Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

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

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

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

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

Weaknesses:

Exposure to intense competition and cyclicality in the real estate segment: The ceramic tiles industry is intensely competitive with many unorganised players. However, with closure of ceramic units running on coal gasifiers, and implementation of GST and Real Estate (Regulation and Development) Act, 2016, market share of organised players has expanded recently.

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

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