 25 %.4 %.8 % Asian Granito NR 54 15,154 NR NR % 1 % 12 %.1 %.1 % November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 3 of 33

4 Investment Rationale Continues to move up the value chain on higher vitrified tile revenues The glazed vitrified tiles (GVT) segment is currently the fastest-growing segment in India s tile industry. In volume terms, the segment grew from 2msm to 8msm over CY1-CY16 (26% CAGR), while from Rs 1bn to Rs 42bn (27% CAGR) in value terms. Polished vitrified tiles (PVT) is the second fastest growing segment after GVT; in volume terms, the segment grew from 17msm to 275msm over CY1-CY16 (8% CAGR), and from 55bn to 115bn (13% CAGR) in value terms. For SOMC, revenue contribution from vitrified tiles (both PVT and GVT) jumped from ~19% in FY1 to ~53% in FY17. The company s ceramic/pvt/gvt revenues have grown at 7%/33%/65% CAGR over FY1-FY17 due to (a) consistent focus on improving the sales mix and (b) more value-added product launches, in line with the industry leader Kajaria Ceramics (KJC), to meet changing consumer preferences. As a result, SOMC s blended realizations grew at 7% CAGR over FY1-FY17. Currently, most of SOMC s new capacity expansion is in the vitrified segment as it aims to move up the value chain. With production ramp-up at its 4mnsqmGVT line at Kassar which become operational in FY17, and higher contribution from JVs over the next three years, we expect SOMC s vitrified segment to see a 16% CAGR over FY17-FY2E. We expect PVT/GVT revenues to constitute 36%/23% of total revenues by FY2E vs. 33%/2% in FY17, leading to a margin improvement. However, revenue growth would mostly be volume-driven with realization growth likely at 1% CAGR over FY17-FY2E. Exhibit 1:Revenue mix shifts from ceramic towards vitrified tiles over FY1-FY Ceramic (Rs bn) PVT (Rs bn) GVT (Rs bn) FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Exhibit 2:Realizations on an uptrend with rising sales contribution from vitrified tiles Blended Realizations (Rs/sqm) FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Exhibit 3:Revenue mix - SOMC & KKC A. Ceramic tiles Moving away from commoditized, low-margin products 9% 8% 7% 6% 5% 4% Somany Kajaria 79% 72% 67% 61% 58% 5% 51% 46% 44% 46% 44% 41% 4% 39% 37% 37% 3% 2% 1% % FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 4 of 33

5 B. PVT - Sharply higher contribution post formation of JVs, expansion of own capacity Somany Kajaria 45% 39% 4% 37% 38% 37% 35% 36% 35% 35% 33% 33% 33% 33% 29% 3% 25% 23% 23% 21% 2% 17% 15% 1% 5% % FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 C. GVT SOMC s fastest-growing segment but still some catching up to do with KJC Somany Kajaria 3% 25% 25% 23% 22% 2% 2% 17% 17% 15% 15% 15% 15% 14% 15% 15% 1% 7% 6% 4% 5% 2% % FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 In tiles, Ceramic wall/floor tiles generate margins of11-12%, while PVT generates around 1% due to stiff competition and the product s commoditized nature. GVT generates around 13-14% margins. Apart from these, value-added products like polished ceramic tiles, unique designer tiles and larger-sized tiles also generate higher margins. Over the years, customer aspirations for a better lifestyle have evolved due to increased urbanization, brand consciousness and rising disposable incomes; this has led branded tile companies to change their product mix towards higher-margin vitrified and value-added tiles. We expect this trend to intensify in the mid-to-long term, with larger tile companies focusing more on innovation and value-added products. Currently, the percentage contribution of value-added tiles to revenues is 43-45% for SOMC vs. KJC s 6%. We expect contribution from value-added products to reach ~6% over the next 3-4 years, thereby boosting margins for SOMC. Value-added products, higher own manufacturing/jvs to drive margins SOMC has historically seen lower margins vs. KJC on account of the following reasons: Reason for margin difference Brand perception Pricing differential Product innovation & first-mover advantage Revenue mix Share of own manufacturing Stake in JVs KJC KJC enjoys strong recall value among customers due to its continuous focus on higher A&P spends Strong retail presence due to higher A&P and brand positioning has ensured a slight premium KJC s product innovativeness and first-mover strategy has always led to market disruption and creation of new markets, helping it clock better realizations As a product innovator, KJC has historically had a higher proportion of value-added and higher-margin products in its revenue mix Higher share of own manufacturing KJC owns majority stakes (51%) in all its JVs, and is able to book the entire margin in its P&L SOMC SOMC too has been increasing focus on stepping up its A&P spends, but still has some catching up to do for creating the kind of consumer recall enjoyed by KJC Current pricing differential: 5-7% lower than KJC SOMC has typically been more reactive to changing customer preferences. That said, it has the largest collection of tiles in the market. SOMC has seen higher contribution from ceramic tiles in its revenue mix though contribution from value added products has improved over last 3-4 years Equal contribution from JVs and own manufacturing Since SOMC has a 26% stake in most of its JVs, it is able to retain only trading margins on its books, leading to lower margins November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 5 of 33

6 Over the last five years, SOMC has been aggressively closing the gap with KJC in terms of revenue contribution from value-added tiles. Before FY11, contribution from third-party outsourcing in SOMC s tile volumes was very high as it sourced most of its ceramic and low-end vitrified product requirements from Morbi-based players. As against this, KJC has focused on higher contribution from own manufacturing, though the share of JVs has also increased in its overall production mix post FY12. Since FY11, SOMC has increased focus on sourcing from JVs, due to which the share of outsourcing has gradually declined; the percentage of volume/revenue contribution from outsourcing in the tiles segment has come down to 12%/15%in FY17 from 41%in FY11. Going forward, we expect the outsourcing volume/value share to decline further to 8%/1% with higher contribution from own manufacturing and JVs. We expect the share of own manufacturing volumes/revenues to increase from 44%/39% in FY17 to 45%/41% by FY2 while JV volume/revenues to increase from 44%/47% in FY17 to 45%/47% by FY2. We expect SOMC s production mix to remain skewed towards JVs as the company is setting up a plant in Andhra Pradesh (AP) with a local partner. Exhibit 4:Production mix: Own manufacturing and JVs to continue to contribute equally for SOMC 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 42% 4% 1% 9% 57% 32% 51% 51% Own Manufacturing JVs Outsourcing 22% 17% 17% 34% 41% 12% 13% 11% 1% 44% 43% 45% 45% 44% 43% 44% 43% 44% 45% FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Exhibit 5:KJC s production mix historically dominated by own manufacturing; trend to continue ahead 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 26% 23% 19% 18% 6% 68% 18% 26% 31% 59% Own Manufacturing JVs Outsourcing 12% 12% 12% 11% 1% 37% 33% 31% 32% 31% 54% 51% 51% 55% 58% 58% 59% FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Higher utilization, upgrades to improve operating leverage/product mix Over the last eight years, SOMC has increased available capacity by 3.6x via a mix of own manufacturing and JVs, or outsourcing from Morbi-based players. The company s first JV was formed in FY12, and it currently has six JVs with a combined production capacity of 25.7msm as against its own manufacturing capacity of~23.8msm. SOMC has recently expanded its value-added PVT (double-charge) capacity from 2.99msm to 4.8msm. Additionally, the company has undertaken de-bottlenecking and a minor brownfield expansion at its own manufacturing units at Kassar and Kadi respectively. At the Kassar plant, de-bottlenecking would lead to ~1% additional manufacturing capacity; the company is also replacing some of its existing lines with new equipment for manufacturing value-added wall tiles. These new products would increase costs by 1% but realizations from these products would by ~2-25% higher than existing products. At the Kadi plant, SOMC is replacing one of its existing lines (~2% of capacity) from manufacturing commodity products to high value-added products (ceramic polished large tiles). The de-bottlenecking and expansion projects will together cost around Rs3mn-35mn vs. Rs 5mn-55mn for any similar greenfield project, as land and other necessary infrastructure is already in place. The first phase of upgrade has been completed in early-2q18 while the second phase would be completed by 3Q18. This upgrade would November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 6 of 33

7 enhance the ratio of value-added products and increase SOMC s operational capacity by ~7%. SOMC has also increased its stake in Vintage Tiles, an associate company, to 5% from 26% earlier to capitalize on the latter s recent expansion in value-added PVT tiles. Besides, SOMC intends to set up a 5msm/annum vitrified tile plant in Andhra Pradesh (AP) through its associate company, Sudha Somany Ceramics Pvt. Ltd. (51% stake),for a total capex of ~Rs 1bn. The plant, likely to be commercialized by FY19-end, would have a peak turnover of Rs 1.8bn-2bn. The end product mix is yet to be finalized by the company. SOMC has a rolling capex of Rs bn planned over the next three years, most of which would be funded through internal accruals. We expect revenue contribution from own manufacturing and JVs to remain at these levels going forward, with the ratio tilting slightly in favor of JVs post commissioning of the new AP plant. Exhibit 6:Own/JV capacities have grown at CAGR of 6%/37% over FY12-FY Own Manufacturing FY11 FY12 FY13 FY14 FY15 FY16 FY17 2Q18 JV Exhibit 7:JV contribution to overall capacity has steadily increased over the years 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 12% 88% 22% 22% 78% 78% Own Manufacturing 45% 49% 5% 5% 52% 55% 51% 5% 5% 48% FY11 FY12 FY13 FY14 FY15 FY16 FY17 2Q18 Brand investments, higher retail penetration to continue yielding results Over the past five years, SOMC has nearly doubled its advertisement and brand promotion spends, from 1.3% (as a percentage of sales) in FY12 to 2.6% in FY17.The company s marketing efforts include: (a) increasing visibility through print, electronic and other advertising media, (b) participation in exhibitions and outdoor promotions, (c)training sessions for masons under Tile Master program a first in the industry - and recognizing them with certificates post completion, and (d) creation of a wide network of exclusive franchisee showrooms and display centers to gain more traction in the retail segment. It has recently launched its new TV commercial as well. As a result of these efforts, the brand Somany now competes for the no. 2 slot (after brand Kajaria) along with HR Johnson in the tiles industry. However, due to delivery issues and lower focus from HR Johnson, the Somany brand has gained more consumer mindshare over the past 2-3 years. The company s marketing expenses as percentage of sales are likely to increase to 2.9-3% over the next three years. Historically, SOMC has been perceived more of a project brand vs. a retail brand; however, it is now focusing on creating brand awareness in the retail chain by opening more large-format stores and giving a complete customer experience. Currently, the retail segment contributes ~65% to SOMC s topline, higher than the industry average of 5% but lower than KJC s 75%. JV November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 7 of 33

8 With SOMC s improving product mix and increased focus on branding and advertisements, the retail contribution should increase going forward, leading to improved realizations and higher margins. However, the company is not looking at any celebrity tie-ups and will focus more on other advertising mediums. Over the next 4-5 years, SOMC targets to take its retail contribution to 75% (from ~65% currently). A higher proportion of retail sales along with a better product mix would enhance pricing power and brand visibility. Exhibit 8:Brand spends (% of A&P) to increase amid focus on improving retail visibility % % 1.3% A&P Expenses (Rs mn) 1.4% 1.6% Allied products complement existing business, to aid revenue and margins 1.9% Though SOMC has been present in the sanitary-ware business since FY8 and bath fittings since FY1, both businesses picked up significantly only over the last three years with improved focus on developing these brands. The sanitary-ware and faucet-ware (S&F) division contributed 8% to total revenues in FY17. As both sanity-ware and faucet-ware products are also sold through the tiles dealer network, this leads to savings on branding & promotion and thus better margins. Initially, the company tested the market for both products by way of importing/outsourcing from domestic/international suppliers, but is now looking at a JV model or a Greenfield project. 2.% A&P as % of Sales 2.7% 2.8% 2.9% 3.% FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 4% 3% 3% 2% 2% 1% 1% % focused on penetrating the mid-end market with comparatively higher share of institutional sales and lower presence in the premium category. Though SOMC offered products ranging from Rs 35-18,/unit in this segment, we believe average realizations would have been on the lower side vs. other established players like Jaguar, HSIL or Cera due to lower management focus and limited consumer awareness. On the pricing front, SOMC s products are priced at par with Cera and HSIL. To cater to high-end premium consumers, SOMC has recently launched the French Collection range of sanitary-ware (smart and intelligent toilet market), which is the company s most premium offering till date. This collection has 28+ products including water closets, urinals, and wash basins, under 11 different series (Jazz, Dior and Ace). Each series follows a particular theme with different patterns of technology integration. Ace series is the star of the French Collection, having the first high-iq toilet designed to ensure minimum pressure points and enhance overall comfort. The price range starts from Rs 7,99/unit for the Quest Art Basin to Rs 165,/unit for the Ace Automatic Toilet. For the sanitary-ware division, SOMC procures products either from its JV Somany Sanitaryware Private Limited (SSWPL, 51% stake) in Morbi, Gujarat, or procures them directly from third-party suppliers. It also imports premium-end sanitary-ware products. To capitalize on a growing market and increase the proportion of JV manufacturing, SOMC has recently expanded its sanitary-ware capacity in SSWPL from.3mn to 1.15mn pieces/annum. At peak capacity, the new plant would generate revenues of Rs65mn- 7mn/annum. For faucets & other bath fittings, SOMC has outsourced its requirements from Morbibased players till now; however, it intends to actively explore opportunities for forming a JV with some existing player or setting up a Greenfield project. The quantum and mode of investment has yet to be decided by management. SOMC aims to double its S&F revenues over the next 3-4 years. We expect the division to register 24% revenue CAGR over FY17-FY2E with sanitary-ware/faucet-ware revenues growing at 27%/2% over this period and their overall contribution to revenues increasing from 8% to 1%. Sanitary-ware growth would mainly be led by higher utilization of the recently-expanded capacity at the JV, while faucets and other bath fittings would also continue to see strong growth led by higher management focus and increased visibility among customers. The S&F segment posted a robust 37% CAGR over the last five years. Total revenue from sanitary-ware/faucet-ware stood at Rs 82mn/Rs 573mn in FY17 vs. Rs 189mn/Rs 96mn in FY12, with outsourcing contributing around 65-7%/1%. The company has historically November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 8 of 33

9 Exhibit 9: S&F segment sees strong growth over last 3 years; revenue contribution to increase to ~1% by FY2E 3, 2,5 2, 1,5 1, 5 3.2% 2.6% % 3.3% Source :Equirus Securities, Company Sanitaryware + Faucetware Revenues 3.9% % % 1, % 7.5% 1,375 1,418 % of Sales 8.5% 1,97 2,629 1.% FY18E FY19E FY2E 12% 1% 8% 6% 4% 2% % Exhibit 1:Scope to improve revenue/dealer with distribution channel rationalization Somany (Rs mn/dealer) Kajaria (Rs mn/dealer) FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Distribution channel rationalized to improve revenue per dealer, market visibility SOMC s transformation from a manufacturing-driven company to a customer-driven brand has been influenced by a change in its distribution strategy from a conventional makeand-sell approach to a relatively de-risked seed-to-sell strategy. SOMC s current customer mix consists of 65% retail and 35% institutional clients. It has 1,72 dealers (1,6 active dealers as on 1H18) and a total of 1, touch-points (avg. of 3 retail touch points/dealer) which is one of the highest in the tiles industry. The company added 223 net dealers in FY17 and 15 in 1H18. SOMC has more number of dealers vs. KJC, and has been facing issues of price undercutting among dealers. To address this, the company has started streamlining its dealer network and is focusing on dealers who have not been active in the past few years. At the same time, it is adding more dealers in tier III & IV cities and towns in order to strengthen its distribution network. Currently, SOMC has 19 sales depots and 18 display centers. Total sales generation from depots has been declining over the years due to SOMC s strong focus on increasing revenue generation from retailers due to better margins and lower working capital requirements vs. projects. The company plans to add 1-15 dealers every year over the foreseeable future. We think SOMC has significant scope for improving its revenue generation per dealer, which stands at merely ~4% of KJC s. November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 9 of 33

10 Exhibit 11:SOMC, with historically higher dealers than KJC, is now rationalizing its channel to make more dealers active in pushing products 2, 1,8 1,6 1,4 1,2 1, , , ,49 75 Somany 1,768 1,8 825 As of 1H18, SOMC has 3showrooms of which 282 showrooms are franchisee-managed. During 1H18, 62 new showrooms were added. Management targets to increase the number of showrooms to325+ in FY18, 45 in FY19 and 575 in FY2.In FY17, it also commissioned the high-end Worli store, showcasing GVT to address the needs of South Mumbai corporates, interior designers and HNIs. SOMC s showrooms can broadly be classified into following categories - Grande, Exclusive and Studio. Exhibit 12:SOMC s showroom product portfolio Kajaria 9 1, ,497 1,72 1,1 1,1 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 SOMC believes there is a large difference in the national appetite for tiles; since only a few brands service this need, nearly 8% of the market remains underpenetrated, particularly in tier II/III cities & towns. In contrast, metros and tier I cities have been hit due to a lull in the real estate industry. With tier II/III cities and towns emerging as new consumption centers, the company has been aggressively focusing on increasing its distribution reach and brand visibility in these markets over the past five years. Consequently, sales from these cities increased to 76% in FY17 from 7% in FY1; we expect the momentum to continue ahead due to higher disposable income and aspirations, as well as increasing brand awareness among tier II/III consumers. Exhibit 13:Revenues led by strong growth in tier II/III cities & towns over last 3-4 years 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 3% 2% 2% 4% 4% 4% 4% 5% 7% 72% 73% 72% 75% 75% 76% 76% 27% 26% 25% 24% 21% 21% 2% 19% Tier I Tier II & III Others Exclusive showrooms Products Dedicated area Somany Grande Entire range of products including S&F 2,5+ sq.ft. Somany Exclusive Different mix of GVT, PVT, ceramic tiles and 1,5 2,5 sq.ft. allied products Somany Studio Ceramic wall & floor tiles 1,5 sq.ft Duragres Studio Glaze vitrified tiles 1, sq.ft Somany Vitro Studio Polished vitrified tiles sq.ft Somany Bath Studio Sanitary-ware, faucet-ware & bath fittings 4 sq.ft Focus on asset-light model to continue, to shore up ROE & ROIC Tiles, being a commodity, are essentially a volume play, due to which players need to keep expanding their capacities. However, due to a downturn in real estate demand over the last 3-4 years, capacity utilization has fallen, particularly for Morbi-based SMEs who only compete on prices; this has enabled larger players to tie up with Morbi-based SMEs for product supply, while they concentrate on marketing and branding. Therefore, most companies have slowed down on adding own capacities and are forming JVs with smaller unorganized players. Such tie-ups have several benefits. Organized players get readily available capacity at one-fifth or one-fourth of the cost of setting up new, own November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 1 of 33

11 capacity with revenue contribution flowing in immediately, thus lowering the payback period. Unorganized players, on the other hand, get a guarantee on offtake of nearly 1% of their production, while learning best production practices and technology knowhow from organized players. Till 211, SOMC was completely focused on either own manufacturing or plain vanilla outsourcing and did not enter into any JVs. In fact, around 41% of its sales volumes and revenues, from mainly low-value commoditized products, were being outsourced from Morbi-based players. Post 211, the company shifted focus on increasing revenue contribution from vitrified tiles (both PVT & GVT) due to higher demand vis-à-vis commoditized ceramic tiles. However, instead of making high capital commitments in its own manufacturing capacity, SOMC made investments in JVs with established Morbibased players who were lacking their own brand but had requisite production capacities and capabilities. The agreement gave SOMC rights to buy the entire annual production from JVs and resell under its own brand name. As a result, the company has been able to quickly ramp up production capability and product mix, as per changing consumer preferences. Over FY12-FY17, core ROIC improved by 29bps as the company effectively utilized its JV capacities to improve EBITDA margins and profitability. Exhibit 14:Expect return ratios to improve 1bps by FY2E due to increased volumes & higher contribution from better margin products 3% 25% 2% 15% 1% 5% % 28% 26% 22% 13% 12% 12% 23% 13% ROIC (%) ROE (%) 15% 1% 19% 13% 2% 2% 14% 15% 17% 13% 2% 15% 21.2% 16.3% FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E SOMC started off by taking minority stakes of 26% in JVs; however, since the last three years, it has also acquired a 51% stake in some JVs. The company s production capacity has increased to 49.5msm from 21.8msm over FY12-1H18, with JV/own capacity growing at a 37%/6% CAGR. Currently, SOMC owns a 26% stake in three JVs with a combined capacity of 13.8msm, 51% in two JVs with a combined capacity of 8.9msm, and 5% in one JV with a capacity of 4.8msm.Of the total JV capacity of 27.5msm, around 69% is high-margin vitrified tile capacity. The total investment in all JVs is Rs 295mn while avg. capacity utilization in the tile segment stood at ~83% in FY17. SOMC also recently expanded its sanitary-ware JV capacity (stake 51%) from.3mn pieces per annum to 1.15mn pieces per annum by incurring a capex of Rs 35mn, of which SOMC s contribution was limited to 51% with a revenue generating potential of 1.5x investment. It also expanded its capacity at its Vintage tiles JV by 1.8msm via debottlenecking. Moreover, the company has finalized the process of setting up a vitrified tile plant with a capacity of 5msm in Andhra Pradesh in a JV with a local player (company stake 51%); the plant, to be set up for a total capex of Rs 1bn,is expected to generate revenues of Rs 1.8bn-2bn. SOMC has been successful in keeping the impact of cost/msm of incremental capacity addition via JVs on cash flows to 1/5 th of a Greenfield capacity addition, while reporting revenue growth and improving profitability (vs. pure outsourcing) at the same time. The company believes this to be a better option for incremental capacity addition as it requires lower capital investment, leading to faster payback and quicker access to capacity. Going forward, we expect the company to take on a 51% stake in future JVs instead of 26% earlier so as to maintain better operational, quality and technological control and increase profitability. We expect ROIC/ROE to improve by 153bps/77bpsfrom 14.8%/2.5% in FY17 to 16.3%/21.2% by FY2E. Product innovation focus to enhance brand recall among retail consumers SOMC is among the few tile companies in India which continues to focus on R&D and introduce niche value-added products. It is currently the only tile company accredited with the first patent in the Indian tile industry for its VC Shield tiles (launched in 28).It then launched the Slip Shield tile, which has a unique coating giving anti-skid properties to ceramic tiles, again a first in the industry. It was also the first Indian company to launch 8x12cm double-charge vitrified tiles. November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 11 of 33

12 Since the last 2-3 years, SOMC has become very aggressive in launching larger-format tiles along with new designs to compete with KJC and other branded players. The company has one of the largest product portfolios in the country and has recently launched a high-end French Collection under the premium segment of its sanitary-ware products which would compete with foreign brands in domestic market. SOMC has also launched Duragres Planks, a range of faux wooden tiles that are exceptionally durable. The main advantage these tiles enjoy over real wooden planks is ease of installation, higher durability, resistance against natural wear & tear and low susceptibility to chemicals. All these launches have helped SOMC generate consumer interest and gain brand visibility. Additionally, as the share of such value-added tiles increases in the overall product mix, SOMC s margins would also improve. Exhibit 15:Key innovations in tiles over the years Key innovation Year of launch Remark the recent increase in crude prices suggests a likely jump in RLNG prices for 2HFY18. Natural Gas prices are already up 1% in last 3 months. Additionally, Haryana govt. has not yet decided on providing any VAT subsidy on Gas (which other state governments have done) due to which SOMC s Kassar plant is still paying 13.2%-15% vs. 4.2% earlier thereby increasing company s gas costs by Rs 8mn/month. So we expect higher gas prices to partially offset the margin improvement (due to a changing product mix) in FY18. Exhibit 16:Natural gas procurement breakup Supplier Name % procured GAIL 65% Sabarmati Gas (GSPC) 19% IOC 6% APM Gas 1% Product description VC Shield tiles 28 Patented Veil Craft technology for abrasion-resistant tiles Slip Shield tiles 214 Anti-skid properties Glosstra tiles 214 Ultra gloss technology for extra glossy surface Optimatte tiles NA Tiles having matt finish Stone16 NA 16mm thick tiles for meeting outdoor requirements Antibacterial tiles 211 Eliminates the risk of growth of microbial organisms Active tiles 212 Tiles which purify the air, leading to healthier floors Expect power & fuel costs to increase in FY18, but remain stable in medium term For tile companies, power & fuel costs are the second-largest cost component after raw materials. At the standalone level, FY17 power & fuel costs (as a percentage of revenues) stood at 8%/1% for SOMC/KJC and at11%/17% at the consolidated level; power & fuel costs were higher for SOMC since it does not consolidate these costs for~5% of its JV capacity (as in case of KJC) as it holds 26% stake in these JVs. For its own manufacturing capacity, SOMC consumes ~5mn cbm of gas annually, which it procures on fixed-contract basis (1% APM, balance from GAIL/Sabarmati Gas/IOCL for its Kassar and Kadi facilities). Currently, APM gas costs around ~Rs 9/scm while the rest around Rs 25/scm. However, November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 12 of 33

13 Financial profile to improve; expect gradual re-rating of stock Margins to improve on higher capacity utilization, improving product mix For FY17, SOMC s EBITDA margins came in at 1.6% vs. 19.5% for KJC. One key reason for this, apart from higher operating leverage, strong brand recall and premium pricing enjoyed by KJC, was that SOMC was able to retain only trading margins from its JVs due to a minority (26%) stake. In comparison, KJC owns a majority stake in most of its JVs and was thus able to book the entire margin in its P&L. Most other branded tile companies have also invested for =>5% stake in their JVs, facilitating higher EBITDA margins. Currently, SOMC has a 26% stake in three of its JVs which form 26% of its entire existing capacity and 5% of its JV capacity. Additionally, close to 1% of its PVT and 34% of its GVT capacity comes from JV partners; in contrast, KJC s 71% PVT capacity is from JV partners while GVT is completely from own manufacturing. Vitrified tile manufacturing involves higher costs and controlling them becomes difficult in case of outsourcing vs. own manufacturing, leading to lower margins from JVs. We believe increased contribution from JVs will lead to margin improvement for SOMC, in line with that of KJC, once it increases stake in its three JVs from 26% currently to 5%+, the timeline for which however is yet to be disclosed. Note that SOMC has increased its stake from 26% to 5% in Vintage Tiles JV during FY17. Therefore, we expect consolidated EBITDA margins to improve from 1.6% in FY17 to 11.9% by FY2E on higher capacity utilization and an improving product mix. Exhibit 17:Margins moving in tandem with higher contribution from vitrified tiles 6% 5% 4% 3% 2% 1.3% 4.4% 9.4% 33.2% 8.4% 8.1% 29.7% 28.6% GM (%) 6.4% 7.% 25.1% 26.% EBITDAM (%) - RHS 8.3% 29.% 1.6% 1.2% 11.3% 11.9% 34.7% 34.8% 35.1% 35.1% 14% 12% 1% 8% 6% 4% 2% Expect 13%/18% revenue/ebitda CAGR over FY17-FY2E SOMC posted revenue & EBITDA CAGR of 19% over FY1-FY17 led by higher utilization of incremental JV capacity and product mix changes towards higher-margin vitrified tiles. The company s revenue growth has easily outperformed industry CAGR of 12-13% over the same period. However, over FY15-FY17, SOMC s revenue CAGR moderated to 8% due to a slowdown in the real estate market and the impact of demonetization in 2HFY17. Though 1H18 has been hit due to demand disruption and a transitional shift post GST implementation, we think that 2HFY18E might see dealer-level re-stocking returning due the downward revision in the GST rate to 18%. However, overall consumer demand still remains muted and growth should start improving in housing sector by 4Q18.We expect revenue CAGR of 13% over FY17-FY2E though EBITDA would grow at an 18% CAGR over this period led by higher revenue contribution from value added products and increased contribution from the sanitary-ware & bath fittings division. Exhibit 18:Expect consolidated revenue/ebitda CAGR of 13%/18% over FY17-FY2E % 9% 8% 8% Revenues (Rs bn) EBITDAM (%) 6% 7% FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 8% 11% 1% 11% 12% 14% 12% 1% 8% 6% 4% 2% % 1% FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E % November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 13 of 33

14 Working capital cycle to remain steady SOMC s receivable days have increased sharply in the last two years, with FY17 seeing a big jump from 67 to 83 days. We believe this increase was led by a general slowdown in real estate demand over the last two years and demand disruption in 2HFY17 post demonetization; note that KJC has also seen a sharp increase in receivable days for the last two years. Even in FY18E, we expect receivable days to remain slightly stretched due to GST-related issues at the dealer level, and believe an improvement in working capital days would start reflecting from FY19 onwards. Overall cash conversion cycle is expected to improve by four days by FY2E with a reduction in receivable days. Exhibit 19:WC days to start improving from FY19E once industry demand stabilizes FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Exhibit 2:Core ROIC to improve once major capex is over, MDF unit stabilizes (FY19E).2 Receivable Days Inventory Days Payable Days Working Capital Cycle FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E % 12% 23% 13% 15% 1% 19% 13% 2% 2% 14% 15% Exhibit 21:CFO to improve gradually on better profitability from changing product mix 2, 1,5 1, PAT (Rs bn) ROE (%) Core ROIC (%) FCF (Rs mn) CFO (Rs mn) % 13% 946 1,7 2% 15% 1,156 21% 16% 72 25% 2% 15% 1% 5% % 1,494 Return ratios to improve fromfy19e, CFO to pick up with rise in profitability SOMC s cash flows are set to gradually improve over FY18E-FY2E due to higher utilization at both owned and JV plants. We expect a 2% PAT CAGR over FY17-FY2E as margins and profitability improve due to a better product mix. The company s D/E will continue to improve from current levels of.53 to.34 infy2e due to strong cash flow generation and enough cash availability on its books. Core ROIC is expected to improve by 153bps over FY17-2Edue to focus on value added tiles& increased contribution from sanitary-ware & faucet-ware , -1,5-1,168 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 14 of 33

15 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Exhibit 22:D/E expected to improve going forward of Rs 91 by assigning a target multiple 3x on our Mar 19 TTM EPS. We expect ROIC to improve by 153bps over FY17-FY2E and expect EPS CAGR of 2% over FY17-FY2E FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Forecast: Key Assumptions & Sensitivity Revenue Contribution FY16 FY17 FY18E FY19E FY2E FY21E Ceramic 41% 39% 37% 34% 31% 29% PVT 35% 33% 35% 36% 36% 36% GVT 17% 2% 2% 22% 23% 24% Sanitary-ware 4% 4% 5% 5% 6% 6% Faucet & Other Fittings 3% 3% 3% 4% 4% 5% Exhibit 23:TTM P/E vs. two-year forward EPS growth Exhibit 24:TTM EV/EBITDA vs. two-year forward EBITDA growth EPS Growth EBITDA Growth 6% 4% 2% % 4% 3% 2% 1% % 4x 3x 2x 1x 5x 2x 15x 1x 5x 3x Valuation SOMC has been changing its product mix towards more value-added and higher margin PVT/GVT products. It remains well-positioned to capture the demand shift from unorganized to the organized sector aided by favorable GST rates of 18% and implementation of the E-way Bill from Apr 18. We expect tiles segment to contribute to volume and revenue growth over FY17-FY2E, while value-added tiles, sanitary-ware and faucet-ware divisions would drive some margin improvement over this period. We expect SOMC to post revenue/ebitda CAGR of 13%/18% over FY17-2E. The stock is currently trading at 28x FY19E EPS of 3.3 and 22x FY2E EPS 38.4 respectively. We arrive at a TP Exhibit 25:TTM P/B vs. two-year forward RoE RoE 5% 4% 3% 2% 1% % 8x 6x 4x 2x 1x November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 15 of 33

16 Investment risks & concerns Demand slowdown in tier/iii cities: SOMC has focussed aggressively on increasing revenue contribution from tier II & III cities/towns over the past 3-4 years as metros and tier I cities are seeing a demand slowdown post demonetization, a situation further exacerbated by GST implementation. If demand recovery takes longer than anticipated, the company s sales may get hit, leading to lower profitability and dampening the overall financial profile. Any strain in relationships with JV/outsourcing partners to increase cost of operations and capital investments: Since FY11, SOMC has forged strong relationships with midsized Morbi-based players leading to a win-win situation for all parties involved. However, maintaining this relationship is very challenging, particularly when the second line of branded players are emerging from Morbi itself. If relationship with any JV partner is strained due to some reasons, SOMC may have to immediately look for another partner with a similar capacity or set up its own plant - which would take both, time and money, thereby impacting company s operations. Corporate Governance SOMC has paid a dividend of Rs 2.7/sh for FY17. Its dividend pay-out ratio is at 12% currently, and the seven-year average dividend pay-out ratio of 13%. As on Mar 17,the Board of Directors comprised nine directors. Of these, five are independent directors while the remaining non-independent directors. Mr. Shreekant Somany, Chairman & Managing Director of the Company is the spouse of Mrs. Anjana Somany, whole time director, and father of Mr. Abhishek Somany, Managing Director. 5% of Directors have attended all four board meetings held during the year. Three out of five independent directors had attended all the four board meetings. Till Mar 17, M/s. Lodha & Co., Chartered Accountants were the company s statutory auditors. They have not made any adverse comments in SOMC s FY17 annual report. M/s. Singhi & Co. has now been appointed as Statutory Auditors for five years. Century Plyboards, Ramkrishna Forgings, Chambal Fertilizers, Gillander Arbuthnot, Aegon Life Insurance, Skipper Ltd. are some other companies audited by Singhi& Co. At FY17-end, SOMC had contingent liabilities and commitments of Rs. 465mn (vs. Rs 467mn in FY16). Majority of this is on account of capital commitments. Competition from unorganised/second-tier organized players: Historically, the tile industry in India has been dominated by unorganized players since majority of the market is price-sensitive due to which it becomes a low-price, high-volume play. While the share of organized players has increased in the recent years, unorganized players continue to remain a formidable threat. Additionally, second tier companies like Varmora, Simpolo and Sunheart have become national players and are continuously strengthening their brand visibility and distribution reach. Thus, unorganized players and second tier national players can seriously impact growth of bigger companies like SOMC or KJC. Unfavourable price movement in natural gas: Power & fuel form the second largest cost component for tiles companies after raw materials. For the last two years, NG prices have corrected largely in line with that of global crude prices. However, crude prices have bounced back over the last six months due to which NG prices might also increase going forward. Any unfavourable change in RLNG prices will severely impact margins of tile manufacturers, particularly of branded players like SOMC. Dumping from Chinese manufacturers: Though the Indian government had recently imposed an anti-dumping duty of US$ 1.87/sqm on tile imports from China, it was lower than industry expectations and kept out of its ambit four Chinese manufacturers with a large capacity base. Consequently, Chinese imports may restart once the domestic demand scenario stabilizes, hitting sales of branded companies like SOMC and KJC. November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 16 of 33

17 Annexure 1: Industry overview Global tile industry Global tile production has grown at a 6.2% CAGR over CY9-CY16 with China, India and Brazil being the top three producers currently accounting for ~63% of the global output. Tile consumption has grown at a 6% over this period, again led by China, Brazil and India. India s production/consumption has grown at a 1%/6.8% CAGR over CY9-16. China accounts for nearly 48% of global production while India s share is 7%. Exhibit 26:China, Brazil & India contributed ~63% of world s tile production in CY16 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 49% 49% 47% 44% 43% 41% 4% 39% 38% 38% 37% 8% 8% 8% 8% 8% 8% 8% 7% 7% 7% 6% 4% 5% 5% 6% 6% 6% 6% 6% 7% 7% 7% 39% 39% 4% 42% 44% 45% 46% 48% 48% 48% 5% Exhibit 27:China, Brazil and India contributed ~54% of world tile consumption in CY16 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % CY6 CY7 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 CY16 China Brazil India ROW China Brazil India ROW 56% 55% 54% 51% 5% 48% 48% 47% 46% 47% 46% 6% 7% 7% 8% 7% 7% 7% 7% 7% 7% 6% 5% 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 33% 33% 34% 36% 37% 38% 39% 39% 41% 4% 43% CY6 CY7 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 CY16 India s exports have grown at a 29% over CY9-CY15 as unorganized Morbi-based players have increased their focus on export business with Brazil, SE Asia and Middle Eastern countries imposing steep anti-dumping duty on Chinese imports. This has made Indian tiles, especially high-volume, lower quality tiles, very competitive. Bigger branded players in India are therefore focusing on developing their domestic business instead of going abroad. Domestic tile industry The Indian tile industry, the third largest in the world, is currently estimated to be around 785mn sqm/annum in volume terms and Rs27bn-28bn in value terms. The industry has been growing at an8-9% CAGR over the last 4-5 years; however, growth has moderated over the last two years due to subdued real estate demand and impact of demonetization with FY17 seeing a growth of just 3%.Historically, the tile industry has been fragmented with about 65-7 units operating in the country, most of them based in Morbi, Gujarat. The unorganized segment occupies nearly 6% market share in volume terms and 5% market share in value terms; that said, their share has been declining over the years as organized players continue to push through by introducing value-added products and focusing on brand promotion. National brands, including second-tier players operating out of Morbi, currently account for nearly 5% of the industry value-wise, with top-1 players accounting for 44% market share as of FY17. Bigger players like KJC and SOMC have successfully increased their market share in the overall industry revenue pie from ~11% in FY1 to nearly 18% in FY17;in the organized segment, their market share has risen from ~22% to 36% over the same time period. Market share gains have been led by intense focus on manufacturing premium and value-added tiles in both PVT and GVT segments, while over the years, Morbi has become an outsourcing hub for these players. November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 17 of 33

18 Exhibit 28:SOMC has increased its share from 5% to 7% in overall market over FY12-17 Kajaria H&R Johnson Somany Asian Granito RAK 5% Simpolo Nitco Orient Bell Varmora Sun Heart 1% 1% 45% 1% 1% 1% 2% 2% 3% 2% 3% 2% 3% 4% 3% 3% 3% 3% 3% 3% 3% 35% 5% 4% 3% 3% 3% 3% 2% 2% 2% 2% 3% 3% 3% 4% 4% 3% 3% 3% 3% 3% 3% 3% 3% 25% 3% 5% 6% 6% 7% 7% 2% 7% 15% 1% 1% 9% 9% 9% 9% 7% 5% 8% 9% 9% 1% 1% 11% % FY12 FY13 FY14 FY15 FY16 FY17 production. The installed capacity of Morbi (which houses close to 6-65 units) stands at 7mn-sqm per annum, with nearly 15-2% of it being idle at any point in time. Exhibit 29:SOMC has increased its market share in the organized space by 3bps over FY12-FY17and is currently the third largest player in the industry 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Kajaria H&R Johnson Somany Asian Granito RAK Simpolo Nitco Orient Bell Varmora Sun Heart 2% 2% 2% 4% 4% 7% 4% 6% 6% 9% 8% 7% 4% 4% 5% 7% 7% 6% 6% 6% 6% 11% 11% 12% 2% 19% 18% 19% 17% 14% 17% 18% 19% 2% 21% 21% 3% 3% 3% 5% 5% 6% 6% 5% 7% 5% 7% 5% 5% 5% 7% 6% 6% 6% 6% 6% 7% 13% 14% FY12 FY13 FY14 FY15 FY16 FY17 States such as UP, West Bengal, Andhra Pradesh, Tamil Nadu, Gujarat and Rajasthan are the main production centers, with Morbi alone contributing 7% of India s total tile 14% In FY17, ceramic wall and floor tiles contributed~55% of industry volumes and 42% of total value, while PVT (including soluble salt vitrified tiles and double-charged vitrified tiles) accounted for 35% of industry volumes and 43% of industry value. GVT accounts for 1% of industry volumes but 16% of industry value as it remains one of the fastest-growing segments in the tile market. Revenue growth for the top-ten listed players in the organized tile industry was only 1% in FY17 vs. 1% CAGR over FY12-FY17 due to slowdown in the real estate market and demand disruption due to demonetization. Going forward, we believe organized players would continue to grow faster than the industry due to their strong brand equity, better marketing and distribution capabilities, focus on product innovation and reducing pricing differential vs. unorganized players post GST. Also, there is a strong structural shift in consumer preferences to better value proposition (vitrified tiles), which would improve profitability of the entire sector, and branded players in particular. November 29, 217 Analyst: Pranav Mehta ( )/Dhaval Dama ( ) Page 18 of 33