Karishma Kothari

Transcription

1 Building Materials Tiles - Burnished prospects April 6, 2016 KS N BA Manish Mahawar manish.mahawar@edelweissfin.com Karishma Kothari karishma.kothari@edelweissfin.com Edelweiss Securities Limited

2 Tiles Executive Summary (Click here for video clip) The domestic tiles industry is poised for a quantum leap clock volume and value CAGR of 7.5% and 11.5%, respectively, over FY16 18E buttressed by multiple structural catalysts. India s low per capita tiles consumption, rising urbanisation & disposable incomes, virtually untapped but highly potential rural market and government s infrastructure push are burnishing the sector s prospects. Within industry, we anticipate organised players to wrest share from unorganised counterparts underpinned by innovations, premiumisation and higher ad spending, resulting in superior margin, profitability and RoCE. Moreover, the asset light JV model, falling gas prices and GST implementation (additional growth potential of %) are potent triggers that will move the pendulum in their favour. Our deep dive analysis estimates the domestic tiles business to clock sustainable 25 30% RoE assuming 100% in house manufacturing. Among domestic players, we place our bets on Kajaria Ceramics (Kajaria) and Somany Ceramics (Somany) as robust distribution network, higher ad spends, strategic alliances, innovative offerings, prescient capacity expansions and sharpening focus on value added products have and will enable them to steal a march over competition; initiate coverage on both with BUY. Structural levers in place to script multi year growth narrative We envisage the domestic tiles industry to embark on the growth super highway volume and value CAGRs of 7.5% and 11.5%, respectively over FY16 18 riding several structural growth levers. India s low per capita tiles consumption at 0.5sqm versus global average of 1.4sqm entails humungous growth potential. Moreover, only 4% of rural population lives in houses with tile flooring and 63% resides in houses with mud flooring, implying the yet untapped but highly potential rural market. Further, the government s infra push 100 Smart Cities, Swachh Bharat Abhiyaan and Housing For All By 2022 along with policy initiatives to help the real estate and housing sector regain mojo are envisaged to give a fillip to demand for tiles over the coming years. Turf wars: Organised players poised to capture lion s share Organised players are progressively wresting share from their traditionally dominant unorganised counterparts former s share catapulted to 51% in FY15 from 40% in FY08 in value terms and estimated to jump to 54% by FY18. This commendable feat has been achieved by organised players innovation, premiumisation and higher ad spending endeavour. We anticipate organised players to clock 10.1% volume and 13.6% value CAGR over FY We envisage premiumisation structural shift in consumer preference to superior value products (vitrified tiles) to drive value growth and improve organised players profitability. Moreover, organised companies, by virtue of their deep pockets, have successfully created brand equity via liberal ad spends 12 13% CAGR over FY08 15 helping them gain substantial ground versus unorganised players. Also, prudent shift to the asset light JV model entailing benefits like easy access to capacity with low investment, not only helps penetrate market and capture share at a faster clip, but also assures reasonable RoE/RoCE despite low margin. 1 Edelweiss Securities Limited

3 Building Materials Leading pack well stocked to satiate appetite for larger market pie A comprehensive product range, aggressive brand spending, extensive distribution network and sustained capacity expansions have and will continue to anchor market leaders Kajaria and Somany s outperformance versus peers. Unwavering focus on brands, reflected in 33.5% and 39.2% ad spend CAGR by Kajaria and Somany over FY08 15, respectively, versus peers 12 13%, and strengthening of the value chain are bound to catapult Kajaria s and Somany s market shares to 12.0% and 7.8%, respectively, by FY18E (from 10.6% and 6.8% in FY15); this, in turn, will spur their shares in the organised market to 22.1% and 14.4% (20.8% and 13.4% in FY15), respectively, over the same period. We estimate FY16 18 revenue CAGR of 14.9% and 16.6% in Kajaria and Somany, respectively. Outlook: Bright prospects; initiate on Kajaria, Somany with BUY Among the domestic pack, while Kajaria s thrust on value added products will continue to spur profitability, we anticipate Somany to clock superior EBITDA and profitability growth over FY16 18 riding rising proportion of manufactured sales (versus trading earlier), particularly in value added products like GVT/PVT. Ergo, we estimate Kajaria and Somany to clock EPS CAGR of 26.5% and 39.9%, respectively, over FY16 18 with strong RoE/pre tax RoCE of >25%. Moreover, buoyed by robust earnings visibility and healthy return ratios, we anticipate Somany to narrow the valuation gap with leader Kajaria. However, owing to its lower margin versus the leader, we have valued the stock at 20x FY18E EPS (versus Kajaria s 25x FY18E EPS). We initiate coverage on Kajaria and Somany with BUY recommendations and target prices of INR1,100 and INR480, respectively. 2 Edelweiss Securities Limited

4 Tiles Contents Executive Summary... 1 At a Glance... 4 Building materials snapshot... 5 Indian Tile Industry... 6 Indian Tile Industry: A perspective... 6 Catalysts in Place to Drive Multi Year Growth Story Premiumisation Aiding Structural Shift to Organised Players Softening Gas Price, Anti Dumping Duty: To Benefit in Near Term Competitive Landscape Kajaria/Somany versus industry Kajaria versus Somany Companies Kajaria Ceramics Somany Ceramics Asian Granito India H & R Johnson (India) Nitco Annexures Edelweiss Securities Limited

5 Building Materials At a glance Financials Rating Price Mcap Year Revenue EBITDA EBITDA Core PAT Core EPS (Growth %) Absolute (INR) (INR bn) (INR mn) (INR mn) Margin (%) (INR mn) (INR) Revenue EBITDA PAT EPS P/E Kajaria Ceramics BUY FY15 21,746 3, % 1, FY16E 24,000 4, % 2, FY17E 27,397 5, % 2, FY18E 31,669 6, % 3, Somany Ceramics BUY FY15 15, % FY16E 17,226 1, % FY17E 19,805 1, % FY18E 23,426 1, % 1, Source: Edelweiss research 4 Edelweiss Securities Limited

6 Tiles Building materials snapshot Currency Market Market Cap Sales CAGR (%)EBITDA CAGR (%) PAT CAGR (%) EPS CAGR (%) PE (x) EV/EBITDA (x) RoE (%) Price (bn) (FY15 18E) (FY15 18E) (FY15 18E) (FY15 18E) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E PAINTS Asian Paints INR Berger Paints INR TILES Kajaria Ceramics INR Somany Ceramics INR Asian Granito INR PLYWOOD Century Plyboards (India) INR Greenply Industries INR CEMENT Ultra Tech Cement INR 3, Shree Cement (Sept. End) INR 12, Ambuja Cement (CY) INR SANITARYWARE Cera Sanitary Ware INR 1, HSIL INR PIPES Astral Poly Technik INR Supreme Industies INR Finolex Industries INR ADHESIVES Pidilite Industries INR GLOBAL TILES COMPANIES Ras al Khaimah Ceramics (CY) AED Saudi Ceramics (CY) SAR Dynasty Ceramics THB NA Source: Bloomberg, Edelweiss research 5 Edelweiss Securities Limited

7 Building Materials Indian Tile Industry Indian Tile Industry: A Perspective Global tiles production volumes clocked a healthy 7% CAGR over CY India (followed by China) is the fastest growing tile market in the world. The Indian tiles industry, worth INR225bn (756msm), clocked an impressive 10% volume CAGR over FY08 15; in value terms, it posted 15.9% CAGR over the same period. Based on our analysis, the tiles business in India can clock RoE of 25 30% on sustainable basis assuming 100% in house manufacturing. Global tiles industry: Clocking 7% CAGR; India, China fastest growing markets Global tiles production volumes clocked a healthy 7% CAGR over CY China, with around 48% share, continues to remain the world s largest tiles producer, consumer and exporter; Brazil is the second largest producer with 7% share, followed by India at 6%. Global tiles consumption clocked 7% CAGR over CY04 14 (USD48 50bn). China cornered 40% of this, followed by Brazil at 7% and India at 6% Chart 1: China, Brazil and India Major players in global tile production 15,000 12,000 (msm) 9,000 6,000 3,000 0 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 China Brazil India Others Source: Ceramic World Review In volume terms, global tiles consumption clocked 7% CAGR over CY04 14 (USD48 50bn). China cornered 40% of this, followed by Brazil at 7% and India at 6%. However, India (followed by China) is the fastest growing tile market in the world. India, China and Brazil s tile consumption clocked 10%, 10% and 7% CAGR over CY04 14, respectively. 6 Edelweiss Securities Limited

8 Tiles India (followed by China) is the fastest growing tile market in the world Chart 2: China, Brazil and India Major ceramic tiles consumers 12,500 10,000 (msm) 7,500 5,000 2,500 0 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 China Brazil India Others Source: Ceramic World Review Chart 3: World's top 10 exporting countries (CY14) 1,250 1,000 Chart 4: World's top 10 importing countries (CY14) (msm) (msm) China Spain Italy Iran India Turkey Brazil Mexico UAE Poland USA Saudi Arabia Iraq France Germany Nigeria South Korea Russia UAE Phillippines Source: Ceramic World Review The Indian tiles industry, worth INR225bn (756msm), clocked an impressive 9.6% volume CAGR over FY08 15; in value terms, it posted 15.9% CAGR Indian tiles industry: Clocking 9.6% CAGR in volume; posted 15.9% in value over FY08 15 The Indian tiles industry, worth INR225bn (756msm), is the third largest in the world in terms production and consumption. The sector clocked an impressive 9.6% volume CAGR over FY08 15; in value terms, it posted 15.9% CAGR over the same period. 7 Edelweiss Securities Limited

9 Building Materials Chart 5: India Tiles industry clocking 9.6% volume CAGR... 1, Chart 6:...and clocking 15.9% value CAGR 3,50, ,80, (msm) (%) (INR mn) 2,10,000 1,40, (%) , FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 In msm Growth % RHS In INR mn Growth % RHS Source: Industry, Edelweiss research The tiles industry is positively correlated with GDP growth and hence is a direct beneficiary of economic recovery in the country. On an average it grows 1.5x GDP. Chart 7: Industry growth versus India s GDP growth (%) (in %) FY05 FY06 FY07 FY08 FY09 GDP growth % FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Tile industry growth % RHS Source: GoI, Edelweiss research Rising housing demand is the key driver of the tiles industry in India. Housing constitutes 70% of tiles demand, followed by commercial (15%) and replacement market (15%) Rising housing demand is the key driver of the tiles industry in India. According to a KPMG report on real estate, the share of real estate sector in national GDP is expected to increase to 13% by 2028 from 6% in In absolute terms, the sector s size is estimated to increase 7x to USD853bn in 2028 from USD121bn in 2013, CAGR of 14%. This entails humungous growth potential for the tiles industry. Housing constitutes 70% of tiles demand, followed by commercial (15%) and replacement market (15%). 8 Edelweiss Securities Limited

10 Tiles Chart 8: Residential consumes larger pie of demand Replacement 15% Commerical 15% Residential 70% Source: Somany Industry is slowly and steadily shifting in favour of organised players The unorganized segment comprises 49% of the overall Indian tiles market. Historically, these players have been highly competitive given low cost manufacturing advantage primarily on account of tax evasion and low level of premiumisation in the industry. However, the industry is slowly and steadily shifting in favour of organized players on account of a couple of factors like premiumisation & product innovation, regulatory levies tax levies, brand spending, among others. Further, the Indian tiles industry has been historically dominated by floor ceramic tiles. However, consumers are increasingly shifting to value added products (glazed vitrified tiles, polished vitrified tiles and wall ceramic tiles), as these products are stronger, stain resistant and offer better designs with low water absorption. We believe the tile business in India is shifting towards branded products, which assures superior margin, profitability and RoCE. Additionally, the JV model (asset light) a major trend in the industry leads to high return on capital. Based on our analysis, the tiles business in India can clock RoE of 25 30% each on sustainable basis assuming 100% inhouse manufacturing. 9 Edelweiss Securities Limited

11 Building Materials Table 1: Tiles Business can generate RoE of 25 30% assuming 100% manufacturing Particulars INR/sqm Capex 200 Debt/Equity 1:1 Sales 365 Less: Raw material cost 80 Packing materials 20 Other Manufacturing Expenses 20 Power and Fuel 100 Gross margin 145 Gross margin (%) 39.7 Less: Employee costs 40 Sales Promotion (incl Ad Spends) 10 Administrative Expenses 26 Total 76 EBITDA 69 EBITDA (%) PBIT 60 10% (on Investment plus working capital assuming 60days) 16 PBT PAT 29 RoE (%) 29.3 Source: Edelweiss research Note: Above data is based on our interactions with Industry participants. However, it may vary from product to product 10 Edelweiss Securities Limited

12 Tiles Catalysts in Place to Drive Multi Year Growth Story Robust growth to continue in Indian tile industry led by lower per capita consumption, rising urbanization and disposable incomes. We have assumed moderate CAGR of 7.5% and 11.5% in volume and value over FY16 18E, respectively (versus 9.6% and 15.9% over FY08 15) considering subdued real estate market currently. We estimate tiles demand to be driven by tier I and II cities in near term. The Indian tiles industry has been increasingly shifting towards premium products i.e., vitrified tiles, which will drive value growth especially for branded players. Indian tile industry is expected to grow at 7.5% and 11.5% in volume and value, respectively, over FY16 18 (versus 9.6% and 15.9% over FY08 15) We believe multiple catalysts are at play for the Indian tile industry which will lead to sustainable growth over medium to long term. We have assumed moderate growth of 7.5% and 11.5% in volume and value, respectively, over FY16 18 (versus 9.6% and 15.9% over FY08 15) considering subdued real estate market currently. We anticipate demand for tiles to be driven by tier I and II cities in the near term. Any uptick in real estate market will be upside risk to our estimate. We envisage following catalyst to drive tiles demand over the medium to long term: Lower per capita consumption. Rising urbanisation and disposable incomes. Government s sharpening focus on infrastructure development. Shift towards premiumisation. Humungous exports opportunity. India s per capita tiles consumption is significantly low at 0.5sqm compared to global average of 1.4sqm Catalyst 1: Low per capita consumption India s per capita tiles consumption is significantly low at 0.5sqm compared to global average of 1.4sqm. This entails humungous potential for growth. However, India s per capita income is much below (1/4 th ) world s per capita income. Chart 9: Low per capita tile consumption versus world (sqm) Chart 10: Low per capita income versus world 56,000 45,000 (USD) 34,000 23, , Saudi Iran Brazil China Turkey Vietnam Russia Indonesia USA India 1,000 USA Russia Saudi Arabia Turkey Iran Brazil China Indonesia India Vietnam Source: ICCTAS, Edelweiss research Source: World Bank 11 Edelweiss Securities Limited

13 Building Materials With rising disposable incomes, we envisage the demand for tiles to catapult Chart 11: Rising urbanisation in India 35.0 Catalyst 2: Rising urbanisation and disposable incomes About 10mn people are moving to Indian cities each year. Rapid industrialization and associated growth in incomes is bound to propel income levels in India at par with those currently enjoyed by global middle income countries. This is bound to boost the tile industry. Chart 12: Increasing disposable incomes in India 9,000 (% of total population) (in USD) 7,200 5,400 3,600 1, USD per household Source: Somany, World Bank Only 4% of India s rural population lives in houses with tile flooring and 63% lives in houses with mud flooring, entailing a huge opportunity for the tile industry Government s sharpening focus on infrastructure development will give fillip to demand for tiles in India over the coming years Based on census 2011, only 4% of India s rural population lives in houses with tile flooring and 63% lives in houses with mud flooring, entailing a huge opportunity to the tile industry. We believe as urbanisation intensifies, an increasing number of people will shift from rural pockets to cities, catalysing demand for flooring material. Table 2: Households by flooring materials (%) Particultars India Rural Urban Mud Stone Cement Mosaic/Floor tiles Others Total Source: Census of India, Kajaria Catalyst 3: Government s sharpening focus on infrastructure development The government has initiated a number of ambitious projects 100 Smart Cities, Swachh Bharat Abhiyaan and Housing For All By Moreover, it has taken several policy initiatives to help the real estate and housing sector amended FDI policy, set up real estate investment trusts, increased deduction limit on housing loan, relaxed norms for issuing longterm bonds by banks for financing affordable housing etc. These measures are envisaged to give fillip to demand for tiles in India over the coming years. 12 Edelweiss Securities Limited

14 Tiles Fig.1: Modi government Focus on infrastructure Swachh Bharat Abhiyan (SBA) to make rural areas open defecation free (ODF) by enabling construction of individual, cluster & community toilets The Swachh Bharat Abhiyaan targets to build 6 crore toilets across the country by Aims to make India Open Defacation Free (ODF) and will drive demand for tiles & sanitaryware Development of 100 smart cities as satellite towns of larger cities Development of industrial corridors Housing for all by 2022 Rural housing fund under National Housing Board (NHB) The Government has launched this mission covering 100 cities in 5 years (FY16 to FY20) to accelerate urbanisation, improve the quality of life and attract investment. This will require a comprehensive development of physical, institutional, social and economic infrastructure The government has conceptualised 5 industrial and economic corridors. It will result in creation of multiple towns and cities along the corridor leading to reduction in transportation time between states, thereby lowering working capital requirement A scheme which will cover all 4041 statutory towns as per Census 2011 with a focus on 500 Class I cities with an investment of USD 2 tn in providing ~11crore houses. This will catapult the demand for building materials Rural Housing fund aims at offering financial assistance to the weaker sections of the society in all those areas in any town whose population does not exceed 50,000 as per census Source: Somany, Kajaria Structural shift in consumer preference to better value products will drive value growth and improve profitability, especially of branded players Catalyst 4: Shift towards premiumisation The Indian tiles industry has been historically dominated by floor ceramic tiles. However, consumers are increasingly shifting to value added products (glazed vitrified tiles, polished vitrified tiles and wall ceramic tiles), as these products are stronger, stain resistant and offer better designs with low water absorption. Table 3: Ceramic versus vitrified tiles Particulars Nature Composition Application Price range/sqm Ceramic tiles Ceramic tiles are glazed and burned clay Have decorative coat on Majorly used in INR products principally used for decorative the top of the tile body, wall covering of and sanitary effects on the wall and floor. hence their composition bathrooms and They have 3 6% water absorption capacity. is non consistent kitchens Vitrified tiles (GVT/PVT) Vitrified tiles are specialised kind, hard backed with low porosity and water absortion (less than 0.5%), making it stain resistent and strong Have a homogeneous body and consistent in composition Majorly used for all type of flooring INR Source: Edelweiss research Structural shift in consumer preference to better value products i.e., vitrified tiles, will drive value growth and improve profitability, especially of branded players 13 Edelweiss Securities Limited

15 Building Materials Fig.2: Structural shift towards better value products Glazed vitrified 8% 15 msm INR 9 bn 21% CAGR 21% CAGR 38 msm INR 23 bn Glazed vitrified 10% Polished vitrified 39% 145 msm INR 47 bn 14% CAGR 15% CAGR 274 msm INR 96 bn Polished vitrified 43% Ceramic Tiles 53% 334 msm INR 64 bn 6% CAGR 11% CAGR 444 msm INR 106 bn Ceramic Tiles 47% Size in FY10: 494 msm, INR 120 bn Size in FY15: 756 msm, INR 225 bn Source: Edelweiss research Indian players will continue to tap new markets and gain market share Catalyst 5: Exports a humungous opportunity Exports from India have catapulted significantly in recent years, especially on account of anti dumping duty imposed on China largest exporter globally from European countries, Korea, Vietnam, Brazil, Chile, etc (EU imposed anti dumping duties on China in May 2013 for 5 years). As these duties are imposed for around 5 years, Indian players will continue to tap newer markets and gain market share therein. During 2014, India climbed from 11th to 5th place in the rankings of top world tiles exporters. Table 4: India s accounts for mere 3.4% of world s tiles export (msm) Particulars China 1,015 1,086 1,148 1,110 Spain Italy Iran India Turkey Brazil Mexico UAE Poland Others Total 2,346 2,520 2,655 2,683 Source: Ceramic world review 14 Edelweiss Securities Limited

16 Tiles Premiumisation Aiding Structural Shift to Organised Players Organised players will continue to outpace unorganised players on account of: a) premiumisation; b) product innovation; and c) higher brand spend. Organised players share has increased from 40% in FY08 to 51% in FY15 in value terms and we estimate it to improve to 54% by FY18. On account of premiumisation, revenue as well as profitability growth will be superior to volume growth for organised players. Good and service tax (GST), if implemented, could result in significant benefit and will lead to acceleration of growth for industry, especially for organised players. It will lead to additional growth of 1.5 2% for the industry. JV model has led to easy access to capacity with low investment, helping penetrate market and capture share at a faster clip and assures good RoE/RoCE despite low margin. The unorganised segment comprises 49% of the overall Indian tiles market The unorganised segment comprises 49% of the overall Indian tiles market. Historically, these players have been highly competitive given: Low cost manufacturing advantage primarily on account of tax evasion. Low level of premiumisation in the industry. The industry was earlier dominated by unorganized players based in Gujarat (Morbi contributes 60% to India s tiles production). But, with stringent pollution control norms by the Gujarat Pollution Control Board (GPCB), the industry in getting more organised. For Morbi and locations of tiles plant in India, please refer Annexure I and II. Earlier, more than 80% unorganised players at Morbi used coal gas as chief fuel in their manufacturing process. This reduced their cost of production, lending them undue advantage over organised players who operated on natural gas. However, in November 2013, the Gujarat High Court issued closure notice to Morbi based tile units running on coal on account of pollution concerns. Further, there was a sharp increase in price of natural gas over the years which has increased unorganised players cost of production over the past few years. 15 Edelweiss Securities Limited

17 Building Materials Unorganised players were forced to shift to natural gas, narrowing the cost difference between organised and unorganised segments Chart 13: Cost dynamics Coal versus gas (INR per sqm) FY11 FY12 FY13 FY14 FY15 FY16E FY17E Natural gas cost Coal cost Source: Bloomberg, Edelweiss research Note: The historical prices of Indonesian Coal and the long term RasGas Contract have been considered for analysis. Also, since the beginning of FY14, GPCB has restricted cargo handling at the Navlakhi port (which handles 60% of coal for tile industry) leading to severe coal shortage. Moreover, importing from Kandla and other ports became costly. Hence, unorganised players were forced to shift to natural gas, narrowing the cost difference between organised and unorganised segments. Chart 14: Lot of steam still left for organised players (FY15) Share in volume Share in value Unorganised 60% Organised 40% Unorganised 49% Organised 51% Source: Industry, Edelweiss research Over the past couple of years, unorganised players have started entering into JVs with organised players Over the past couple of years, un organised players have started entering into JVs with organised players. Also, India is currently witnessing a change in preference towards highend polished vitrified tiles, leading to higher demand growth for organised players. 16 Edelweiss Securities Limited

18 Tiles JVs between organised and unorganised players: A win win situation Over the past couple of years, most organised players have entered into JVs with unorganised players for tile manufacturing. The JV model benefits both the partners. Unorganised players capacity utilisation improves and they do not have to worry about branding and logistics. Sales are guaranteed by organised players and costs are pre determined. Organised players benefit since capital deployment in JVs is much lower than greenfield capacity expansion, negligible gestation period aiding quicker volume/revenue growth and improvement in reach driving logistic savings. We believe this business model has changed the industry s dynamics as large or organised players like Kajaria, Somany and HR Johnson are able to access capacity easily with low investment. This helps penetrate market and capture share at a faster clip. Further, it assures good RoE/RoCE despite having low margin. Feedback from our interactions with few JV partners of organised players during our recent visit in Morbi, Gujarat. JV model provides us stability in terms of production and profitability. Further, we are able to run plant at optimal utilisation on account certainty in sales as partners (organised players) have strong brand recall. Further, JV model also mitigate the risk in terms of collection. JV model has 3 4 years payback period Structural shift in consumer preference to better value products will lead to superior value and realisation growth versus volume growth, especially for branded players The industry is slowly and steadily shifting towards organised players over the years on account of a couple of factors like premiumisation & product innovation, regulatory levies tax levies, brand spending etc. We believe premiumisation i.e., structural shift in consumer preference to better value products will lead to superior value and realization growth versus volume growth, especially for branded players. Larger tile brands (organised players) are significantly ahead of unorganised players in terms of product innovation in terms of size and design, which positions them strongly, as consumer preference shifts to premium products. 17 Edelweiss Securities Limited

19 Building Materials Table 5: Some innovations in tiles apart from size and design Key Innovations Company Description Digital Glazed Tiles Kajaria Ceramics The company was the first to introduce digital glazed tiles in India. These entailed digital printing. VC (Veilcraft) Shield Protection Somany Ceramics The VC Shield Protection is a patented high abrasion resistant glaze layer which protects each tile from abrasion, scratch and stains ensuring timeless elegance. Somany Slip Sheild Somany Ceramics A slip resitant tile for which the compnay has patent. Forever Tiles Orient Bell Forever Tiles are a licensed technology floor tiles that come with 40% higher resistance to abrasion compared to any other product in the market which means that the tiles will last a long time with no signs of wear and tear. This will result in floors that look good forever. This also means that high traffic areas now have the appropriate and effective material for floor covering, with no need to do up flooring at short intervals. The tiles have been tested at an independent Italian test laboratory. This is a patented technology by Orient Bell. Germ free Tiles Orient Bell The Germ Free tiles kill more than 99.5% of the disease causing bacteria found in homes and public places.these are manufactured using a specially formulated antimicrobial glaze. This special glaze inhibits the growth of germs, bacteria, fungus and other microbes that come in contact with the tile thus contributing to a healthier living environment. Monoporosa Kajaria Ceramics Monoporosa refers to glazed tiles made by single firing invented in Spain. It has a different process of manufacturing from regular tiles made by double firing. Kajaria Ceramics was the first company to adapt to the single firing technology in manufacturing wall and floor tiles. 8 colour print technology Asian Granito This technology provides printing tiles with more than one colour. When combined with third firing technology, this technology offers smoother surfaces with increased design and image resolution to give finer details to effects. It renders more vivacity to the tiles with highly crisp colour effects giving extraordinary ambiance to spaces. Through this technology, myriad effects like emboss, polished, luster and precious metals, among others can be printed on the tiles. Micro Crystal tiles Asian Granito Asian Granito was the first company in India to manufacture high tech Micro Crystal tiles. Micro Crystal tiles have extremely attractive finish and texture that gives an incomparable aesthetic look to floors. Its high glossy mirror finish, strain resistance and dirt free qualities make it a perfect choice for both offices and homes Rustic Tiles Nitco Nitco Introduced Rustic tiles in 1998, which requires a unique dry powder application technology in order to create a natural stone look. Nitco was then the only tile manufacturer in India, with this advanced technology. Source: Industry, Edelweiss research 18 Edelweiss Securities Limited

20 Tiles The share of organised players has increased to 40% in FY15 from 30% in FY08 in volume terms. Further, their contribution has increased to 51% in FY15 from 40% in FY08 in value terms. Chart 15: Organised market is growing steadily In volume (%) (%) In value 0.0 FY08 FY09 FY10 FY11 Organised FY12 FY13 FY14 FY15 FY16E FY17E Unorganised FY18E 20.0 FY08 FY09 FY10 FY11 Organised FY12 FY13 FY14 FY15 FY16E FY17E Unorganised FY18E Source: Industry, Edelweiss research We anticipate organised and unorganised segments to grow at 13.6% and 9.2% (volume 10.1% and 5.7%), respectively, in value terms over FY16 18E Over FY08 15, the organised and unorganised industry grew at 14.2% and 7.3%, respectively, versus overall industry growth of 9.6% in volume terms; in value terms it grew at 20% and 12.6%, respectively over the same period versus industry growth of 15.9%. We anticipate the industry to grow at 11.5% (volume CAGR of 7.5%) over FY16 18E in which organised and unorganised segments will grow at 13.6% and 9.2% (volume 10.1% and 5.7%), respectively, in value terms. We believe the Good and Service Tax (GST), if implemented, could result in significant benefit and will accelerate growth of organised players. 19 Edelweiss Securities Limited

21 Building Materials GST: Potent game changer GST can accelerate the shift towards organised sector as it will 1) lower tax rates and 2) strengthen competitive positioning of organized players by eliminate/reduce tax arbitrage (including tax evasion) and advantages currently enjoyed by unorganised players. Thus, it will create a level playing field between unorganised and organised players. We believe GST is one of the key factors which will drive the shift to the organised segment. Other factors that too will play a pivotal role in determining the magnitude and extent of the shift are: Price difference between organised and unorganised players. Difference in product quality and basket of offerings between organised and unorganised players. Brand appeal of products from organised sector. Distribution network and availability of products. Tax and regulatory considerations. Currently, the tile industry pays total tax of 26.36%, which consists of 2% CST, 12.36% excise and 12% VAT. Hence, if the GST rate is set at 18 20%, we believe the industry s tax rate will fall 6 8%, going forward. Further, players with pan India presence (mostly organized) will save costs related to octroi, freight etc. Mr Ashok Kajaria, CMD, Kajaria Ceramics, expects the organised sector to pass on the benefits of lower taxes to consumers. He also stated that price difference between unorganised and organised sectors, which is currently 15 20%, will decline to ~10 12% on implementation of GST. It will lead to additional growth of % for the industry. 20 Edelweiss Securities Limited

22 Softening Gas Price, Anti Dumping Duty: To Benefit in Near Term Tiles Imports constitute 10% of domestic industry currently and anti dumping duty will boost sentiments and support domestic players. Power and fuel constitute significant portion i.e., 25 30% of overall cost. Hence, reduction in gas cost is likely to benefit the industry. Recently imposed anti dumping duty on imports of vitrified tiles will boost sentiments and support domestic players Anti dumping duty to boost industry Recently, government has imposed anti dumping duty of US$1.37/sq mtr on imports of vitrified tiles from China. Earlier, the government has initiated an anti dumping investigation since October 2015 on imports of glazed/unglazed porcelain/vitrified tiles originating in or exported from China. Imports constitute 10% of domestic industry currently and anti dumping duty will boost sentiments and support domestic players. For history of anti dumping duty on Indian tile industry, please refer Annexure III. Softening gas price to boost margin in short term Post ban on use of coal for manufacture of tiles since October 2013, most tiles manufacturers entered into long term agreements with GAIL (India) and Gujarat State Petroleum Corporation (GSPC) for supply of liquefied natural gas (LNG) at contracted prices. The pricing formula was for contracted LNG and was linked to the Japan Crude Cocktail (JCC) index which is largely dependent on movement of crude oil prices. Contracted LNG prices in USD terms increased to USD12.6/mmbtu in H1FY14 from USD6.1/mmbtu in FY11. This, coupled with the INR s depreciation (35% over same period), led to significant increase in gas costs of domestic players. However, in 2015, with the decline in Japanese Crude Spot prices and crude oil prices globally, Gujarat Gas Ltd. reduced gas prices to INR29/SCM from INR31.8/ SCM. This provided Morbi based ceramic players some relief. 21 Edelweiss Securities Limited

23 Building Materials Chart 16: Declining crude oil prices of Japanese Crude Cocktail (JCC) (USD/mmbtu) Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Power and fuel constitute significant portion i.e., 25 30% of overall cost. Hence, reduction in gas cost is likely to benefit the industry in the near term Japan Arrival based Spot LNG Import Price Source: Bloomberg However, there was no corresponding reduction in price of gas supplied by GAIL. Thus, organised players with plants outside Gujarat suffered due to high gas cost. But, post negotiations of Petronet LNG (PLNG) and Qatar s Rasgas, the gas pricing formula has been revised in January 2016 to almost half the earlier price. The new agreement came as a big relief to all parties in the LNG value chain such as GAIL, PLNG, IGL and Gujarat Gas which will in turn benefit organised players in the tiles industry with long term contracts with GAIL. Power and fuel constitute significant portion i.e., 25 30% of overall cost. Hence, reduction in gas cost is likely to benefit the industry in the near term. 22 Edelweiss Securities Limited

24 Tiles Competitive Landscape Kajaria/Somany versus industry Market share: Kajaria and Somany, both have taken market share from unorganised as well as other organised players and have enhanced scale, invested in distribution/brand resulting in improved market share. Organised market share of both has increased from 26% in FY11 to 34% in FY15 in value terms. Further, overall market share has improved from 11% in FY08 to 17% in FY15. Superior financials: We believe that Kajaria and Somany have the best financials in the industry. Most branded manufacturers, except Kajaria and Somany, have leveraged balance sheets and hence, these players are facing growth challenges. Brand spend: Kajaria and Somany spend 2.5% and 1.9% of revenue as ad spend, respectively, versus average industry spent of 1.8%. Kajaria and Somany s ad spend grew at 33.5% and 39.2%, respectively, over FY08 15 versus industry CAGR of 12 13%. Within organised players, top 5 players HR Johnson, Kajaria, Somany, Nitco and Asian Granito control 70% of the market Limited players; top 5 companies control 70% organised market The tiles industry, comprising private players and a large number of small & regional players, is highly fragmented. Within organised players, top 5 players HR Johnson, Kajaria, Somany, Nitco and Asian Granito control 70% of the market. Chart 17: Organised market share of key players (%) (%) FY11 FY12 FY13 FY14 FY15 Kajaria H& R Johnson Somany Nitco Asian Granito Source: Edelweiss research Kajaria and Somany outpaced industry as well as organised players Kajaria and Somany have captured market share from unorganised as well as other organised players like HR Johnson, Nitco etc Leading brands, Kajaria and Somany, posted 24.5% and 23.3% CAGR, respectively, over FY08 15 as they enhanced scale and invested in distribution/brand, resulting in improved market shares. Both the players have captured market share from unorganised as well as other organised players like HR Johnson, Nitco etc. 23 Edelweiss Securities Limited

25 Building Materials HR Johnson (leader till FY14) has lost market share over the past couple of years on account of natural gas and power supply issues faced by its plants in Karnataka and AP, which account for 40% of total capacity. However, the company has addressed these issues recently and is expected to recover lost ground. Chart 18: Kajaria and Somany have outperformed industry 60.0 (INR bn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Kajaria Somany Source: Edelweiss research Kajaria and Somany have the best financials in the industry on most parameters Better financials enable aggressive brand push Based on our analysis on below mentioned criteria, Kajaria and Somany have the best financials in the industry on most parameters. Barring these 2, none of the branded manufacturers have the financial might (have high leverage) and hence, they are facing growth challenges. Table 6: Kajaria and Somany have best financials in industry Company Market share (FY15) Revenue FY15 3years CAGR 7years CAGR EBITDA Overall Organised FY15 (FY12 15) (FY08 15) margin PAT CAGR (%) (%) (INR mn) (%) (%) (%) (FY12 15) (FY08 15) Kajaria , Somany , HR Johnson , NA NA NA NA NA NA Nitco* ,850 NA NA NA (4.9) NA Asian Granito , (6.4) (9.4) Orient Bell , (27.5) Note: Financials of HR Johnson are not available. Hence, we have not considered the same. Further, Nitco has negative networth. Hence, ratios related to networth have not been calculated. Table 7: Competition ranking Particulars Kajaria Ceramics Somany Ceramics Asian Granito Orient Bell Nitco Size Overall Profitability Cashflows Balance Sheet strength Overall Ranking years 7years FY15 ROCE (%) FY15 Working capital CFO/EBITDA D/E No. Of days Average of (x) (FY15) 5 years 24 Edelweiss Securities Limited

26 Tiles Bolstered by strong financials, Kajaria and Somany spend liberally on brand building Bolstered by strong financials, Kajaria and Somany spend liberally on brand building via outdoor and television advertisements. Given that retail sales contribute significantly (>60%) to revenue of tile companies, brand recall plays a pivotal role in influencing decisions of customers, especially in tier II/III markets. Table 8: Increased focus on brands led to spurt in ad spend (% of net sales) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Nitco NA NA NA Asian Granito Orient Bell Note: For NITCO data has been considered from FY11 15 as earlier data not available Tale 9: Absolute ad spend grew sharply for biggies (INR mn) Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 CAGR FY08 15 (%) Kajaria % Somany % Nitco NA NA NA % Asian Granito % Orient Bell % Fig. 3: TV ad of Kajaria Ceramics Note: For NITCO data has been considered from FY11 15 as earlier data not available Fig. 4: TV ad of Somany Ceramics 25 Edelweiss Securities Limited

27 Building Materials Fig. 5: TV ad of HR Johnson 26 Edelweiss Securities Limited

28 Tiles Table 10: Operational Snapshot Parameters Year Kajaria Ceramics Somany Ceramics H.R. Johnson Asian Granito Orient Bell Nitco Production capacity of tiles (in MSM) FY (Own + JV) Market Share in the FY Organised Sector (%) FY FY Retail vs Instituional Sales FY15 70:30 65:35 70:30 65:35 Substantially Retail Substantially Retail Distribution Network FY15 Tile Manufacturing Units (including JV) FY15 Sikandrabad (Uttar Pradesh) Kassar (Harayana) Pen ( Maharashtra) Sabarkantha (Gujarat) Gailpur (Rajasthan) Kadi (Gujarat) Dewas (Madhya Pradesh) Sikandrabad (Uttar Pradesh) Morbi (Gujarat) Morbi(Gujarat) Kunigal (Karnataka) Hoskote (Kanarataka) Vijaywada (Andhra Pradesh) Karaikal(Pondicherry) Alibaug (Maharashtra) Dora (Gujarat) Morbi (Gujarat) Andhra Pradesh Gujarat No. of plants (tiles) FY No. of JV/ Associates for FY tiles Product Mix (FY 15) (%) Ceramic PVT Revenue Mix (FY 15) (%) 950 dealers and 4000 associate dealers catering to 10,000 sales point across the country 1272 dealers, 179 showrooms with more than 10,000 touch points 1000 dealers with 10,000 sub dealers and 28 showrooms 4000 dealers and sub dealers 4500 active dealers with 120 Orient Bell tiles Boutiques and 25 depots 1100 dealers, 26 depots and 125 showrooms GVT Others Own JV NA NA Outsourcing NA Edelweiss Securities Limited

29 Building Materials Kajaria versus Somany Kajaria s business model is superior: given a) revenue mix in terms of manufactured and traded; b) revenue mix in terms of value added products; and c) distribution. Somany is catching up at faster pace: We believe Somany is improving its business model in terms of above factors which will lead to superior growth versus Kajaria, going forward. EBITDA analysis: Kajaria has much superior EBITDA margin (19 20%) versus Somany (6 7%). Our detailed analysis on financials of both the companies reflects: a) Kajaria s EBITDA contributed by 81% of manufactured volume versus Somany s 50% (versus sales mix of 50%/44% in volume term); b) Kajaria manufactures value added products (like PVT/GVT) at own plants versus Somany s preference for outsourcing. Kajaria is larger than Somany in terms of capacity with 54msm versus Somany s 43msm. Apart from this, both the companies also outsource production to third parties. Capacity Kajaria is larger than Somany in terms of capacity with 54msm versus Somany s 43msm as on March 31, However, Somany s JV capacity is 49% versus Kajaria s 42%. Apart from this capacity, both the companies also outsourced the production to third parties. Somany owns 26 50% stake in its most of the JV s versus Kajaria >50% stake. Hence, Somany has average 31% stake in JV s versus Kajaria s 55% stake as on March 31 st, Chart 19: Kajaria is larger in overall capacity with JVs contributing 42% (msm) (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Own JV Subsidiaries JV as % of total capacity RHS 28 Edelweiss Securities Limited

30 Tiles Chart 20: versus Somany s JV contribution of 49% (msm) (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Own JV Subsidiaries JV Associates JV as % of total capacity RHS Own versus JV & outsourced revenue Further, Kajaria and Somany have outsourced revenue of 17% and 20% during FY15, apart from JV revenue of 31% and 40%, respectively. Hence, Kajaria and Somany have JV+outsourced revenue of 48% and 60%, respectively. Chart 21: JV+outsourced contribute 60% to Somany s revenue Chart 22:..versus Kajaria s 48% 40, , , , (INR mn) 24,000 16, (%) (INR mn) 15,000 10, (%) 8, , FY12 FY13 FY14 FY15 FY16E FY17E FY18E 30.0 Own JV Outsourced JV+outsourced revenue contributon (%) RHS 0 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Own JV Outsourced JV+outsourced revenue contributon (%) RHS 29 Edelweiss Securities Limited

31 Building Materials Kajaria was early entrant in the GVT and PVT market which led to superior product mix versus Somany Product mix Kajaria was early entrant in the GVT and PVT market that led to superior product mix versus Somany. GVT and PVT contributed 57% to Kajaria s sales versus 51% to Somany s in FY15. Chart 23: Kajaria has superior mix with GVT/PVT contribution of 57% (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Ceramic tiles PVT GVT Others Chart 24:.against 51% of Somany (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Ceramic tiles PVT GVT However, faster addition of capacity and sales of GVT and PVT in Somany over the years led to narrowing of the gap and we expect it to narrow further over FY Edelweiss Securities Limited

32 Tiles Chart 25: Somany is narrowing the gap with Kajaria at a faster pace 75.0 Faster addition of capacity and sales of GVT and PVT in Somany led to narrowing of the gap over the years versus Kajaria. We expect it to narrow further over FY16 18 (% of revenue) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Somany Kajaria On account of better product mix in terms of GVT and PVT, Kajaria earns higher realisation versus Somany Better realisation in Kajaria led by product mix; however, gap has narrowed substantially On account of better product mix in terms of GVT and PVT, Kajaria earns higher realisation versus Somany. However, the realisation gap has narrowed over the years primarily on account rising share of GVT and PVT in Somany versus Kajaria. Somany s realisation clocked CAGR of 8.4% versus Kajaria s 6.8% over FY Chart 26: Kajaria s better product mix reflects in realisation too (INR per Sqm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Kajaria Somany On account of focused approach, Kajaria has better revenue per dealer versus Somany Somany has higher dealers versus Kajaria; however, Kajaria has added aggressively Somany has dealer network of 1,272 versus Kajaria s 950. However, the latter has increased dealer network 35% over FY Kajaria chooses dealers with an eye on high demand areas. Hence, it has better revenue base with less dealers. Somany has started rationalising its dealer network over the past couple of years. 31 Edelweiss Securities Limited

33 Building Materials These dealers have multiple sub or associate dealers who directly deal with ultimate consumers. Both the companies earn 60 70% revenue from retail customers who directly buy products from sub/associate dealers. Both the players provide dealer /sub dealer average margin of 15 20%. On account of focused approach, Kajaria has better revenue per dealer versus Somany. Chart 27: Dealers Kajaria on addition spree..somany rationalisation drive Kajaria 1,000 2, (No. of Dealers) (No. of Dealers) 1,600 1, ,334 Somany 1,768 1, FY11 FY13 FY15 0 FY11 FY13 FY15 Chart 28: Revenue/dealer Kajaria is way ahead of peers (INR mn) Kajaria HR Johnson Somany Nitco Asian Orient Bell Revenue/Dealer (INR mn) Granito Source:Edelweiss research Kajaria has superior realisation of INR368/sqm versus Somany s INR344/sqm primarily on account of better product mix Financial Analysis Kajaria and Somany s volume grew at 15.5% and 14.1% over FY08 15, respectively. However, their realisation grew at 6.7% and 8.4%, respectively over the same period. Kajaria has superior realisation of INR368/sqm versus Somany s INR344/sqm primarily on account of better product mix. 32 Edelweiss Securities Limited

34 Tiles Table 11: Consolidated financial ratios (%) Particulars Kajaria Ceramics Somany Ceramics FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15 Net Sales (INR mn) 9,532 13,115 16,109 18,295 21,746 7,139 8,761 10,499 12,606 15,352 Materials Consumed Raw Material Consumed Purchase of stock in trade (Increase)/Decrease in stocks 0.4 (1.7) (1.3) 1.8 (4.2) (3.0) (0.1) (1.5) 2.1 (2.6) Total Raw Material Consumed Manufacturing Expenses Packing materials Power and Fuel Total Manufacturing expenses Total Material & Mfg. expenses Employee costs Advertisement expenses Other Expenses EBITDA Depreciation Other Income EBIT Finance Cost Forex loss/(gain) 0.3 (0.6) (0.1) (0.2) Exceptional Item (0.0) 0.0 (0.0) PBT Provision for Tax PAT before associate profit Minority Interest (0.1) Share of net profit/(loss) of associates (0.1) PAT Source: Edelweiss research Both the companies have increased their spending significantly over the years to sharpen focus on brands and capture market share Ad spend Kajaria and Somany spent 2.5% and 1.9% of sales on advertisements, respectively, in FY15. Both the companies have increased their spending significantly over the years to sharpen focus on their brands and capture market share. Kajaria has increased ad spends from INR71mn in FY08 to INR543mn in FY15, at 33.5% CAGR. Somany s ad spends catapulted from INR29mn in FY08 to INR289mn in FY15, 39.2% CAGR. 33 Edelweiss Securities Limited

35 Building Materials Chart 29: Aggressively spending on advertisements 625 Chart 30:...Somany is narrowing gap with Kajaria (INR mn) (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Kajaria Somany Power and fuel cost Somany s power and fuel cost is marginally lower than Kajaria s in terms of power and fuel/sqm Power and fuel cost constitutes 25 30% of manufactured revenue. However, it constitutes 13% and 22% of Somany s and Kajaria s overall revenue, respectively, on account of mix change in terms of trading sales. Further, our analysis in terms of power and fuel/sqm indicates that Somany s power and fuel cost is marginally lower than Kajaria s. However, our checks with managements indicate that gas procurement of both companies is largely similar. Both have long term gas procurement contracts in each of their plants. Chart 31: Somany s power and fuel cost/sqm is lower than Kajaria (INR per sqm) FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Note: On account of unavailability of production volume of Amora Tiles (subsidiary of Somany), we have assumed capacity utilisation of 50% in FY14/15. However, it will not change our analysis materially. 34 Edelweiss Securities Limited

36 Tiles EBITDA margin Kajaria s FY15 EBITDA margin of 15.7% (9mFY16: 18.7%) is significantly superior versus Somany s 6.5% (9mFY16: 6.8%) despite being sales differential of only 30%. Chart 32: Kajaria s EBITDA margin is way ahead of Somany (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Kajaria Somany 35 Edelweiss Securities Limited

37 Building Materials EBITDA margin: A perspective Kajaria s EBITDA margin is significantly superior versus Somany s. Further, the gap has widened from ~5% in FY08 to ~12% in 9mFY16 primarily due to increased proportion of outsourced/jv sales in Somany in which it earns trading margin. Somany s EBITDA margin fell from 11% in FY08 to 6.5% in FY15. However, Kajaria s EBITDA margin was stable over the same period. Our detailed analysis of financials of both the companies indicates that Somany owns only 26% in JVs on account of which its earnings are accounted as associated income, below PBT. Somany is the marketing arm for its own as well JV s products. Hence, sales of entire production in JV are executed through Somany. Hence, entire sales of JVs come as raw material in Somany and it retains only trading/marketing margin. However, Kajaria owns majority stake (>51%) in all its JVs. Hence, financials of all JVs are merged line by line. On account of this, significant differential emerges in EBITDA margins of both the companies. The economic capacities of Kajaria and Somany are 55msm and 30msm, respectively, in FY15 versus reported capacity of 54msm and 43msm, respectively. Chart 33: Kajaria has much higher economic capacity versus Somany Kajaria Somany (msm) (msm) FY08 FY09 FY10 Own FY11 FY12 FY13 FY14 FY15 JV FY16E FY17E FY18E FY08 FY09 FY10 FY11 Own FY12 FY13 FY14 FY15 JV FY16E FY17E FY18E Major factors are Manufactured volume contributes 81% to Kajaria s EBITDA versus 50% in case of Somany While Kajaria manufactures value added products (like PVT/GVT) at its own plants, Somany prefers to outsource them. GVT/PVT are superior margin products versus ceramic tiles. Manufactured volume contributes 81% to Kajaria s profit versus 50% to Somany s In value terms, Kajaria and Somany earned outsourced revenue of 17% and 20% during FY15 apart from JV revenue of 31% and 40%, respectively. Hence, Kajaria and Somany have JV+outsourced revenue of 48% and 60%, respectively. On account of differential stakes in JVs by both companies and accounting methods, manufactured volume contributed 81% to Kajaria s profit versus 50% for Somany 36 Edelweiss Securities Limited

38 Tiles Table 12: Manufactured versus outsourced metrics (FY15) Particulars Kajaria Somany Contribution to Revenue Manufactured volumes JV + outsourced volumes Contribution to Gross Margin Manufactured volumes Traded volumes EBITDA Margin PAT Margin ROCE Kajaria manufactures value added products (PVT/GVT) at its own plants versus Somany s preference to outsource them Kajaria was an early entrant in the GVT and PVT market that led to superior product mix versus Somany. GVT and PVT contributed 57% to Kajaria s sales versus 51% in case of Somany in FY15 (refer page no. 30) Further, Somany has outsourced production of value added products (like GVT/PVT), which entail better margins, to either associates or third parties. However, Kajaria manufactures these products at its own plants or in that of subsidiaries. Kajaria has entire (100%) production of GVT and PVT capacities under own/subsidiaries versus mere 15% in case of Somany. Further, this has led to significant difference in realisation and gross margin of manufactured capacities. Chart 34: Realisation in manufactured volume (INR per sqm) Chart 35: Gross margin in manufactured volume (INR per sqm) FY09 FY10 FY11 FY12 FY13 FY14 FY FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Kajaria Somany Apart from the above factors, we believe: Kajaria commands brand premium versus Somany as well as other organised players, which leads to the former earning superior realisation and gross margin. Further, higher revenue contribution of GVT and PVT to overall revenue supports superior EBITDA margin of Kajaria versus Somany (refer page no.35) 37 Edelweiss Securities Limited

39 Building Materials Return ratios Somany s asset turnover is higher (3.1x vs 1.8x for Kajaria) due to larger proportion of trading sales. Despite better asset turnover, it has lower RoCE due to significantly lower EBITDA than Kajaria Chart 36: Kajaria's RoCE is superior despite lower asset turnover ratio Asset turnover ratio RoCE (x) (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Kajaria Somany Way forward We anticipate that Kajaria is likely to increase its EBITDA margin by 160bps over FY16 18E primarily on account of 1) rising share of manufactured sales 2) increasing share of GVT/PVT and 3) lower gas prices. Further, Somany is enhancing its GVT and PVT capacity from 16.7sqm in FY15 to 25.4sqm by FY17 which is coming in own/subsidiaries financials. It will lead to manufactured GVT and PVT capacity rising to 42% in FY17 from 15% in FY15. Further, it will improve GVT and PVT sales mix to 64% in FY18 from 51% in FY15. Hence, we believe Somany s EBITDA margin will catapult to 8.0% in FY18E from 6.8% in FY16. EBITDA margin is expected to be further supported by lower gas prices. 38 Edelweiss Securities Limited

40 Tiles Kajaria has marginally higher capex per sq meter versus Somany Capex Kajaria has marginally higher capex per sq meter versus Somany, which we believe is on account of higher GVT and PVT capacities. Chart 37: Kajaria capex/sq mtr>somany (INR per sqm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Note: we have not considered Sanitary ware/bathroom fittings capacity in our calculation on account of non availability of data Kajaria has much lesser debtor days versus Somany which we believe is due to the brand premium it commands Working capital Kajaria has much lesser debtor days versus Somany which we believe is due to the brand premium it commands. However, Somany is better than Kajaria on inventory and payable days front. Chart 38: Kajaria working capital is better versus Somany Debtor (No. of days) (No. of Days) Inventory 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Kajaria Somany 39 Edelweiss Securities Limited

41 Building Materials Chart 38: Kajaria working capital is better versus Somany (Contd ) Payable Cash conversion cycle (No. of days) (No. of Days) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Kajaria Somany Kajaria Somany 40 Edelweiss Securities Limited

42 India Midcaps INITIATING COVERAGE KAJARIA CERAMICS Glazed glory: Scaling the growth pitch India Equity Research Miscellaneous A vibrant product range, aggressive brand spending, extensive distribution network, sustained capacity expansion have and will continue to anchor Kajaria Ceramics (Kajaria) outperformance versus peers. Unwavering focus on brands (33.5% ad spend CAGR versus peers 12 13%; 2.5 3% of sales) and strengthening of the value chain are bound to catapult market share to 12.0% by FY18E from 10.6% in FY15, driving up share in organised market to 22.1% from 20.8% over same period. Ergo, we estimate the company to clock revenue and PAT CAGR of 14.9% and 26.5% over FY16 18, respectively, with strong RoE/pre tax RoCE of >25%. Further, we estimate Kajaria to generate FCF of INR5.6bn during the same period. Initiate coverage with BUY and target price of INR1,100. Unwavering brand focus, value added products: Growth catalysts We anticipate Kajaria s market share to jump to 12.0% by FY18E from 10.6% in FY15 anchored by unwavering focus on brands, amply reflected in 33.5% CAGR in ad spends over FY Further, capacity expansion to 74msm by FY17E will fuel rise in share of GVT/PVT to 66% in FY18E from 57% in FY15. Moreover, a gradual paced and well thought out dealer expansion strategy not only eliminates cannibalisation, but also ensures superior revenue per dealer versus peers. Ample levers to drive EBITDA margin Kajaria has consistently sustained EBITDA margin at 15 16% over the years bolstered by superior mix and rising proportion of manufactured sales. We estimate its EBITDA margin to jump 160bps to 20.3% over FY16 18 led by rising share of manufactured sales, higher share of value added products (GVT/PVT) and lower gas prices. Outlook and valuations: Leading the pack; initiate with BUY We believe Kajaria will command premium valuation riding industry leadership, continued market share gain, superior brand and healthy profitability matrix. Further, it will be supported by strong industry drivers along with structural shift from unorganised to organised players. We initiate coverage with BUY, valuing the stock at 25x FY18E. The stock traded at 6 29x valuations during FY12 16 (average P/E 26x). At current levels, it is trading at 26.8x FY17E and 21.5x FY18E, respectively. Financials Year to March FY14 FY15 FY16E FY17E Revenues (INR mn) 18,295 21,746 24,000 27,397 EBITDA (INR mn) 2,783 3,418 4,496 5,374 Adjusted Profit (INR mn) 1,243 1,758 2,176 2,789 Adjusted Diluted EPS (INR) Diluted P/E (x) EV/EBITDA (x) ROACE (%) ROAE (%) EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: KARJ.BO, B: KJC IN) CMP : INR 942 Target Price : INR 1, week range (INR) : 998 / 607 Share in issue (mn) : 79.5 M cap (INR bn/usd mn) : 75 / 1,126 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q3FY16 Q2FY16 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) Sensex Stock Stock over Sensex 1 month 0.9 (0.5) (1.4) 3 months (2.1) (2.8) (0.7) 12 months (12.7) Manish Mahawar manish.mahawar@edelweissfin.com (Click on image (Click on image for video) to view video) Karishma Kothari karishma.kothari@edelweissfin.com April 06, Edelweiss Securities Limited

43 Miscellaneous Investment Rationale Mr. Ashok Kajaria Chairman and Managing Director At Kajaria, we expect exciting opportunities to unfold over the next 5 years Comprehensive product range: Kajaria has developed a wide range of products and straddles entire size and price value chain, ranging from affordable tiles to upperend glazed vitrified tiles. Strong brands: A name to reckon with, Kajaria enjoys highest brand equity in the industry. The company has been successful in creating pull for its products and commands pricing premium of 5 7% versus organised players. Widespread distribution network: It has a strong and widespread dealership network of 1,100, which caters to ~4,000 associate dealers across India. Kajaria has superior revenue per dealer versus competition. Capacity expansion: Expanding capacity from 54msm to 74msm by FY17E, which will bolster growth. Continuous market share gains: The above factors have helped Kajaria outperform both industry and organised players. We estimate market share to surge to 12% in FY18 from 10.6% in FY15. EBITDA margin: We are assuming 160bps jump over FY16 18 on: a) rising share of value added products; b)higher manufactured sales; and c) lower gas price. Kajaria is present across the entire size and price value chain, ranging from affordable tiles to upper end glaze vitrified tiles Leading player with comprehensive product range Kajaria is the largest player in the domestic tiles industry. The company has, over the years, developed a comprehensive range of products including ceramic wall & floor, vitrified (soluble salt & double charge) and high end designer tiles (ceramic digital and digital glazed vitrified tiles). It sells tiles in varying sizes, starting from 20x20cm (8"x8") to 120x240cm (48"x96"). Kajaria is thus present across the entire size and price value chain, ranging from affordable tiles to upper end glaze vitrified tiles. These are either manufactured in house or through joint ventures, outsourced from third parties or imported. Over the past few years, the share of value added products has considerably increased. Kajaria focuses on innovation in design and concepts. The company introduces new designs and variants continuously. At any given point, it has more variety than any other player, making it a unique selling point. Table 1: Kajaria offers multiple choices to customers Type of Tiles Capacity Designs Sizes Varities Price ranges (msm) (No.) (No.) Ceramic wall and floor tiles *80, 25*75, 30*60, 30*45, 25*37.5, Wall tile, floor tile, paving INR *32.5, 25*33, 20*30, 15*60, tile 15*45, 30*30, 60*60, 40*40, Polished Vitrified tiles *120, 80*80, 60*60 Grande, Solitaire, Sandune, INR Premier, Elegant solable salt Glazed Vitrified tiles *60, 30*120, 40*80, 13*80, 20*120, 60*120, 80*80, 30*60 The beast, the slim, the INR collection, Eternity wood, the size, the square, 42 Edelweiss Securities Limited

44 Kajaria Ceramics The company has aggressively increased its ad spend to sales proportion to 2.5% in FY15 from 1.4% in FY08. Management anticipates this to be in the % range going forward Strong brand equity and recall Kajaria has been focusing on building its brand image over the past 8 10 years. The company undertook a major TV advertisement campaign in most leading channels to create mind recall for its brands. Apart from this, the company participates in exhibitions, advertises in trade magazines and is seen on hoardings. Consequently, though ad spends have catapulted over the years, Kajaria has established a strong brand image. The company s ad spend clocked 33.5% CAGR over FY08 15 versus peers 12 13% and further aggressively increased its ad spend to sales to 2.5% in FY15 from 1.4% in FY08. Management anticipates this ratio to be in the % range going forward. Chart 1: Liberal ad spends leading to strong brand recall (INR mn) (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 (0.0) Ad spend (INR mn) As % net sales RHS On account of strong brand, Kajaria commands 5 7% pricing premium versus other organised players The company has been able to successfully create a pull for its products and currently enjoys highest brand equity in the industry bolstered by quality, innovation and availability. It has been conferred the Superbrand status for the eighth year in a row. As a Superbrand organisation, Kajaria has been a branding phenomenon for over 13 years now. The criteria for selection of winning consumer brands includes perceived brand image plus the brand's mindshare, goodwill, consumer loyalty, trust and emotional bonding. Winners are identified to be the strongest brands in their respective categories and are chosen from more than 700 shortlisted consumer brands. On account of strong brand, Kajaria commands of 5 7% pricing premium versus other organised players. The company is also able to pass on input cost pressures to a certain extent. It has maintained EBIDTA margin over the past 5 years despite increase in gas price and other costs, while peers margins have declined over the same period. 43 Edelweiss Securities Limited

45 Miscellaneous Chart 2: Commands brand premium versus competitors leading to stable margins (INR per sqm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Realisation Gross margin Cost except RM EBITDA Kajaria is increasing dealer and associate dealer network in tier I and II cities. On account of focused approach, the company has better revenue per dealer versus peers Widespread dealer network Kajaria has a strong and widespread dealership network of 1,100 currently, up from 700 in These dealers cater to ~4,000 associate dealers across the country. The company s strategy is to add dealers in a relatively gradual manner than peers as dealer loyalty increases as they have been allowed to grow in size along with the company (they are able to maintain their territory). The company s distribution network is divided strategically to minimize cannibalisation, thereby limiting under cutting and precluding brand dilution. It has the strongest distribution reach in metros and major cities. Currently, Kajaria is increasing dealer and associate dealers in tier I and II cities. On account of focused approach, the company has better revenue per dealer versus peers. Chart 3: Higher revenue per dealer versus peers (FY15) (INR mn) Kajaria HR Johnson Somany Nitco Asian Orient Bell Granito Revenue/Dealer Source: Edelweiss research 44 Edelweiss Securities Limited

46 Kajaria Ceramics We believe there are still many untapped potential markets where Kajaria can extend its distribution reach. The company follows a transparent and consistent policy while dealing with dealers. Dealers are continuously kept motivated through attractive promotional schemes, apart from being ensured of adequate stock levels or quick availability of products across range and design, which is an advantage over competitors. This has resulted in Kajaria building a financially strong set of dealers, thereby keeping its working capital cycle largely under check. Dealer size along with their strong retail presence ensures better realisations and margins for the company compared to peers. Apart from having an exhaustive and nation wide dealer network, Kajaria also has 26 display centers located at its regional offices, where customers/architects come to select tiles. Kajaria has always outperformed industry and organised players in the past Market share surge to persist Kajaria is the largest tile player in India with 10.6% (FY08: 6.5%) market share backed by comprehensive product range, superior design capability, high brand recall, widespread dealer network and strong marketing capabilities, lending it an edge over competition. Further, it enjoys market share of 20.8% in the organised tile industry (FY15) in value terms. Kajaria has always outperformed industry and organised players in the past. We foresee the company s market share to surge to 12.0% by FY18, assuming industry CAGR of 11.5% over FY16 18E. This will lead to rising share, within organised players, to 22.1% by FY18E. Chart 4: Market share continues to rise (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Kajaria's overall MS Kajaria's MS in organised players Source: Industry, Edelweiss research Expanding capacity to 74msm by FY17E from 54msm in FY15, which will drive growth Capacity expansion to bolster growth To lend fllip to growth, Kajaria has continuously expanded capacity in all format of tiles ceramic, GVT, PVT, etc either at own or subsidiaries site. However, the company also outsources manufacturing to third parties based on requirement. It has increased its capacity at 14.5% CAGR to 54msm in FY15 from 21msm in FY08 in both ceramic and vitrified tiles. Further, Kajaria is expanding capacity to 74msm by FY17E from 54msm in FY15, which will drive growth. Kajaria owns majority stake in its joint ventures (JVs). Hence, its economic capacity has increased to 44msm in FY15 from 21msm in FY08 and will rise to 59msm in FY17E. 45 Edelweiss Securities Limited

47 Miscellaneous Chart 5: Consistent capacity expansion to ramp up growth Chart 6: Economic capacity set to increase (msm) (msm) FY08 FY09 FY10 FY11 Ceramic tile FY12 FY13 FY14 FY15 FY16E FY17E Vitrified tile FY18E 0 FY08 FY09 FY10 FY11 Own FY12 FY13 FY14 FY15 FY16E JV FY17E FY18E Multiple levers to improve EBITDA margin Kajaria has been able to consistently sustain its EBITDA margin over the years, which we believe was on account of superior mix in terms of value added products like GVT/PVT and rising proportion of manufactured sales. This was despite the industry as well as the company facing challenges like rising costs, primarily gas prices, in the past few years. Chart 7: Superior product mix helped sustain margin In terms of value added products (% of gross sales) FY11 FY12 FY13 FY FY15 FY16E FY17E Ceramic tiles GVT PVT Others FY18E In terms of manufactured versus traded (% of gross sales) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Manufactured Traded 46 Edelweiss Securities Limited

48 Kajaria Ceramics EBITDA margin to jump 160bps over FY16 18 primarily on account of: 1) rising share of manufactured sales; 2) increasing share of valueadded products; and 3) lower gas prices We estimate Kajaria s EBITDA margin to jump 160bps over FY16 18 primarily on account of: 1) rising share of manufactured sales; 2) increasing share of value added products like GVT/PVT; and 3) lower gas prices. We expect GVT/PVT contribution to revenue to increase to 66% in FY18 from 57% in FY15. Further, we estimate manufactured revenue contribution to increase to 90.7% by FY18 from 82.6% in FY15. Power and fuel cost constitutes 25 30% of manufactured revenue (for details on costing, please refer table 1, page 10 of the report) Thus, the recent dip in gas prices will help improve margin. Hence, we estimate Kajaria s FY17 EBITDA to rise 190bps YoY on account of lower gas prices. However, we believe industry as well as the company will partially pass on the benefits to consumers. Table 2: Lower gas price to boost margin Location of the Plant Gas Contract With Sikandrabad, UP GAIL Gailpur Rajasthan GAIL Malootana, Rajasthan Coal based Others Morbi, Gujarat GSPC Remarks The company has contract with GAIL for its Gailpur and Sikandrabad plant, prices of which declined from USD14/mmbtu in FY15 to USD10/mmbtu in 9mFY16. Further after the Rasgas revision prices they declined to ~USD8/mmbtu from 1st January, For the Morbi plants, prices had already been reduced to INR29/scm in June,2015. Further they have reduced to INR26/scm since January Sanitaryware contributes mere 2% to total revenue, which the company estimates to rise to 4 5%, going forward. Manufacture of sanitary ware: A logical extension Having established a powerful presence in the tile segment, Kajaria has added sanitary ware to its repertoire of products in Initially, it only imported sanitary ware through its alliance with European brands like Saloni, Grespania, Argenta and Baldocer for premium products. In January 2011, Kajaria entered into a tie up with VitrA, a leading European brand, to market high end bath ware and fittings. VitrA is part of Eczacibasi, one of Turkey s largest industrial groups. This arrangement positioned Kajaria as an exclusive and sole marketer and distributor of VitrA range in India for a period of 5 years. This arrangement was made to target the premium segment. Realising the immense potential of sanitary ware and faucets, especially in the mid segment and absence of large organised players in that segment, the company decided to develop the products in house. Kajaria Sanitaryware, in which Kajaria through its wholly owned subsidiary Kajaria Bathware holds 82% stake, set up a 7 lac piece per annum sanitary ware manufacturing facility at Morbi (Gujarat), which commenced operation in May The company has invested INR340mn in the facility. It expects to achieve optimum production in FY16. Products sold were marketed under the Kerovit brand, which was launched at the Acetech exhibition, Delhi, Kerovit was primarily introduced to cater to the mid segment. Kajaria has also roped in celebrity Nargis Fakri as its brand ambassador. The product range comprises 65 SKUs catering to diverse customer requirements. Under Kajaria Bathware, the company has set up a faucet plant of 1mn pieces at Gailpur (Rajasthan) with an investment of INR500mn. The project commenced commercial production in July Edelweiss Securities Limited

49 Miscellaneous Currently, this segment contributes mere 2% to total revenue, which management estimates to rise to 4 5% at best going forward. Fig. 1: Venturing in to bathware Kajaria Ceramics 100% Stake 82% Stake Kajaria Bathware (P) Ltd. Kajaria Sanitaryware (P) Ltd. Faucets facility in Gailpur (Rajasthan) Source: Edelweiss research 48 Edelweiss Securities Limited

50 Kajaria Ceramics Valuation Kajaria to command premium valuation riding industry leadership, continued market share gain, superior brand and healthy profitability matrix. Further, it will be supported by strong industry drivers along with structural shift from unorganised to organised players. We estimate Kajaria s revenue and PAT to clock 14.9% and 26.5% CAGR over FY16 18 (23.3% and 42.1% CAGR during FY08 15), respectively, with strong RoE/pre tax RoCE of >25%. The stock traded at 6 29x valuations during FY12 16 (average P/E: 26x) and consistently re rated over the past few years on account of strong industry growth, market share gains and robust financials. We value it at P/E of 25x FY18E and initiate coverage with BUY. We estimate Kajaria to clock revenue and PAT CAGR of 14.9% and 26.5% over FY16 18 (FY08 15 CAGR of 23.3% and 42.1%), respectively, with strong RoE/pre tax RoCE of >25%. Further, we estimate it to generate FCF of INR5.6bn over the period. We believe its investment phase is near completion as current capacity expansion (from 54msm in FY15 to 74msm by FY17) is sufficient to bolster growth over the next months. We value the stock at P/E of 25x FY18E and initiate coverage with BUY and target price of INR1,100. The stock traded at 6 29x valuations during FY12 16 (average P/E: 26x) and witnessed consistent re rating over the past few years on account of strong industry growth, market share gains and robust financial performance. At current levels, the stock is trading at P/E of 26.8 FY17E and 21.5 FY18E. Chart 8: One year forward P/E 1,250 1, Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Source: Bloomberg, Edelweiss research 49 Edelweiss Securities Limited

51 Miscellaneous Chart 9: One year forward P/B 1,250 1, Jun 10 Dec 10 Jul 11 (x) Feb 12 Sep 12 Apr 13 Nov 13 Jun 14 Jan 15 Aug 15 Mar 16 Source: Bloomberg, Edelweiss research Chart 10: One year forward EV/EBITDA 1,250 1, Jun 10 Dec 10 Jul 11 Feb 12 (INR) Sep 12 Apr 13 Nov 13 Jun 14 Jan 15 Aug 15 Mar 16 Source: Bloomberg, Edelweiss research 50 Edelweiss Securities Limited

52 Kajaria Ceramics Key Risks Slowdown in real estate sector Tile industry growth is highly dependent on overall economic development and in real estate sector. Any slowdown in real estate sector will dampen Kajaria s growth prospects. Intensifying competition The tile industry is highly fragmented with the unorganised sector accounting for ~49%. Within the organised segment there are few players who enjoy majority market share and offer stiff competition. Despite the changing preferences of consumers in favour of branded products leading to gradual shift towards the organised sector, any competitive moves by players such as Somany Ceramics, HR Johnson, Orient, Asian Granito, etc., and the unorganised segment may have detrimental effects on the company s revenues. Volatility in fuel prices Natural gas forms one of the key inputs for the tile industry. Majority of the company s plants run on gas. Power and fuel costs formed 22% of sales in FY15. Availability and pricing of natural gas remains a concern as increase in gas price could increase operating costs and adversely impact margins. However, Kajaria has entered into long term agreements with GAIL and other suppliers, which will provide some hedge against volatility. Threat of Chinese imports China is the largest producer of tiles globally. Import of cheap Chinese tiles poses a threat to the company. However, the government has imposed anti dumping duty of USD1.37 per sq mtr recently on import of vitrified tiles from China. 51 Edelweiss Securities Limited

53 Miscellaneous Company Description Kajaria is India s leading manufacturer of ceramic and vitrified tiles. Ceramic, GVT and PVT contribute 41%, 20% and 37% to net sales, respectively. Retail and institutional businesses contribute 70% and 30% to the company s revenue, respectively. Management team has rich experience in tile industry. Fig. 2: Evolution of Kajaria Ceramics 1985 About Kajaria Ceramics Kajaria is India s leading manufacturer of ceramic and vitrified tiles. The company got incorporated in 1985 by Mr. Ashok Kajaria in technical collaboration with the world s second largest tiles manufacturer, Todagres, SA. Promoted by Mr. Ashok Kajaria, his associate and Kajaria Exports Ltd. Entered into a technical colloboration agreement with Todagres S.A., Spain Commmenced production at Sikandrabad (UP) with 1msm p.s with with machinery supplied Sacmi Imola and Omis Due SPA of Italy. Maintained an average capacity utilisation of 120% Commenced export to the Gulf countries, Europe and Bangladesh Awarded "CAPEXIL" special exports award for the year 1992 for being the largest exporter of ceramic tiles from the country Commissioned 2nd plant at Gailpur (Rajasthan) with a capacity of 6 msm p.a. Split the face value of its shares from INR 10 per share to INR 2 per share. Entered into an agreement with Gas Authority of India Ltd. (GAIL) in order to supply of regasified liquefied natural gas (RLNG) for its Gailpur plant (Rajasthan). Entered into a MOU with M/s Eczacibasi Yapi Gerecleri A.S., (Eczasibasi) of Turkey Sanitary ware and CP Fittings under the Brand name of "VitrA". Acquires 51% stake in Soriso Ceramic, Morbi, Gujarat Acquires 51% stake in: Jaxx Vitrified, Morbi, Gujarat, Vennar Ceramics, Vijaywada, AP, Cosa Ceramics, Morbi, Gujarat Equity fund raising from WestBridge Crossover Fund aggregating INR1.5 bn (equity and warrant) Commissioned a 7 lakh piece facility at Morbi, Gujarat in May, 2014 under Kajaria Sanitaryware. Launched Kerovit inhouse bathware brand Acquired Taurus Tiles Private Limited which set up a 5msm PVT plant at Morbi, commenced operations in June, Acquired 100% stake in Kajaria Bathware Private Limited. Set up a 1 million piece faucet facility at Gailpur, Rajasthan which commenced commercial production in July, Entered into a JV with Floera Ceramics Pvt. Ltd which plans to put up a 5.70 msm polished vitrified tile facility in Andhra Pradesh by Commissioned a 6.50 msm PVT plant at Malutana, Rajasthan in Jan, 2016 Source: Company 52 Edelweiss Securities Limited

54 Kajaria Ceramics Kajaria started business by setting up a plant to manufacture 1msm ceramic tiles at Sikandrabad, Uttar Pradesh in At present, the company has aggregate manufacturing capacity of 68.60msm distributed across 9 plants. Table 3: Manufacturing facilities and capacities Plant Location Ceramic tiles PVT GVT Total Remarks (msm) (msm) (msm) (msm) Sikandrabad, Uttar Pradesh Own Plant Gailpur, Rajasthan Own Plant Malootana, Rajasthan Own Plant Morbi, Gujarat (5 Plants) Subsidiary Plants Vijaywada, Andhra Pradesh Subsidiary plant Total Kajaria is currently India s largest ceramic and vitrified tiles manufacturer surpassing H R Johnson, having market share of 10.6% in overall tiles market and 20.8% in the organised tile sector. The company has an in house research and development facility that focuses on developing new designs and creating cost effective products. It has invested in specialised tiles technology called Monoporosa (single firing) and also imported equipment from Sacmi Imola, Italy. Over the years, Kajaria has developed a comprehensive range of products including ceramic wall and floor, vitrified (soluble salt and double charge), high end designer tiles (ceramic digital and digital glazed vitrified tiles) and value added products (sanitary ware). The company sells tiles of different sizes and is present across a wide range of sizes and price value chain, ranging from affordable tiles to high end designer products catering to needs of different segments of society. Chart 11: Revenue pie in terms of ceramic, GVT, PVT, others FY15 Others 2 % PVT 37% Ceramic Tiles 41 % GVT 20 % 53 Edelweiss Securities Limited

55 Miscellaneous Table 4: Kajaria s JVs Increasing joint ventures Setting up a green field capacity becomes increasingly difficult due to high land cost as a tiles manufacturing unit require vast land to accommodate large inventory and material. Besides, many unorganised players are finding it difficult to market their products. Consequently, larger companies have started forming JVs with such unorganised players. Kajaria also has been picking up 51% equity in such JVs, which has helped in improving its returns. Currently, the company has 7 such JVs. Year of Stake Capacity Product Type Name of Company Acquisition (%) (msm) Remarks Soriso Ceramic Pvt. Ltd Ceramic tiles Cosa Ceramics Pvt. Ltd PVT Jaxx Vitrified Pvt. Ltd PVT Vennar Ceramics Pvt. Ltd High end Ceramic Tiles Tauras Tiles Pvt. Ltd PVT Commenced Production in June, 2015 Floera Tiles Pvt. Ltd PVT The land has already been acquired. The plant is expected to be commissioned by end of FY17. Kajaria Sanitaryware Pvt. Ltd mn pcs Sanitaryware Retail and institutional businesses contribute 70% and 30% to total revenues, respectively. Kajaria also caters to brand enhancing names under institutional sales. Further, North, west, south and east India contributes 40%, 25%, 25% and 10%, respectively to Kajaria s revenue. 54 Edelweiss Securities Limited

56 Strong management team Table 5: Management team has rich experience in tile industry Key Personnel Profile Mr. Ashok Kajaria Chairaman and Managing Director Mr. Chetan Kajaria Joint Managing Director Mr. Rishi Kajaria Joint Managing Director Kajaria Ceramics Holds B.Sc and has pursued Engineering (BSME) from UCLA, California, USA. He has more than 30 years of rich experience in the tiles industry and is widely credited with spearheading a transformation of the tile industry in India and is best known for being the pioneer behind launching large format wall tiles in the country and his catalytic role in revolutionizing tile display and marketing. He has held several important industry positions in past like Chairmanship of the Indian Council of Ceramic Tile and Sanitaryware, President of the PHD chamber of commerce. Is a Gold Medalist and holds Bachelors in Petrochemical Engineering from Pune University. He also holds an MBA from Boston College, USA. He has been instrumental in opening International standard tile showrooms across and is responsible for the first ever acquisition in the Company s history acquiring a ceramic tile plant in Gujarat for better feeding the Western and Southern markets in Feb 2011, and the company's entry into South India by leading the aquisition of Vennar Ltd. Holds B.Sc. in Business Administration from Boston University (USA). He serves as the Joint Managing Director of Kajaria Ceramics and spearheads the vitrified tile vertical. The first production unit of vitrified tiles at Sikandrabad was set up under his guidance. He helped to commission a unit at Gailpur to manufacture glazed vitrified tiles matching the globallysourced variants. He entered into a joint venture with four tile manufacturers thus adding capacity without any gestation period and acquired reach (West and South) which was critical to capitalise on the various pan India opportunities. Mr. Basant Kumar Sinha Director Technical Mr. Dev Datt Rishi Director Technical Mr. Sanjeev Agarwal CFO Is B.Tech (IIT Kanpur), PGDM (AIMA).He has rich experience of about 45 years in various segments of Tiles & Sanitary ware. Prior to joining the company, he has worked with Hindustan Sanitaryware and Industries Ltd., Orient Ceramic Industries Ltd., Somany Tiles, Asian Granito Ltd. and as Technical Director with Kaneria Granito Ltd. before joining Kajaria Ceramics. Is B.Sc. (Engineering) Chemical Hons: DIM. He has been associated with Kajaria Ceramics for more than 20 years holding various positions. Under his dynamic leadership, the Company has successfully carried out various expansions. His knowledge and techniques have contributed to produce international standards quality tiles. He has over 22 years of experience and holds B.Com. and FCA. Mr. Agarwal serves as Senior Vice President of Finance & Corporate Strategy in Kajaria Ceramics. Prior to joining the company, he was the Deputy Manager of Finance at J.K Corp. 55 Edelweiss Securities Limited

57 Miscellaneous Financial Outlook We have built in 10.3% volume growth for Kajaria versus industry growth of 7.5% over FY Further, we have considered revenue CAGR of 14.9% versus industry CAGR of 11.5% over the period. As a result, we estimate Kajaria s market share to surge to 12.0% in FY18 from 10.6% in FY15, in value terms. We anticipate 160bps jump in EBITDA margin over FY16 18E on account of: a) rising share of value added products like GVT/PVT; b) rising share of manufactured sales; and c) lower gas prices. Kajaria is expected to complete major capex soon which will bolster revenue growth over the next months. This will lead to significant cash flow generation and consequently, reduction of debt in ensuing years. The company has been clocking healthy RoE/RoCE of >25% consistently. We estimate its pre tax RoCE to improve to 36.9% in FY18 from 32.6% in FY15. We have built in volume and value growth of 10.3% and 14.9% for Kajaria, respectively, versus industry growth of 7.5% and 11.5% over FY16 18 Healthy volume led growth momentum to sustain Kajaria s revenue clocked CAGR of 23.3% over FY08 15, primarily led by volumes (grew at 15.5%) and market share gains. We expect the volume growth momentum to sustain riding its wide distribution, brand spend and product portfolio. We expect the company to outperform industry going forward. Hence, we have built in volume growth of 10.3% for Kajaria versus industry growth of 7.5% over FY Further, we have considered revenue CAGR of 14.9% versus industry CAGR of 11.5% over the period. This will lead to Kajaria s market share surging to 12.0% in FY18E from 10.6% in FY15, in value terms. We believe an improved mix i.e., higher share of value added products (GVT/PVT) will spur realisation. Chart 12: Volume led growth Chart 13: Healthy revenue growth momentum to continue 40, , (msm) (%) (INR mn) 24,000 16,000 8, (%) 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Own JV Outsourced Overall volume growth (%) RHS FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Own JV Outsourced Overall revenue growth (%) RHS 56 Edelweiss Securities Limited

58 EBITDA margin to jump 160bps over FY16 18E Kajaria Ceramics Kajaria has been able to consistently sustain its EBITDA margin over the years, which we believe has been on account of superior product mix (in terms of value added products like GVT/PVT) and rising proportion of manufactured sales. This was despite industry and the company facing issues such as rising costs, primarily gas prices, over the past couple of years. We estimate EBITDA margin to jump 160bps over FY16 18, primarily on account of: 1) rising share of manufactured sales; 2) increasing share of value added products like GVT/PVT; and 3) lower gas prices. We anticipate GVT/PVT s contribution to revenue to increase to 66% in FY18E from 57% in FY15. Further, manufactured revenue contribution is expected to increase to 90.7% by FY18 from 82.6% in FY15. The recent fall in gas prices will help improve margins. We estimate Kajaria s FY17E EBITDA to rise by 190bps YoY. However, we believe the industry and Kajaria will partially pass on the benefits to consumers. Chart 14: EBITDA margin to improve further 7,000 5, ,200 2,800 1, FY08 FY09 FY10 (INR mn) (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E EBITDA (INR mn) EBITDA margin RHS Kajaria will be done with major capex soon, which will support its revenue growth over the next months We believe Kajaria will be done with major capex soon, which will support its revenue growth over the next months. This will lead to significant cash flow generation (FCF of INR5.6bn over FY16 18E) and reduction in debt in ensuing years, in turn lowering interest costs. We foresee PAT CAGR of 26.5% over FY16 18E versus 42.1% during FY Edelweiss Securities Limited

59 Miscellaneous Chart 15: Robust PAT growth to sustain 4,000 3, (INR mn) 2,400 1, (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 PAT PAT margin RHS We anticipate significant cash flow generation and debt to dip in ensuing years Strong balance sheet coupled with healthy return ratios Kajaria has a strong balance sheet with debt/equity of 0.3x (FY15). In the past 20 years, the company raised equity only in FY14 of INR1.5bn. It has issued 2mn and 3.9mn warrants at INR250/share and INR257.4/share, respectively, to Westbridge Crossover Fund LLC. The company utilised these funds to meet its capex requirement and reduce debt. We anticipate significant cash flow generation and debt to dip in ensuing years. Kajaria incurred capex of INR5.4bn during FY13 15 to ramp up capacity from 36msm in FY12 to 54.1msm in FY15. We have considered capex of INR4.3bn over FY16 18 which will ramp up capacity to 74msm in FY17E from 54msm in FY15. Chart 16: Under leveraged balance sheet 3,600 2, Chart 17: Aggressive capex over the years 3,000 2,400 (INR mn) 1, (x) (INR mn) 1,800 1,200 (1,200) (2,400) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E (0.6) 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net debt (INR mn) Debt/Equity (x) RHS Capex 58 Edelweiss Securities Limited

60 Kajaria Ceramics Chart 18: Superior asset turnover 4.0 Chart 19: Capex per sqm (x) (INR) FY11 FY12 FY13 FY14 FY15 Somany Ceramics Kajaria Ceramics Asian Granito Nitco 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Chart 20: Cash flow set to improve 4,500 3,000 (INR mn) 1,500 0 (1,500) (3,000) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Operating cashflow Capex Free cashflow Kajaria has superior cash conversion cycle of days versus industry s days primarily on account of its strong brand. 59 Edelweiss Securities Limited

61 Miscellaneous Kajaria has superior cash conversion cycle of days versus industry s days primarily on account of its strong brand Chart 21: Comfortable working capital (No of days) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Cash Conversion Cycle The company has been consistently posting healthy RoE/RoCE of >25%. We estimate its pre tax RoCE to improve to 36.9% in FY18 from 32.6% in FY15. We estimate Kajaria s pre tax RoCE to improve to 36.9% in FY18 from 32.6% in FY15 Chart 22: Healthy return ratios (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Pre ROCE RoE 60 Edelweiss Securities Limited

62 Kajaria Ceramics Kajaria has been consistently distributing 20 25% of PAT as dividend. Chart 23: Consistent dividend payout (INR) (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Dividend per share(inr) Dividend payout(%) 61 Edelweiss Securities Limited

63 Miscellaneous Financial Statements Key assumptions FY15 FY16E FY17E FY18E Macro GDP(Y o Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Indian Tile Industry Volume wise growth(%) Org. Sector Share Vol. wise (%) Unorg. Sector Share Vol. wise(%) Value wise growth (%) Org. Sector Share Value wise(%) Unorg. Sector Share Value wise(% Company Capacity (in msm) Own JV Product wise capacity (in msm) Ceramic Tile Glazed Vertified Tiles Polished Vertified Tiles Sales growth (%) Volume wise Growth (%) Own JV Outsourced Realization per sqm (INR) Manufactured JV Others Product Value Growth(%) Ceramic PVT GVT Cost Assumptions Excise Duty as % of Sales Packing mat. as % of Net Sales Power & Fuel as % of Net Sales Mfg. expenses as % of Net Sales Employee Cost as % of Net Sales Sales Promotion as % of N. Sales Ad. & Selling Cost as % of N. Sales Financial Assumptions Dep. as % of avg. gross block Int. rate as % of total debt Tax rate as % of PBT Capex (INR mn) 2,646 1,322 1,500 1,500 Net borrowing (INR mn) 2,323 1, (1,944) Income statement (INR mn) Year to March FY15 FY16E FY17E FY18E Net revenues 21,746 24,000 27,397 31,669 Raw material costs 7,354 7,456 8,462 9,618 Gross profit 14,392 16,545 18,935 22,051 Employee expenses 2,073 2,568 2,877 3,262 Other expenses 8,901 9,480 10,685 12,351 Operating expenses 10,974 12,048 13,562 15,613 Total expenditure 18,328 19,504 22,023 25,231 EBITDA 3,418 4,496 5,374 6,438 Depreciation & amortisation EBIT 2,860 3,779 4,581 5,595 Interest expense Other income Profit before tax 2,703 3,466 4,429 5,523 Provision for tax 854 1,179 1,506 1,878 Minority interest Reported Profit 1,756 2,176 2,789 3,485 Exceptional Items(Net of tax) (2) Adjusted Profit 1,758 2,176 2,789 3,485 No. of Shares outstanding (mn) Adjusted Basic EPS No. of Diluted shares outstanding Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio (%) Common size metrics (% net revenues) Year to March FY15 FY16E FY17E FY18E Gross margin Operating expenses EBITDA margins EBIT margin Interest Net profit margin Growth metrics (%) Year to March FY15 FY16E FY17E FY18E Revenues EBITDA PBT Adjusted Profit EPS Edelweiss Securities Limited

64 Kajaria Ceramics Balance sheet (INR mn) As on 31st March FY15 FY16E FY17E FY18E Share capital Reserves & surplus 7,251 8,948 11,164 13,979 Shareholder equity 7,409 9,107 11,323 14,137 Minority Interest ,031 Long term borrowings Short term borrowings 1,470 1, Total Borrowings 2,434 2,934 1,934 1,934 Deferred Tax Liability (net) Long Term Liabilities & Provisions Sources of funds 11,362 13,672 15,021 17,996 Gross Block 12,356 14,356 15,856 17,356 Accumulated depreciation 3,829 4,547 5,339 6,182 Net Block 8,528 9,810 10,517 11,174 Intangible assets Capital work in progress Total net fixed assets 9,378 9,983 10,690 11,347 Non current investments Cash and cash equivalents 112 1,499 1,854 3,879 Inventories 3,033 3,064 3,246 3,689 Sundry Debtors 2,071 2,286 2,609 3,016 Loans & Advances 980 1,077 1,185 1,304 Other Current Assets Total Current Assets (ex cash) 6,102 6,445 7,058 8,027 Trade payable 2,418 2,247 2,318 2,635 Other Current Liab. & ST Prov. 1,812 2,009 2,263 2,622 Total Current Liabilities & Prov. 4,230 4,256 4,582 5,257 Net Current Assets (ex cash) 1,871 2,189 2,476 2,770 Uses of funds 11,362 13,672 15,021 17,996 Book Value per share (INR) Free cash flow (INR mn) Year to March FY15 FY16E FY17E FY18E Reported Profit 1,756 2,176 2,789 3,485 Add: Depreciation Add: Interest Add:Others 233 (236) (156) (156) Gross cash flow 2,756 2,894 3,582 4,327 Less: Changes in working cap Operating cash flow 2,098 2,576 3,295 4,034 Less: Capex* 2,646 1,322 1,500 1,500 Free cash flow (548) 1,254 1,795 2,534 Cash flow metrics Year to March FY15 FY16E FY17E FY18E Operating cash flow 2,098 2,576 3,295 4,034 Financing cash flow (1,440) (509) Investing cash flow (2,630) (1,322) (1,500) (1,500) Net cash flow 60 1, ,025 Capex 2,646 1,322 1,500 1,500 Dividends paid Profitability ratios Year to March FY15 FY16E FY17E FY18E Pre tax ROCE (%) ROAE (%) ROA (%) Current ratio Quick ratio Cash ratio Receivable turnover (x) Inventory turnover (x) Payables turnover (x) Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Debt equity (x) Debt/EBITDA Adjusted debt/equity (x) Interest coverage (x) Operating ratios (x) Year to March FY15 FY16E FY17E FY18E Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to March FY15 FY16E FY17E FY18E Adjusted Diluted EPS (INR) Y o Y growth (%) Adjusted Cash EPS (INR) Diluted P/E (x) Price to Book Ratio (P/B) (x) Enterprise Value / Sales (x) Enterprise Value / EBITDA (x) Dividend Yield (%) Edelweiss Securities Limited

65 Miscellaneous Additional Data Directors Data Ashok Kajaria Chairman and Managing Director Chetan Kajaria Joint Managing Director Rishi Kajaria Joint Managing Director Dev Datt Rishi Director Technical Basant Kumar Sinha Director Technical Raj Kumar Bhargava Independent Director Ram Ratan Bagri Independent Director Debi Prasand Bagchi Independent Director H. Rathnakar Hegde Independent Director Sandeep Singhal Independent Director Sushmita Shekhar Independent Director Auditors O.P. Bagla & Co. *as per last annual report Holding Top 10 Perc. Holding Perc. Holding West Bridge Crossover Fund 7.41 L & T Investment Management Ltd Norges Bank Investment Management 3.14 Dimensional Fund Advisors LP 0.80 Tata Asset Management Ltd 1.50 Vanguard Group Inc 0.77 Wasatch Advisors 1.47 SBI Funds Management 0.63 Goldman Sachs Asset Management 1.43 Kotak Mahindra 0.40 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 25/Jul/15 Ashok Kajaria Sell 1,455,624 25/Jul/15 Versha Kajaria Sell 325,000 30/Jul/15 Ashok Kajaria Sell 99,980 *in last one year 64 Edelweiss Securities Limited

66 India Midcaps INITIATING COVERAGE SOMANY CERAMICS Potent catalysts: Primed for the big leap India Equity Research Miscellaneous Somany Ceramics (Somany) has captured 6.8% market share of the domestic tiles industry anchored by a comprehensive product range, innovative products, aggressive brand spending (39.2% ad spend CAGR versus peers 12 13% during FY08 15), extensive distribution network and outsourced manufacturing. We anticipate the company s current endeavour to build manufacturing capacities primarily in value added products to yield superior profitability and boost market share to 7.8% by FY18E. Consequently, its organised market share is set to catapult to 14.4% in FY18E from 13.4% in FY15. Moreover, EBITDA margin will get a 140bps boost over FY16 18E from superior product mix and lower gas prices. We perceive re rating potential riding strong earnings momentum and rising market share. Initiate coverage with BUY and TP of INR480. Strong brand recall; manufactured sales to boost profitability Somany has been aggressive on ad spends to create strong brand recall. It is planning to increase ad spends to % of sales, going forward, from 1.9% in FY15. Moreover, rising trading sales, primarily of value added products, has helped the company to garner market share. However, Somany is focusing on increasing proportion of manufactured sales by adding 8msm capacity by FY17. We estimate manufactured volume contribution to catapult to 56.9% in FY18 from 49.4% in FY15. EBITDA margin at inflection point Somany s EBITDA margin is likely to surge 140bps over FY16 18E led by: a) rising share of manufactured sales; b) higher share of value added products; and c) lower gas prices. The share of GVT/PVT is likely to boost to 63.4% in FY18E from 51.4% in FY15. Outlook and valuations: Emerging strong; initiate with BUY We estimate Somany to clock revenue and PAT CAGRs of 16.6% and 39.9%, respectively, with strong pre tax RoCE of >20% over FY In light of robust earnings visibility and healthy return ratios, we expect Somany to narrow the valuation gap with leader Kajaria. However, owing to the company s lower margins versus the leader, we have valued the stock at 20x FY18E EPS (at 20% discount to Kajaria). The stock has traded in the 4 32x band during FY08 15 (average P/E of 14x). At CMP, it is available at 20.8x FY17E and 15.7x FY18E. We initiate coverage with BUY. Financials Year to March FY14 FY15 FY16E FY17E Revenues (INR mn) 12,606 15,352 17,226 19,805 EBITDA (INR mn) ,173 1,575 Adjusted Profit (INR mn) Adjusted Diluted EPS (INR) Diluted P/E (x) EV/EBITDA (x) ROAE (%) EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: SOCE.BO, B: SOMC IN) CMP : INR 375 Target Price : INR week range (INR) : 499 / 303 Share in issue (mn) : 42.4 M cap (INR bn/usd mn) : 16 / 239 Avg. Daily Vol. BSE/NSE ( 000) : 22.8 SHARE HOLDING PATTERN (%) Current Q3FY16 Q2FY16 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) Sensex Stock Stock over Sensex 1 month months (2.1) (5.0) (2.9) 12 months (12.7) (11.9) 0.8 Manish Mahawar manish.mahawar@edelweissfin.com (Click on image for video) Karishma Kothari karishma.kothari@edelweissfin.com April 06, 2016 (Click on image to view video) 65 Edelweiss Securities Limited

67 Miscellaneous Investment Rationale Mr. S. Somany Chairman At Somany Ceramics, we have remained at the forefront of the development of ceramic tiles industry in India for more than 4 decades. All along, the company has introduced many firsts in the country Strong brand: Somany, by virtue of strong brand equity, commands 4 5% pricing premium versus organised players. Widespread distribution network: The company is bolstered by a strong and widespread network of 1,471 dealers. It is planning to further expand geographical presence, particularly in India s under penetrated regions. Rising market share: Somany s overall market share improved to 6.8% in FY15 from 4.4% in FY08 and we estimate it to rise further to 7.8% by FY18. In the organised market, the company s share has jumped to 13.4% in FY15 from 11.0% in FY08, and is well poised to improve to 14.4% by FY18E. Expanding capacity to sustain growth momentum: Somany enhanced capacity to 43msm by FY15 from 17msm in FY10. The company has also access to outsourced capacity of 9msm in FY15. It is further increasing capacity by 8msm by FY17. EBITDA margin: We anticipate Somany s EBITDA margin to catapult to 8.2% in FY18 from 6.5% in FY15 led by: 1) rising share of manufactured sales; 2) increasing share of value added products like GVT/PVT; and 3) lower gas prices. Retail: institutional mix: Contributes 65%:35% of sales, respectively, and contribution of retail sales is expected to improve further, going forward. Comprehensive product range, innovations buttressed by robust R&D Somany, a leading player in the Indian tiles industry, boasts of a comprehensive range of products including ceramic wall & floor, vitrified (soluble salt and double charge) and highend designer tiles (ceramic digital and digital glazed vitrified tiles). Its wide range of ceramic tiles, polished vitrified tiles, glazed vitrified tiles, sanitary ware and bath fittings enable it to effectively address the diverse requirements of end customers and induce distributors to source most of their products from the company. Over the years, Somany has leveraged its product design, development and manufacturing capabilities to develop a diversified range of such products across various price segments. Table 1: Wide range for customers Type of Tiles Capacity Designs* Sizes Price ranges (msm) (No.) (No.) Ceramic wall and floor tiles INR Polished Vitrified tiles INR Glazed Vitrified tiles INR Note: *FY14 data Sustained investments in its R&D facility at the Kassar plant have enabled the company to manufacture a wide range of innovative products including its patented product V.C.Shield and anti skid floor tiles Slip Shield (applied for patent). Through continuous product innovation and R&D, it has developed a wide range of tiles and related solutions as well as certain products that are new to the market and innovative. As on Sept 30, 2015, Somany has 13 employees in R&D and design department. 66 Edelweiss Securities Limited

68 Aggressive ad spends strengthening brand equity Somany Ceramics Somany is an established premium brand representing luxury, innovation and quality. The brand is further strengthened by quality of products, competitive prices, expansive pan India network of dealers and sub dealers and intensive, strategic marketing initiatives to grow brand awareness among customers. The company s sustained marketing efforts have been brought to the fore through various media including print, electronic, advertisements, media, exhibitions and outdoor promotions directed at retail and institutional customers, dealers, sub dealers and key influencers. Mr. Abhishek Somany Managing Director As part of key strategic objectives, we aimed to sustain our growth momentum in terms of revenues and access capacities on the one hand. On the other, we targeted to alter the revenuemix towards higher contributions from value added products and also to intensify marketing and brand promotion activities. By attempting these, we endeavored to achieve much higher sales growth than industry average and consequently improve our profitability margins As of September 30, 2015, Somany had 1,639 permanent employees, of which sales, marketing and distribution team comprised 476. The company continues to focus on honing skills of its sales, marketing and distribution personnel through a series of defined training modules at various levels which focus on product training for internal marketing personnel as well as sales personnel at multi brand outlets. We believe a well thought out marketing and branding strategy over the past few years has enabled Somany develop a strong brand, lending it a key competitive strength that it continues to leverage in implementing its product diversification strategy. It undertook major TV advertisement campaigns on most leading channels to create mind recall for its brand. Besides this, Somany regularly participates in exhibitions and advertises in trade magazines and through hoardings. Though this has led to sharp increase in ad spends over the years, it has helped the company garner a strong brand image. Somany expects its ad spend to increase to % of sales, going forward, from 1.9% in FY15. Chart 1: Sharp rise in ad spend led to strong brand equity (INR mn) (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY Ad spends (INR mn) As % of sales RHS Riding the strong brand, Somany commands pricing premium of 4 5% versus organised players (on price premium, only Kajaria Ceramics is ahead of Somany). 67 Edelweiss Securities Limited

69 Miscellaneous Table 2: Brand evolution Year Brand Particulars 1972 Somany Pilkington's Limited Established the Kassar manfacturing unit in technical collaboration with Pilkington's Tile Holdings (UK) 1996 SPL Limited Indian Promoters of SPL Ltd. Bought all shares from Pilkington's Tile Holding(UK) 1998 Somany Tiles Changed logo from SPL Ltd. To Somany Tiles Somany Wall & Floor Tiles Changed to Somany Wall & Floor Tiles to bring in more product focus 2004 Durastone Launched India's toughest heavy duty vitrified tiles 'Durastone' 2005 VC Shield Somany invented a 'High Abrasion Resistant Glaze Composition' called 'VC Shield' 2007 Somany Changed the compnay name from SPL Ltd. To Somany Ceramics Ltd. Somany Vitro Introduced polished vitrified tiles under the brand name 'Somany Vitro' 2010 Somany Brand Somany changed to more vibrant, young, bold and smart look. The brand got power brand status on research conducted by IMCR. Duragres Launched 'Duragres' (GVT) an alternative to high end marble and mosaic varieties 2011 Powerbrand Award Received the prestigious 'Powerbrand Award' 2012 Asia's Most Promising Brand Received the 'Powerbrand Award'for the second time and declared as 'Asia's Most Promising Brand' 2013 Inc. India Innovative 100 AwardWon Inc. India Innovative 100 Award for the 'VC Shield Technology' Somany Slip Shield Launched 'Somany Slip Shield' tiles 2014 Best in Class Contribution India's strongest distribution and one of the best retail footprint 1,700 dealers and 8,000 retailers Glosstra Presented India's glossiest tiles 'Glosstra' Somany intends to add new dealers and customers in existing as well as new markets and commence operations in certain under penetrated regions Extensive and widening dealer network to boost growth As of September 30, 2015, Somany had a distribution network of 1,471 dealers, each affiliated with a number of sub dealers. The company has established 19 sales depots throughout India and also has a representative office in China. To facilitate distribution, Somany has also established marketing offices and manages display centres that are strategically located in various cities of India. In addition, sales and marketing initiatives are supplemented by an extensive customer service network. The company intends to further grow business by adding new dealers and customers in existing as well as new markets. It intends to further expand geographical presence across India by commencing operations in certain under penetrated regions. Somany s strong marketing capabilities, wide distribution network and established relationships with dealers and customers as well as wide product range at various price points will enable the company to rapidly expand its dealer and customer base, lending it a distinct competitive advantage. Market share gain to continue Somany is continuously improving its market share anchored by a comprehensive product range, product innovation, brand visibility and extensive distribution network, also outperforming the industry as well as organised players in the past. It has improved its overall market share to 6.8% in FY15 from 4.4% in FY08 and we expect it to improve further to 7.8% by FY18. Further, in the organised market, Somany s share has jumped to 13.4% in FY15 from 11% in FY08 and we expect it to rise to 14.4% by FY Edelweiss Securities Limited

70 Somany Ceramics The company has improved overall market share to 6.8% in FY15 from 4.4% in FY08 and we estimate it to improve further to 7.8% by FY18 Chart 2: Market share continues to surge (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Overall market share Organised market share Source: Industry, Edelweiss research Plans are afoot to enhance capacity by 8msm over FY15 17E, primarily in GVT/PVT (4msm each in own and JV plants) Building scale to sustain growth momentum Somany s capacity increased only marginally to 19msm in FY11 from 14msm in FY05. However, from FY12 the company started inking JVs with unorganised players to tap the growing opportunities in domestic tile market. As a result, by FY15 its overall capacity, including JVs, increased to 43msm. The company owns majority 26 51% stakes in its JVs. Apart from this, Somany also has access to outsourced capacity of 9msm (as on FY15). Plans are afoot to further enhance capacity by 8msm over FY15 17E, primarily in GVT/PVT (4msm each in own and JV plants). Post expansion, by FY17, GVT/PVT capacity will be higher at ~25msm (from ~17msm in FY15). Somany s economic capacity has increased from 17msm in FY08 to 28msm in FY15 and will rise to 37msm in FY17E. Chart 3: Consistent capacity expansion to support growth Chart 4: Economic capacity set to increase (msm) (msm) FY08 FY09 FY10 Own FY11 FY12 FY13 FY14 FY15 JV FY16E FY17E FY18E 0.0 FY08 FY09 FY10 FY11 Own FY12 FY13 FY14 FY15 FY16E JV FY17E FY18E Source: Industry, Company, Edelweiss research 69 Edelweiss Securities Limited

71 Miscellaneous EBITDA margin is likely to spurt on account of 1) rising share of manufactured sales; 2) increasing share of value added products; and 3) lower gas prices Superior product mix, lower gas price: Potent EBITDA margin kickers Somany owns 26% in most of its JVs owing to which its earnings are accounted as associated income, below PBT. The company is the marketing arm for own as well production of JVs. Hence, sale of entire production by JVs is executed via Somany. Entire sales of JVs come as raw material in Somany and the company retains only trading/marketing margin. This has led to the company s EBITDA margin declining to 6.5% in FY15 from 10.3% in FY10 as the proportion of outsourced sales catapulted despite rising share of value added products like GVT/PVT. Further, higher power and fuel costs have impacted profitability over the years. During FY10 15, while contribution of outsourced revenue increased to 59.6% from 35.1% in value terms, in volume terms, it jumped to 55.9% from 34.2%. Meanwhile, revenue contribution from GVT/PVT also surged to 51% from 19% during the period. Somany is expanding its GVT/PVT capacity by ~4msm at the Kassar plant and also adding 4msm of GVT/PVT in its 51% JV, Somany Fine Vitrified. Hence, we estimate manufactured volume contribution to catapult to 56.9% in FY18 from 49.4% in FY15. Further, the proportion of GVT/PVT is likely to increase to 63.4% in FY18E from 51.4% in FY15. Based on our analysis, players enjoy average gross margin in manufacturing sales to the tune of 35 40% which is superior versus gross margin in trading sales of 20 25%. Chart 5: Rising proportion of manufactured sales Chart 6: Rising proportion of GVT/PVT 15,000 12, (%) (INR mn) 9,000 6, (%) , FY08 FY09 FY10 FY11 FY12 Manufactured FY13 FY14 FY15 FY16E FY17E Trading FY18E 0 FY10 FY11 FY12 FY13 GVT/PVT sales FY14 FY15 FY16E FY17E FY18E 0.0 As % of sales RHS The recent fall in gas prices will also help improve margin. We estimate Somany s FY17E EBITDA margin to rise 130bps YoY gaining from lower gas prices. However, we believe industry as well as the company will partially pass on the benefits to customers. 70 Edelweiss Securities Limited

72 Somany Ceramics Table 3: Lower gas price to boost margin Location of the Plant Gas Contract With Kassar, Haryana GAIL Kadi, Gujarat Sabarmati Gas Others Morbi, Gujarat GSPC Remarks Gas prices for the Kassar plant (Haryana) having contract with GAIL have reduced from INR38 plus/ scm in 9mFY16 to INR26/scm in January, 2016 with the revision in Rasgas contract. The gas price of Kadi plant (Gujarat) which had reduced to INR 28/scm in 9mFY16 has further gone down to INR26/scm. For the Morbi JV, prices had already been reduced to INR29/scm in June,2015. Further they have reduced to INR26/scm from January We anticipate Somany s EBITDA margin to jump to 8.2% in FY18E from 6.5% in FY15 Overall, we anticipate Somany s EBITDA margin to jump to 8.2% in FY18E from 6.5% in FY15 led by: 1) rising share of manufactured sales; 2) increasing share of value added products like GVT/PVT; and 3) lower gas prices. Chart 7: EBITDA margin set to surge 2, , (INR mn) 1,500 1, (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 EBITDA EBITDA % RHS Sanitaryware segment contributed ~5% to FY15 revenue and management expects it to contribute only <10% to total revenue over the next 3 4 years Sanitaryware: A natural extension As a natural extension of its product line, Somany ventured into the sanitary ware segment in 2007 offering products under the Somany brand. Initially, the company was only involved in trading of sanitary ware products. Somany tied up with leading sanitary ware manufacturers in China to import a range of premium sanitary ware products. The products were sold via the company s existing distribution network and retail showrooms (Somany Global, Somany Exclusive and Somany Studio). In 2010, the company launched a new sanitary ware and fitting segment by further introducing 19 new products. It also launched CP fittings and faucets segment as part of its product offerings under the Somany brand. By FY10 end, it was selling a wide range of sanitary ware products (toilets, basins, urinals and cisterns, among others) and CP fitting products (faucets, showers, bathroom accessories and allied products, among others). Somany also expanded its distribution network to North Eastern states like Assam and countries like Nepal. Realising the immense potential of sanitary ware and faucets and with the increase in scale of operations in FY14, Somany made a strategic move in the sanitary ware space by 71 Edelweiss Securities Limited

73 Miscellaneous acquiring 26% stake in Somany Sanitaryware (earlier Sonec Sanitaryware), which had existing capacity to produce 0.3mn pieces p.a. During FY16, the company acquired further 25% stake in Somany Sanitaryware for INR10mn, taking its total stake in the company to 51%. Somany is also planning to expand its sanitary ware capacity to 0.9m pieces/p.a. for which it has acquired land in November This segment contributed ~5% to the FY15 revenue. Management aims to strengthen its hold on the segment as it is bullish on returns, even though it expects the segment to contribute only <10% to total revenue over the next 3 4 years. 72 Edelweiss Securities Limited

74 Somany Ceramics Valuation We estimate revenue and PAT CAGR of 16.6% and 39.9% over FY16 18E, respectively, with strong pre tax RoCE of >20% supported by strong industry drivers along with structural shift from unorganised to organised players. Riding better earnings matrix and rising market share, the stock has potential to re rate going forward. Given strong earnings growth visibility and return ratios, we expect the valuation gap between Somany and Kajaria Ceramics to narrow, going forward. We value it at P/E of 20x FY18E (at 20% discount to leader Kajaria Ceramics) and initiate coverage with BUY. We estimate Somany to clock revenue and PAT CAGR of 16.6% and 39.9% over FY16 18E (24.5% and 42.8% CAGR during FY08 15), respectively, with strong pre tax RoCE of >20% supported by strong industry drivers along with structural shift from un organized to organized players. Riding better earning matrix and rising market share, we perceive rerating potential in the stock. Given strong earnings growth visibility and return ratios, we expect the valuation gap between Somany and Kajaria Ceramics to narrow, going forward. However, given Somany s lower margin profile versus Kajaria Ceramics, we value the stock at 20x FY18E EPS (at 20% discount to leader Kajaria Ceramics). The stock traded at valuations of 4 32x during FY08 15 (average P/E of 14x). At current levels, the stock is trading at P/E of 20.8FY17E and 15.7FY18E, respectively. We initiate coverage with BUY and target price of INR480. Chart 8: One year forward P/E Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Source: Bloomberg, Edelweiss research 73 Edelweiss Securities Limited

75 Miscellaneous Chart 9: One year forward P/B Jun 10 Dec 10 Jul 11 (x) Feb 12 Sep 12 Apr 13 Nov 13 Jun 14 Jan 15 Aug 15 Mar 16 Source: Bloomberg, Edelweiss research Chart 10: One year forward EV/EBITDA Jun 10 Dec 10 Jul 11 Feb 12 (INR) Sep 12 Apr 13 Nov 13 Jun 14 Jan 15 Aug 15 Mar 16 Source: Bloomberg, Edelweiss research 74 Edelweiss Securities Limited

76 Somany Ceramics Key Risks Slowdown in real estate sector The tile industry growth is highly dependent on overall economic development and growth in real estate sector. Any slowdown in real estate sector may dampen growth prospects of Somany. Volatility in fuel prices Natural gas forms one of the key inputs for industry. Majority of the company s plants run on gas. Availability and pricing of natural gas remains a concern as increase in gas cost could increase operating costs and impact margins. Intensifying competition The tile industry is highly fragmented with ~49% share accounted by unorganised sector. Within the organised segment there are few players who enjoy majority market share and offer stiff competition. Despite changing preferences of consumers in favour of branded products leading to gradual shift towards the organised sector, any competitive moves by players such as Somany, H R.Johnson, Orient, Asian Granito, etc., and the unorganised segment may have detrimental effects on the company s revenues. Termination of joint venture Somany is highly dependent on joint ventures (JV) with unorganized players. Majority of its capacity expansion in past has been through JVs. The JVs contributed 50% of total capacity in FY15. Termination of JVs, for any reason in future, could impact the company s sales volume and revenue growth. Threat of Chinese imports China is the largest producer of tiles globally. Import of cheap Chinese tiles poses a threat to the company. Recently, the government has imposed an anti dumping duty of USD1.37 per sq mtr on vitrified tiles imported from China. 75 Edelweiss Securities Limited

77 Miscellaneous Company Description Somany is the third largest player in the Indian tile industry with market share pegged at 6.8% in FY15. Ceramic, GVT and PVT contribute 49%, 16% and 35% to the company s sales, respectively. Retail and institutional businesses contribute 65% and 35% to Somany s revenue, respectively. The company also caters to brand enhancing names under institutional and retail sales. Somany is the first in India to file a patent for its VC Shield Protection and Somany Slip Shield technologies used in the manufacture of tiles. About the company Set up in 1968 by Mr. Hira Lall Somany, Somany is India s third largest floor and tiles manufacturing company and the oldest ceramics brand in India. The company has its headquarters at Delhi. It is the second largest company in India in terms of profitability after Kajaria Ceramics. Somany was formed in technical collaboration with Pilkington s Tile Holding (UK) and was named as Somany Pilkington Limited. Later in 2007, it was renamed as Somany Ceramics Limited. The company started business by setting up a plant to manufacture 0.52msm ceramic tiles at Kassar, Haryana in Edelweiss Securities Limited

78 Somany Ceramics Fig. 10: Evolution of Somany Ceramics 2010 Successfully completed expansion of Kassar plant and commenced commercial production on Mar 28, Acquired 26.6% in Somany Fine Vitrified Pvt. Ltd Increased the stake of Somany Sanitaryware Pvt. Ltd. (formerly, Sonec Sanitaryware Pvt. Ltd.) to 51%. QIP of 35,34,600 Equity Shares of face value INR 2/ each at the issue price of INR per share 2014 Raised INR50 Crores through private equity from Creador Acquired 26% each in Vicon Ceramics Pvt. Ltd and Acer Granito Pvt. Ltd. Acquired 51% in Amora Tiles Pvt. Ltd. Acquired 26% in Sonec Sanitaryware Pvt. Ltd. (sanitartware capacity, 0.3mn pa) 2012 Accquired 26% stake each in Vintage Tiles Pvt. Ltd and Commander Vitrified Tiles Pvt Share Split from INR10 per share to INR2per Received patent for its product VC shield, India s highest abrasion resistant tiles a first in the Indian tile industry Ventured into the sanitaryware space under Somany brand 2006 Entered into JV with Kerbaen S A for distribution within and outside 2001 Launched a new concept in floor and wall tiles, called the VersaTile Launched vitrified tiles segment under brand Entered into technical collaboration with Leonardo Ceramica, Italy part of the "Cooperative Ceramica di Imola R&D facility received government recognition, a first in the Indian industry The Company introduced India's largest ceramic tile (45cm X 45cm) Expanded production capacity to 6.7msm pa Installed Automantic hydrolic presses at Kassar and Kadi 1986 Expanded capacity at Kassar to 3.13msm pa Set up second manufacturing unit at Kadi (capacity 2.65msm pa.) Doubled production capacity to 2.07 msm pa. Established the Kassar plant (capacity 0.52msm pa) in technical collabaration with Pilkington's Tile 1968 Incorporated at Kolkata by Shri Hiralal Somany Source: Company, Edelweis research 77 Edelweiss Securities Limited

79 Miscellaneous Somany has successfully leveraged its strong distribution network and entered into various JVs with Morbi based players to drive revenue. JVs contribute ~50% to the company s total capacity (FY15) leading to higher asset turnover at 3x it is significantly higher than other players. Chart 11: Superior asset turnover (x) FY11 FY12 FY13 FY14 FY15 Table 4: JVs of Somany Ceramics Somany Ceramics Kajaria Ceramics Asian Granito Nitco It is one of the oldest players to have started the trend of entering into JVs for capacity expansion. Since 2012, it has entered into JVs to enhance its product portfolio. Majority of Somany s GVT and PVT manufacturing is done via JVs. Currently, it has 7 JVs including its 3 subsidiaries. Name of Company Year of Acquisition Stake (%) Capacity (in msm) Product Type Vintage Tiles Pvt. Ltd PVT Commander Vitrified Pvt. Ltd GVT and PVT Vicon Ceramic Pvt. Ltd Industrial Vitrified Tiles and Cermic Tiles Amora Tiles Pvt. Ltd Ceramic Tiles Acer Granito Pvt. Ltd PVT Somany Fine Vitrified Pvt Ltd PVT Somany Sanitary ware Pvt. Ltd mn pcs Sanitaryware In past 5 years, Somany has increased capacity by almost 2.7x from 17msm in FY10 to 43msm in FY15. Currently, the company has access to capacity of 56msm distributed across 8 plants including 9msm outsourced capacity. It has also ventured into in house manufacturing of sanitary ware products and has total capacity of 0.3mn pieces pa. 78 Edelweiss Securities Limited

80 Somany Ceramics Table 5: Manufacturing facilities of Somany Ceramics Plant Location Ceramic tiles Capacity PVT Capacity GVT Capacity Total Capacity Remarks (msm) (msm) (msm) (msm) Kassar, Haryana Own Plant Kadi, Gujarat Own Plant Morbi Gujarat Subsidiary Plant Morbi, Gujarat (5 Plants) Associate Companies Outsourced Capacity 9.0 No Equity Stake Total 56.3 Morbi, Gujarat (Sanitary ware) 0.3m pcs. 0.3m pcs. Subsidiary Plant Over the years, Somany has emerged as one of the leading players in the Indian tile Industry. The company has increased its market share from 4.4% in FY08 to 6.8% in FY15. From being a ceramic wall and floor tiles manufacturer, it has diversified its product portfolio to polished vitrified (soluble salt and double charge) tiles, glazed vitrified tiles and sanitary ware and bath fitting. Somany s floor tiles include durastone, duragres, slip shield and veil craft shield. The tiles are available in different sizes and come with the option of digitally printed. Its PVT range is named as Somany Vitro. Its GVT has 7 different sizes of tiles, each with various design options under the Duragres brand. Somany s sanitary ware includes products for toilets, basins, urinals, allied products, sinks and cabinet basins. The company s chrome plated (CP) fittings include faucets, showers and allied products. It also offers tile laying solutions, including Ezy fix, Tile master and Ezy grout. Chart 12: Revenue pie in terms of ceramic, GVT and PVT (FY15) GVT 16% Ceramic Tiles 49% PVT 35% 79 Edelweiss Securities Limited

81 Miscellaneous Customers Retail and instituional business contributes 65% and 35% of the company s revenue, respectively. The Company also caters to brand enhancing names under institutional sales and retail sales. Fig. 11: Key customers Developers Corporates / Banks PSU Retailers/Hospitality/ Hospitals 80 Edelweiss Securities Limited

82 Somany Ceramics Strong management team Company is building up a strong team to scale up its market share in the tiles industry. Table 6 : Management profile Key Personnel Mr. Shreekant Somany Chairman Mr. Abhishek Somany Managing Director Mr. G.G. Trivedi CEO Mr. T. R. Maheshwari Deputy CEO and CFO Mr. Sanjay Kalra President (Sales & Marketing) Profile Is a science graduate from the University of Kolkata. He joined the compnay in 1992 and has more than 44 years of rich experience in ceramics and glass industry. He is responsible for overall management of the company and policy decision making. Prior to joining the company, he was the President at Hindustan Sanitaryware & Industries Limited. He has also held key positions in ASSOCHAM, PHDCC and ICCTAS. He holds Bachelor of Business Administration in General Administration & Marketing from Richmond University, U.K. Having more than 18 years of rich experience in the Ceramic Industry & International Marketing, he started his career with an initial training at Kanoria Chemicals, (Renukoot Works) U.P. Later on he resumed his specialized intensive training in M/s. Pilkington's Tiles U.K. at their Manchester and Brighton Plants. Soon after his specialized training, he joined Somany Group as a Management Trainee, later on took complete charge of domestic marketing as President, and then became Executive Director. Presently, he is in charge of operational responsibility and day today functioning of the Company. He is also personally involved with the Product Designing and Sales & Marketing of Somany Ceramics. He is also a member of the Executive Committee of the Federation of Indian Chambers of Commerce and Industry (FICCI). Leading from the front, he is confident to take Somany Ceramics Limited reach the zenith of the Indian Ceramic Industry and make Somany the most sought after tile brand in India. Is M. Sc (Electronics), Cost Accountant and Law Graduate and possesses rich 45 years experience in the field of ceramic and distillery industry. Presently he serves as the Chief Executive Office of Somany Ceramics Limited. Shri. Trivedi has been associated with Somany Ceramics Ltd since 1987 and has served as Chief Executive Officer of its Kadi Unit. Prior to joining So many Ceramics, he was the President of LMP Precision Engineering Ltd. Mr. T. R. Maheshwari has been re designated as the Deputy Chief Executive Officer and appointed as Chief Financial Officer of Somany Ceramics Limited since January 26, Holds a PG diploma in Marketing and Sales and Management. He has a total experience of 30 plus years in sales and marketing. Presently he is the President of Sales and marketing department of Somany Ceramics. Prior to joining the compnay he has worked at Sintex Industries Limited ( President of Sales and Marketing), Pidilite Industies Limited, HSIL Ltd. ( Sr. VP Sales). 81 Edelweiss Securities Limited

83 Miscellaneous Financial Outlook We have built volume growth of 10.5% in Somany versus industry growth of 7.5% over FY16 18E. Rising share of GVT/PVT will boost realisation which we estimate at 5% CAGR over FY Revenue CAGR of 16.6% versus industry s 11.5% will lead to Somany s market share surging to 7.8% in FY18E from 6.8% in FY15 in value terms. EBITDA margin will catapult to 8.2% in FY18E from 6.5% in FY15 on rising share of manufactured sales, increasing share of value added products and lower gas prices. Somany s pre tax RoCE will improve from 20.8% in FY15 to 24.7% in FY18E. Further, its cash flow situation is likely to improve on account of better profitability. We have built in volume growth of 10.5% for Somany versus industry run rate of 7.5% over FY Further, we estimate realisation CAGR of 5% over FY16 18 versus 8.4% over FY08 15 on account of rising share of GVT/PVT Sustained volume and realisation surge to boost revenue Somany clocked revenue CAGR of 24.5% over FY08 15 primarily led by volume (grew at 14.1%) coupled with market share gains. We believe the volume growth momentum will sustain bolstered by its wide distribution network, liberal brand spending and comprehensive product portfolio. Hence, we expect Somany to outperform the industry going forward. Ergo, we have built in volume growth of 10.5% for Somany versus industry run rate of 7.5% over FY Further, we estimate realisation CAGR of 5% over FY16 18 versus 8.4% over FY08 15 on account of rising share of GVT/PVT (refer chart 6). Hence, we estimate revenue CAGR of 16.6% versus industry growth of 11.5% over the same period. This will lead to Somany s market share surging to 7.8% in FY18E from 6.8% in FY15 in value terms. Chart 13: Strong volume growth momentum to continue Chart 14: Better product mix to drive realisation ( msm) (%) (INR/msm) (%) 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Manufactured JVs Outsourced Growth % RHS 90 0 FY09 FY10 FY11 FY12 Realisation FY13 FY14 FY15 FY16E FY17E FY18E Growth % RHS Edelweiss Securities Limited

84 Somany Ceramics Chart 15: Healthy revenue growth momentum to continue 25,000 20, (INR mn) 15,000 10, (%) 5, FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Manufactured JVs Outsourced Growth % RHS We estimate Somany s EBITDA margin to jump to 8.2% in FY18 from 6.5% in FY15 Value added products, lower gas prices: Potent EBITDA margin kickers We estimate Somany s EBITDA margin to jump to 8.2% in FY18 from 6.5% in FY15 led by: a) rising share of manufactured sales; b) increasing share of value added products; and c) lower gas prices. Chart 16: EBITDA margin set to surge 2,500 2, (INR mn) 1,500 1, (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 EBITDA EBITDA % RHS Further, we expect PAT CAGR of 39.9% over FY16 18E versus 42.8% in FY Edelweiss Securities Limited

85 Miscellaneous Chart 17: Robust PAT growth to sustain 1,250 PAT (INR mn) 1,000 (INR mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E PAT (INR mn) Somany is expected to use QIP money to repay debt, meet capex requirements and drive future growth Strong balance sheet coupled with healthy return ratios Somany has a strong balance sheet with debt/equity of mere 0.7x (FY15). The company raised INR0.5bn equity in FY14 and also issued 4.3mn shares to Latinia at INR113/share. Further, in FY16 the company raised INR1.2bn at INR339.5/share and issued 3.5mn shares via QIP. The company is expected to use these funds to repay debt, meet capex requirements and drive future growth. Chart 18: Deleveraging the balance sheet 2,000 1,600 (INR mn) 1, (x) 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Net debt (INR mn) Net debt/equity (x) RHS Somany has cash conversion cycle of days versus industry s days run rate, primarily on account of strong brand. 84 Edelweiss Securities Limited

86 Somany Ceramics Somany has cash conversion cycle of days versus industry s days run rate, primarily on account of strong brand Chart 19: Better working capital versus peers (No. of Days) FY12 FY13 FY14 FY15 Kajaria Somany Asian Granito Nitco We expect pre tax RoCE to improve to 24.7% in FY18 from 20.8% in FY15 Chart 20: Healthy return ratio The company has been registering healthy RoE/RoCE on consistent basis. We expect pre tax RoCE to improve to 24.7% in FY18 from 20.8% in FY15 primarily aided by improvement in EBITDA margin. Its cash flow is also likely to improve owing to improved profitability. Chart 21: Cash flow set to improve 1, (%) (INR mn) (400) 5.0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Pre tax ROCE (%) RoE (%) FY18E (800) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Operating cash flow Free cashflow 85 Edelweiss Securities Limited

87 Miscellaneous Somany has been consistently distributing 20 25% of PAT as dividend. Chart 22: Consistent dividend payout (INR ) (%) 0.0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 0.0 Dividend Per share (INR) Dividend payout Ratio (%) 86 Edelweiss Securities Limited

88 Somany Ceramics Financial Statements Key assumptions FY15 FY16E FY17E FY18E Macro GDP(Y o Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Indian Tile Industry Volume wise growth (%) Org. Sector Share Vol. wise (%) Unorg. Sector Share Vol. wise(%) Value wise growth (%) Org.Sector Share Value wise(%) Unorg. Sector Share Value wise(%) Company Mfg. Wise capacity (in msm) Own JV Outsourced Product wise capacity (in msm) Ceramic Tile Glazed Vertified Tiles Polished Vertified Tiles Sales growth (%) Volume Growth (%) Own (3.5) JV Outsourced (23.1) (2.0) Realization per sqm (INR) Manufactured JV Others Product Value Growth(%) Ceramic PVT GVT Cost Assumptions Excise Duty as % of Sales Packing mat. as % of Net Sales Power & Fuel as % of Net Sales Employee Cost as % of Net Sales Sales Promotion As % of N. Sales Ad. & Selling Cost as % of N. Sales Financial Assumptions Dep. as % of avg. gross block Int. rate as % of total debt Tax rate as % of PBT Capex (INR mn) (508) (900) (350) (350) Net borrowing (INR mn) 1, (11) Income statement (INR mn) Year to March FY15 FY16E FY17E FY18E Net revenues 15,352 17,226 19,805 23,426 Raw material costs 9,039 10,755 12,193 14,489 Gross profit 6,312 6,471 7,612 8,937 Employee expenses 1,014 1,115 1,249 1,436 Other expenses 4,303 4,183 4,788 5,578 Operating expenses 5,316 5,298 6,036 7,014 Total expenditure 14,356 16,053 18,229 21,502 EBITDA 996 1,173 1,575 1,924 Depreciation & amortisation EBIT ,241 1,570 Less: Interest Expense Add: Other income Add: Exceptional items (38) Profit Before Tax ,111 1,465 Less: Provision for Tax Less: Minority Interest 9 Add: Share of profit from associate Reported Profit ,010 Less: Exceptional Items (Net of Tax (25) Adjusted Profit ,010 No. of Shares outstanding (mn) Adjusted Basic EPS No. of Diluted shares outstanding Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio (%) Common size metrics (% net revenues) Year to March FY15 FY16E FY17E FY18E Gross margin Operating expenses EBITDA margins EBIT margin Interest Net profit margin Growth metrics (%) Year to March FY15 FY16E FY17E FY18E Revenues EBITDA PBT Adjusted Profit EPS Edelweiss Securities Limited

89 Miscellaneous Balance sheet (INR mn) As on 31st March FY15 FY16E FY17E FY18E Share capital Reserves & surplus 2,502 4,074 4,712 5,569 Shareholder equity 2,580 4,159 4,796 5,654 Minority interest (4) (47) Long term borrowings Short term borrowings 1, Total Borrowings 1,912 1,412 1,412 1,412 Deferred Tax Liability (net) Long Term Liabilities & Provisions Sources of funds 5,058 6,099 6,705 7,519 Gross block 4,907 5,107 6,157 6,507 Accumulated depreciation 2,306 2,578 2,913 3,266 Net Block 2,601 2,529 3,244 3,241 Intangible assets Capital work in progress Total Fixed Assets 2,646 3,273 3,289 3,286 Non current investments Cash and cash equivalents ,423 Inventories 1,364 1,491 1,729 2,010 Sundry Debtors 2,591 2,926 3,364 3,979 Loans & Advances 1,383 1,509 1,660 1,826 Other Current Assets Total Current Assets (ex cash) 5,390 5,977 6,804 7,866 Trade payable 2,079 2,416 2,739 3,255 Other Current Liabilities & Short T 1,518 1,489 1,714 1,999 Total Current Liabilities & Provisio 3,597 3,905 4,453 5,254 Net Current Assets (ex cash) 1,792 2,072 2,351 2,612 Uses of funds 5,058 6,099 6,705 7,519 Book Value per share (INR) Free cash flow Year to March FY15 FY16E FY17E FY18E Reported Profit ,010 Add: Depreciation Add:Interest Add:Other non cash items 32 (148) (114) (114) Gross cash flow ,099 1,364 Less: Changes in working capital Operating cash flow ,103 Less: Capex Free cash flow (257) (441) Cash flow metrics Year to March FY15 FY16E FY17E FY18E Operating cash flow ,103 Financing cash flow (64) 550 (160) (196) Investing cash flow (379) (900) (350) (350) Net cash flow (192) Capex (508) (900) (350) (350) Dividends paid (68) (112) (128) (153) Profitability ratios Year to March FY15 FY16E FY17E FY18E Pre tax Return on Capital Employe Return on Average Equity (ROAE) (% ROA (%) Current ratio Quick ratio Cash ratio Receivable turnover (x) Inventory turnover (x) Payables turnover (x) Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Gross Debt/Equity Gross Debt/EBITDA Operating ratios (x) Year to March FY15 FY16E FY17E FY18E Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to March FY15 FY16E FY17E FY18E Adjusted Diluted EPS (INR) Y o Y growth (%) Adjusted Cash EPS (INR) Diluted Price to Earnings Ratio (P/E Price to Book Ratio (P/B) (x) Enterprise Value / Sales (x) Enterprise Value / EBITDA (x) Dividend Yield (%) Edelweiss Securities Limited

90 Somany Ceramics Additional Data Directors Data Shrikant Somany Chairman Dr. Y.K. Alagh Director Abhishek Somany Managing Director G.L. Sultania Director Anjana Somany Director Ravinder Nath Director R.K. Daga Director Siddharth Bindra Director Salil Singhal Director Narayan Anand Director Auditors Lodha & Co. *as per last annual report Holding Top 10 Perc. Holding Perc. Holding DSP Blackrock Investment Manager 5.35 L & T Investment Management Ltd 1.50 Ntasian Discovery Mastfund 3.96 Macquarie Bank Limited 1.03 Hind Strategic Investment 2.84 HSBC Asset Mgmt India Pvt. Ltd 0.48 Wasatch Advisors 2.49 Birla Sunlife Asset Management 0.41 Catamaran Management Services Pvt Ltd 1.61 L & T Mutual Fund 0.40 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price 14/Oct/15 L&T Mf Tax Advantage Fund Buy 499, /Oct/15 Macquarie Bank Ltd Sell 500, *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 17/Mar/15 Macquarie Bank Limited OBU Sell 380,000 *in last one year 89 Edelweiss Securities Limited

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92 India Midcaps COMPANY PROFILE ASIAN GRANITO INDIA Pioneering growth India Equity Research Miscellaneous Asian Granito India (AGL) is the fourth largest tile manufacturer in India with share of 3.8% and 7.4% in the overall and organised market. The company is also one of the largest manufacturers of marble and quartz with a market share of 43%. AGL is the pioneer of digital tiles and digital printing technology in the industry. It has a strong distribution network of 2,800 dealers/sub dealers and is planning to hike it to 4,000 going ahead. Further, it will increase the number of exclusive showrooms to 150 by FY19 from 75 currently. AGL is likely to increase share of vitrified tiles to 65% in future from 58% in FY15. Not Rated. Strong distribution network; sharpening focus on retail business With a pan India distribution network comprising 4,000 dealers and sub dealers servicing over 91 worldwide showrooms, Retail and institutional business contribute 35% and 65% to the company s revenue, respectively. Management is focusing more on the retail business and expects it to increase to 50% by FY17. AGL sells all its products under 3 brands Asian Granito, AGL and Bonzer7. High end products focus to boost realisation and profitability AGL has 7 modern manufacturing plants at Gujarat with annual capacity of manufacturing 26msm. The company is planning to focus on high end products by increasing their share to 51% by FY17 from 46% currently, which will lead to better realisations and profitability. The tiles segment contributed ~87% to AGL s FY15 revenue (vitrified tiles 42% and ceramic tiles 58%). The company is planning to increase the contribution of vitrified tiles to 65% by FY17. Marble and quartz segment: On strong footing The marble and quartz division contributed 12% to FY15 revenue. AGL has a marble and quartz processing plant at Dalpur (Gujarat) with annual capacity of 1.3msm. The company has ventured into the natural imported marble segment and is planning to introduce imported allied products to boost revenue. EDELWEISS RATINGS Absolute Rating NOT RATED MARKET DATA (R: ASGI.BO, B: ASIAN IN) CMP : INR 150 Target Price : NA 52 week range (INR) : 198 / 83 Share in issue (mn) : 22.6 M cap (INR bn/usd mn) : 3 / 51 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q3FY16 Q2FY16 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Sensex Stock : NIL Stock over Sensex 1 month months (2.1) (16.9) (14.8) 12 months (12.7) Outlook and valuations: Firming up; NOT RATED AGL s revenue and EBITDA clocked CAGR of 14.4% and 4.1%, respectively over FY The stock is trading at 25FY15 EPS. The stock is NOT RATED. Financials Year to March FY12 FY13 FY14 FY15 Revenues (INR mn) 6,238 7,084 7,752 8,460 EBITDA (INR mn) Adjusted Profit (INR mn) Adjusted Diluted EPS (INR) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Manish Mahawar manish.mahawar@edelweissfin.com Karishma Kothari karishma.kothari@edelweissfin.com April 06, Edelweiss Securities Limited

93 Miscellaneous Financial Statements Income statement (INR mn) Year to December FY12 FY13 FY14 FY15 Net revenues 6,238 7,084 7,752 8,460 Raw material costs 3,222 3,784 4,814 5,357 Gross profit 3,016 3,299 2,937 3,104 Employee expenses Other expenses 2,038 2,219 1,893 2,087 Operating expenses 2,345 2,583 2,281 2,527 Total expenditure 5,567 6,367 7,095 7,883 EBITDA Depreciation & amortisation EBIT Less: Interest Expense Add: Other income Add: Exceptional items (4) (18) (25) 19 Profit Before Tax Less: Provision for Tax Add: Share of profit from assoc. 0 0 (11) 15 Reported Profit Less: Except. Items (Net of Tax) (3) (12) (17) 13 Adjusted Profit No. of Shares outstanding (mn) Adjusted Basic EPS No. of Dil. Sh.outstanding (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio (%) Common size metrics (% net revenu 1.33 Year to December FY12 FY13 FY14 FY15 Gross margin Operating expenses EBITDA margins EBIT margin Interest Net profit margin Growth metrics (%) Year to December FY12 FY13 FY14 FY15 Revenues Gross Profit (11.0) 5.7 EBITDA (8.4) (12.2) PBT 2.3 (6.0) (14.9) (12.4) Adjusted Profit (8.9) 0.1 (24.8) (1.9) EPS (8.9) (4.9) (26.2) (1.9) Balance sheet (INR mn) As on 31st December FY12 FY13 FY14 FY15 Share capital Reserves & surplus 2,185 2,399 2,528 2,672 Shareholder equity 2,396 2,646 2,754 2,898 Minority interest Long term borrowings Short term borrowings 1,531 2,181 2,083 1,607 Total Borrowings 1,943 2,518 2,282 1,753 Long Term Liabilities & Provisions Deferred Tax Liability (net) Sources of funds 4,554 5,382 5,281 4,920 Gross block 2,721 2,820 3,076 3,305 Accumulated depreciation 872 1,084 1,300 1,489 Net Block 1,849 1,736 1,776 1,815 Capital work in progress Intangible assets Total Fixed Assets 1,850 1,764 1,848 2,030 Non current investments Cash and cash equivalents Inventories 1,595 1,904 2,074 1,912 Sundry debtors 1,296 1,699 1,912 1,656 Loans and advances Other Current Assets Total current assets (ex cash) 3,250 4,249 4,687 4,232 Trade payable ,412 1,371 Other Current Liab. & ST Prov Total Current Liabilities & Prov ,102 1,573 1,595 Net Current Assets (ex cash) 2,421 3,147 3,114 2,637 Uses of funds 4,555 5,382 5,281 4,920 Book Value per share (INR) Free cash flow (INR mn) Year to December FY12 FY13 FY14 FY15 Reported Profit Add: Depreciation Interest other non cash items (1,332) (1,104) Less: Changes in working cap. (820) (739) Operating cash flow ,042 Less: Capex Free cash flow (148) Edelweiss Securities Limited

94 Asian Granito India Cash flow metrics Year to December FY12 FY13 FY14 FY15 Operating cash flow ,042 Financing cash flow (432) (761) Investing cash flow (203) (490) (285) (326) Net cash flow (101) (45) Capex (171) (131) (297) (374) Dividends paid (25) (24) 0 0 Profitability ratios Year to December FY12 FY13 FY14 FY15 Pre tax ROCE (%) ROAE (%) ROA (%) Current ratio Quick ratio Cash ratio Receivable turnover (x) Inventory turnover (x) Payables turnover (x) Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Operating ratios (x) Year to December FY12 FY13 FY14 FY15 Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to December FY12 FY13 FY14 FY15 Adjusted Diluted EPS (INR) Y o Y growth (%) (8.9) (4.9) (26.2) (1.9) Adjusted Cash EPS (INR) Dil. Price to Earnings Ratio (P/E) (x) Price to Book Ratio (P/B) (x) Enterprise Value / Sales (x) Enterprise Value / EBITDA (x) Dividend Yield (%) Edelweiss Securities Limited

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96 India Midcaps COMPANY PROFILE H & R JOHNSON (INDIA) Gaining lost ground India Equity Research Miscellaneous H & R Johnson (India; HRJ) is the second largest tile player in India with overall market share of 9.9%. It is the only company in the country offering end to end solutions in tiles, sanitary ware, bath fittings, engineered marble and quartz as well as modular kitchen and furniture. HRJ is a subsidiary of leading integrated building materials company Prism Cement and contributed 39% and 23% to latter s FY15 sales and EBITDA, respectively. Over FY03 12, HRJ clocked 17% revenue CAGR riding strong brand and distribution network. But, unavailability of power and fuel in South based plants dented its FY13/14 performance. However, the issues have been resolved and HRJ has started recovering lost ground. Not Rated. EDELWEISS RATINGS Absolute Rating NOT RATED Robust distribution network and well entrenched brand HRJ has a strong pan India distribution network comprising 1,000 dealers and 10,000 sub dealers servicing over 49 branches and 28 House of Johnson showrooms. The company s 28 depots are located strategically across India. It has been continuously focusing on expanding its global reach and has operations in Sri Lanka, Bangladesh and Nepal currently. 70% of its current business is from the retail section. HRJ boasts of strong Johnson brand recall amply bolstered by liberal spending on print, social and electronic media and participation in exhibitions to market its products. Bollywood actress Katrina Kaif is the company s brand ambassador. Comprehensive capacity across India Currently, the company has 10 tile manufacturing plants across India with a total capacity of 58msm. It has 5 JVs 2 in Andhra Pradesh and 3 in Gujarat contributing 65% to total FY15 capacity. The company s capacity utilisation stood at ~75% in FY15. Further, it also has 2 bath products facilities. Outlook and valuations: Back in Reckoning; NOT RATED HRJ is a subsidiary of leading integrated building materials company Prism Cement. The company contributed 39% and 23% to latter s FY15 sales and EBITDA, respectively. Over FY03 12, HRJ s revenue clocked 17% CAGR riding its strong brand and distribution network. But, it faced issues in FY13/14 due to unavailability of power and fuel in its South India plants, which contribute 40% to capacity. However, the company has now resolved the issues and started recovering ground. In FY15, revenue and EBITDA jumped 16% and 73%, respectively. Financials FY12 FY13 FY14 FY15 Revenue (INR mn) 17,290 18,320 19,160 22,270 EBITDA (INR mn) 1, Margin (%) Manish Mahawar manish.mahawar@edelweissfin.com Karishma Kothari karishma.kothari@edelweissfin.com April 06, Edelweiss Securities Limited

97 Miscellaneous Fig. 1: Business Model 'House of Johnson chain of retail outlets Manufacturing JVs 'Ardex Endura' Construction Chemicals Johnson Bathrooms' 'Johnson Kitchens' Modular Kitchens 28 across the country. Selling complete range of products. Contributes ~10% of the Division's total sales. Asset Light Business Model. 5 manufacturing JVs 2 in AP and 3 in Gujarat. Contributes ~65% of the total capacity. 50% Stake in Ardex Endura JV with Ardex, Germany R&D Driven Pioneer in tile fixing adhesives Added industrial flooring and waterproofing Plants in Bengaluru and Vadodara; Pan India presence Sanitaryware, Taps, Bath Fittings, wellness products Healthy industry structure; Brand and after sales service play key role 2 Manufacturing plants for Fittings Baddi, HP & Samba, J&K Sunrise industry High growth potential Offers complete range of products including installation Tie up with a German company for sourcing Chart 1: Revenue clocked 13.4% CAGR over FY ,000 Chart 2: Declining EBITDA margin 2, ,000 1, (INR mn) 15,000 10,000 (INR mn) 1, (%) 5,000 0 FY10 FY11 FY12 FY13 FY14 FY FY10 FY11 FY12 FY13 FY14 FY15 EBITDA (INR mn) EBITDA margin RHS 96 Edelweiss Securities Limited

98 H&R Johnson (India) Chart 3: Declining market share (%) 6.0 (%) FY11 FY12 FY13 FY14 FY FY11 FY12 FY13 FY14 FY15 Overall market share Organised market share Source: Edelweiss research 97 Edelweiss Securities Limited

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100 India Midcaps COMPANY PROFILE NITCO Innovation led surge India Equity Research Miscellaneous Nitco is among the top premium tiles manufacturers in India. Established as a cement tiles manufacturer, the company has now emerged as a complete flooring solution provider. It deals in ceramic tiles, vitrified tiles, marble and mosaic. Nitco is the pioneer of environment friendly tiles, rustic tiles and dirt free tiles in the industry. The company is expanding its tiles capacity to 18msm from 16msm. Despite facing challenges on the business model front, the company has maintained organised markets share of 7.3%. Not Rated. Strong distribution network Nitco has a strong pan India distribution network consisting of 1,100 direct dealers servicing over 5,000 retail outlets backed by 26 depots located across the country. It operates more than 13 exclusive Nitco showrooms Le studio. Nitco has around 117 showrooms operating as franchisees under Le Studio Express (LSE) and NITCO Look. Innovation bolstering market share The company has carved a distinctive reputation via manufacture of pioneering and innovative products such as the rustic tile using dry powder application technology, environmental friendly tiles, etc. It has developed a unique 6 colour digital printing which imparts natural look to a tile. These innovations have helped Nitco maintain market share of 7.3% within the organised segment (in FY15). Capacity expansion to boost growth Nitco s manufacturing units are strategically located in multiple states. While its marble divisions are located in Mumbai (Maharashtra) and Silvassa (Dadra and Nagar Haveli), its ceramic tiles division is located in Alibag with a total capacity of 16msm (including JV) and mosaic tiles division in Mumbai (both in Maharashtra). It is enhancing its capacity further by 2msm which is expected to be operational soon. EDELWEISS RATINGS Absolute Rating NOT RATED MARKET DATA (R: NCOT.BO, B: NITCO IN) CMP : INR 39 Target Price : NA 52 week range (INR) : 51 / 14 Share in issue (mn) : 54.7 M cap (INR bn/usd mn) : 2 / 32 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q3FY16 Q2FY16 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) : 58.5 PRICE PERFORMANCE (%) Sensex Stock Stock over Sensex 1 month months (2.1) (17.0) (14.9) 12 months (12.7) Outlook and valuations: Stabilising; NOT RATED Nitco s business model was dependent on imports till FY12. However, this model was unviable on account of INR depreciation. Hence, it changed it to outsourcing/jvs which led to stabilisation of the business over FY The stock is NOT RATED. Financials Year to March FY12 FY13 FY14 FY15 Revenues (INR mn) 8,419 7,734 7,786 8,374 EBITDA (INR mn) 851 (380) (137) 22 Adjusted Profit (INR mn) (338) (2,374) (2,111) (1,193) Adjusted Diluted EPS (INR) (10.4) (72.8) (38.6) (21.8) Diluted P/E (x) NA NA NA NA EV/EBITDA (x) 9.4 NA NA NA ROAE (%) NA NA NA NA Manish Mahawar manish.mahawar@edelweissfin.com Karishma Kothari karishma.kothari@edelweissfin.com April 06, Edelweiss Securities Limited

101 Miscellaneous Financial Statements Income statement (INR mn) Year to December FY12 FY13 FY14 FY15 Net revenues 8,419 7,734 7,786 8,374 Raw material costs 5,494 5,015 4,461 4,873 Gross profit 2,925 2,719 3,325 3,501 Employee expenses Other expenses 1,591 2,390 2,754 2,737 Operating expenses 2,074 3,099 3,461 3,479 Total expenditure 7,568 8,114 7,922 8,353 EBITDA 851 (380) (137) 22 Depreciation & amortisation EBIT 524 (802) (611) (676) Less: Interest Expense 751 1,541 1, Add: Other income Profit Before Tax (568) (2,325) (2,093) (1,159) Less: Provision for Tax Reported Profit (569) (2,374) (2,111) (1,193) Adjusted Profit (338) (2,374) (2,111) (1,193) No. of Shares outstanding (mn) Adjusted Basic EPS (10.4) (72.8) (38.6) (21.8) No. of Dil. Sh.outstanding (mn) Adjusted Diluted EPS (10.4) (72.8) (38.6) (21.8) Adjusted Cash EPS (0.3) (59.9) (29.9) (9.1) Common size metrics (% net rev 1.33 Year to December FY12 FY13 FY14 FY15 Gross margin Operating expenses EBITDA margins 10.1 (4.9) (1.8) 0.3 EBIT margin 6.2 (10.4) (7.8) (8.1) Interest Net profit margin (4.0) (30.7) (27.1) (14.1) Growth metrics (%) Year to December FY12 FY13 FY14 FY15 Revenues 31.0 (8.1) Gross Profit 26.5 (7.1) EBITDA 10.9 NA NA NA PBT NA NA NA NA Adjusted Profit NA NA NA NA EPS NA NA NA NA Balance sheet (INR mn) As on 31st December FY12 FY13 FY14 FY15 Share capital Reserves & surplus 4,459 2, (923) Shareholder equity 4,785 2, (376) Minority interest Long term borrowings 3,107 11,567 8,885 7,921 Short term borrowings 4, ,096 5,444 Total Borrowings 7,309 12,216 12,980 13,365 Long Term Liabilities & Provisio Deferred Tax Liability (net) Sources of funds 12,545 15,872 14,760 13,478 Gross block 8,903 10,078 10,188 10,235 Accumulated depreciation 1,521 1,931 2,402 3,144 Net Block 7,382 8,147 7,786 7,091 Capital work in progress Intangible assets Total Fixed Assets 7,478 8,249 7,915 7,188 Non current investments Cash and cash equivalents Inventories 7,003 5,561 5,281 4,988 Sundry debtors ,297 1,247 Loans and advances Other Current Assets Total current assets (ex cash) 9,638 8,375 8,347 7,954 Trade payable 4, ,456 1,551 Other Current Liabilities & ST Pr Total Current Liabilities & Prov. 5,157 1,136 1,793 1,913 Net Current Assets (ex cash) 4,481 7,239 6,554 6,041 Uses of funds 12,545 15,872 14,760 13,478 Book Value per share (INR) Free cash flow (INR mn) Year to December FY12 FY13 FY14 FY15 Reported Profit (569) (2,374) (2,111) (1,193) Add: Depreciation Interest 503 1,032 1, other non cash items 2,092 (4,279) 1, Less: Changes in working cap. 926 (2,408) Operating cash flow 1,428 (2,791) Less: Capex 1,398 1, Free cash flow 30 (3,987) Edelweiss Securities Limited

102 Nitco Cash flow metrics Year to December FY12 FY13 FY14 FY15 Operating cash flow 1,428 (2,791) Financing cash flow 554 3,958 (456) (145) Investing cash flow (1,398) (1,196) (142) (22) Net cash flow 583 (29) (91) (35) Capex (1,398) (1,196) (142) (23) Dividends paid Profitability ratios Year to December FY12 FY13 FY14 FY15 Pre tax ROCE (%) 4.5 NA NA NA ROAE (%) NA NA NA NA ROA (%) NA NA NA NA Current ratio Quick ratio Cash ratio Receivable turnover (x) Inventory turnover (x) Payables turnover (x) Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Operating ratios (x) Year to December FY12 FY13 FY14 FY15 Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to December FY12 FY13 FY14 FY15 Adjusted Diluted EPS (INR) (10.4) (72.8) (38.6) (21.8) Y o Y growth (%) NA NA NA NA Adjusted Cash EPS (INR) (0.3) (59.9) (29.9) (9.1) Dil. Price to Earnings Ratio (P/E) NA NA NA NA Price to Book Ratio (P/B) (x) (5.7) Enterprise Value / Sales (x) Enterprise Value / EBITDA (x) 9.4 NA NA NA Dividend Yield (%) Edelweiss Securities Limited

103 Tiles Fig. 1: Morbi Mecca of Indian tile industry Annexure I Morbi: Mecca of Indian tile industry Morbi is now India s largest ceramic tile making cluster spread over 60 sq km with ~600 tiles manufacturers having total installed capacity of 2.8msm tiles per day and ~ 65 sanitary ware units with an annual production capacity of 28.5mn pieces. Currently, it holds more than 600 tile manufacturers (mostly unorganized) of the total 700 in India. Approximately, 60% of India s tiles volume is manufactured in Morbi and the region is also a top export supplier, having hegemony in exports to Africa and the Gulf Cooperation Council (GCC) region. Proximity to Raw Materials Proximity to key raw materials in Gujarat and Rajasthan Clay, red and black soil, minerals including calcite and wallastonite, frits and glazes are abundantly available locally or from neighboring region of Rajasthan Dedicated Gas lines available from Gujarat State Petroleum Corporation (GSPC) ensured continuous supply of gas Morbi, Gujarat Outsourcing to unorganised players Leading ceramic companies like Kajaria ceramics, HR Johnson, Asian Granito, Somani Tiles, NITCO are outsourcing their requirements from Morbi. Branded players acquiring unorganized players or forming JVs with the unorganized players. Highly capital efficient model supply of gas Competitively placed Capability to manufacture vitrified tiles, floor tiles, quartz stone, sanitary ware, roofing tiles and mosaic tiles Proximity to major ports makes it a low cost transport hub. Exports to markets such as Middle East, Africa, Sri Lanka and Bangladesh along with supplying significant quantities to the Indian branded players. supply of gassupply of gas Source: Edelweiss research 102 Edelweiss Securities Limited

104 Tiles Annexure II Fig. 1: Geographical presence of tile industries in India Source: Tiles association of India AML Antique Marbonite, AGL Asian Granito (India), CGT Coral Gold Tiles, CGL Coral Granito CTL Cengres Tiles, ECL Euro Ceramics, GCL Gokul Ceramics, HRJ H & R Johnson(India), KCL Kajaria Ceramics, MCL Murudeshwar Ceramics, OGL Oracle Granito, OCL Orient Ceramics & Industries, OVL Jaxx Vitrified (Formerly Ozzy Vitrified), RAK R.A.K Ceramics India, RGL Regent Granito (India), SGL for Senso Granito Pvt., SCP Sentini Cermica, SIC Silica Ceramics, SCL Somany Ceramics, SVP Simpolo Vitrified, SJT Spectrum Johnson Tiles, STL Sunshine Tile Co., SWC Swastik Ceracon, UCL for Umiya Ceramic, VGL Varmora Granito (P) 103 Edelweiss Securities Limited