Rating Rationale
September 27, 2022 | Mumbai
Somany Ceramics Limited
Ratings reaffirmed at 'CRISIL AA- / Stable / CRISIL A1+ '
 
Rating Action
Total Bank Loan Facilities RatedRs.425 Crore
Long Term RatingCRISIL AA-/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Somany Ceramics Ltd (SCL; a part of the Somany group).

 

The rating continues to reflect groups strong business risk profile supported by strong brand presence in the tile industry in the organised segment and diversified product portfolio.

 

SCL reported revenue growth of ~27% in fiscal 2022, to Rs. 2094 crore in fiscal 2022 against Rs. 1650 crore in fiscal 2021. This growth is driven by both volume growth and improved price realization owing to multiple price hike undertaken by SCL during last one year. The revenue is expected to improve by over CAGR of 12-15% driven by capacity enhancement, healthy demand from real estate industry, diversification in product mix. Further, the capacity expansion of 11 SQM in Kassar, Gujarat Plant and southern plant has successfully been commissioned during July, 2023. Consequently, total installed capacity has improved to ~74 MSM per year in fiscal 2023 from ~63 MSM per year during last fiscal. Though, timely ramp-up of enhanced capacities remains key monitorable. Operating margins of the company has declined to 9.98% in FY22 from 10-12% in past fiscals, due to increase in the raw material prices, rising fuel cost and freight cost etc. Sustenance of improved sales growth along with improvement in profitability levels over the medium term remain a key rating sensitivity factor.

 

The ratings continue to reflect the Somany group's established market position in the domestic tile industry, its well-diversified geographical reach and customer base, and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition and cyclicality in the real estate segment, and fluctuations in prices of raw material and natural gas.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SCL, its joint ventures and associate companies -- Amora Tiles Pvt Ltd (ATPL), Somany Fine Vitrified Pvt Ltd (SFVPL), Somany Sanitary Ware Pvt Ltd (SSWPL), Amora Ceramics Pvt Ltd (ACPL), Acer Granito Pvt Ltd (AGPL), Vicon Ceramic Pvt Ltd (VCPL), Vintage Tiles Pvt Ltd (VTPL), Somany Bath Fittings Pvt Ltd (SBFPL), Sudha Somany Ceramics Pvt Ltd (SSCPL) and Somany Piastrelle Private Limited (SPPL). This is because SCL has investments in all these entities, and purchases finished material from them, to be marketed under its own brand. All the entities are collectively referred to as the Somany group.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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.

Liquidity: Superior

Bank limit utilization was negligible, averaging around 1-2% over the twelve months ended July  2022. Expected cash accrual of over Rs 150 crore, should suffice to cover the term debt obligation of Rs 55-60 crore in FY23 and FY24. Current ratio was moderate at 1.14 times as on March 31, 2022. The healthy cash balance and liquid investments worth Rs 208 crore as on March 31,2022, aid overall liquidity. Low gearing and moderate networth support financial flexibility, to raise additional debt in case of any adverse business scenario.

Outlook Stable

CRISIL Ratings believes the Somany group will continue to benefit from its established market position, strong distribution network, and enhanced financial risk profile.

Rating Sensitivity factors

Upward factors:

  • Significant growth in revenue by more than 35% and sustained improvement in profitability by at least 300 basis points.
  • Prudent working capital management, reducing receivables and debt levels

 

Downward factors:

  • Decline in operating income or drop in operating margin by 150 basis points, resulting in significantly low cash accrual and weakening the financial risk profile
  • Any major debt-funded capex, straining the capital structure or increase in working capital requirement weakening the financial risk profile.

About the Group

SCL was incorporated in 1968, as Somany Pilkington’s Ltd (SPL), promoted by Mr H L Somany in collaboration with the UK-based Pilkington’s Tiles Plc (PTP). The Somany family purchased PTP’s stake in SPL in 1971 and the name was changed to the current one. SCL is listed on the Bombay Stock Exchange and National Stock Exchange. Mr Shreekant Somany is the chairman and managing director, and Mr Abhishek Somany, the Managing Director.

 

SCL manufactures ceramic tiles and glazed vitrified tiles, and trades in polished vitrified tiles, along with sanitary ware and bathroom fittings. SCL group has a combined tile manufacturing capacity of 73 MSM p.a. SCL group has two of its own manufacturing units at Kadi (Gujarat) and Kassar (Haryana); seven ancillary units of associates / subsidiaries and arrangements with other manufacturers. Own manufacturing accounts for approximately 50% of the total production, remaining is contributed by JVs and arrangement with other manufacturers. The company sells products under brands such as Somany, Somany French Collection, Somany Vitro, Somany Duragres, Somany VC, Somany Signature, Somany Glosstra, and Somany Slip Shield.

 

Majority-owned subsidiaries, ATPL and ACPL, manufacture ceramic wall glazed tiles, while SFVPL manufactures vitrified floor tiles. AGPL, in which SCL has a 26% stake, manufactures soluble salt and double charge vitrified tiles. All these subsidiaries/joint ventures have plants in Morbi (Gujarat). The plant under SSCPL (60% stake held by SCL) also commenced production on March 27, 2019, at Andhra Pradesh, and manufactures glazed vitrified tiles. In May 2018, SCL also acquired 51% stake in SBFPL, which manufactures and sells bath fittings such as faucets and showers.

 

Sudha Somany Ceramics Private Limited (SSCPL) is engaged in manufacturing of glazed vitrified tiles with installed capacity of 3.5 Million Square per Meter (MSM) per annum.

 

Somany Max Private Limited (SMPL) is subsidiary company of Somany ceramics with approx. 80% (approx.). SMPL is in the process of setting up a manufacturing facility for larges tiles/slab

Key Financial Indicators

As on / for the period ended March 31

 

2022

2021

Operating income

Rs crore

2,094.4

1,650.60

Reported profit after tax

Rs crore

93.41

60.58

PAT margins

%

4.46

3.67

Adjusted Debt/Adjusted Net worth

Times

0.62

0.55

Interest coverage

Times

7.05

4.89

CRISIL Adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of Instrument

Date of allotment

Coupon Rate (%)

Maturity date

Issue size  (Rs. Crore)

Complexity Level

Outstanding rating with Outlook

NA

Letter of Credit

NA

NA

NA

70.0

NA

CRISIL A1+

NA

Cash Credit

NA

NA

NA

160.0

NA

CRISIL AA-/Stable

NA

Proposed Fund-Based Bank Limits

NA

NA

NA

169.1

NA

CRISIL AA-/Stable

NA

Term Loan

NA

NA

Oct-24

25.9

NA

CRISIL AA-/Stable

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Amora Ceramics Private Limited

Fully consolidated

Subsidiary company

Amora Tiles Private Limited

Fully consolidated

Subsidiary company

Acer Granito Private Limited

Fully consolidated

Subsidiary company

Sudha Somany Ceramics Private Limited

Fully consolidated

Subsidiary company

Somany Sanitary Ware Private Limited

Fully consolidated

Subsidiary company

Somany Fine Vitrified Private Limited

Fully consolidated

Subsidiary company

Vicon Ceramic Private Limited

Fully consolidated

Subsidiary company

Vintage Tiles Private Limited

Fully consolidated

Subsidiary company

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 355.0 CRISIL AA-/Stable   -- 12-07-21 CRISIL AA-/Stable   -- 11-12-19 CRISIL AA-/Stable CRISIL AA-/Stable
      --   -- 26-03-21 CRISIL AA-/Stable   -- 16-09-19 CRISIL AA-/Watch Developing --
      --   --   --   -- 30-07-19 CRISIL AA-/Stable --
      --   --   --   -- 24-06-19 CRISIL AA-/Stable --
      --   --   --   -- 04-04-19 CRISIL AA-/Stable --
Non-Fund Based Facilities ST 70.0 CRISIL A1+   -- 12-07-21 CRISIL A1+   -- 11-12-19 CRISIL A1+ CRISIL A1+
      --   -- 26-03-21 CRISIL A1+   -- 16-09-19 CRISIL A1+/Watch Developing --
      --   --   --   -- 30-07-19 CRISIL A1+ --
      --   --   --   -- 24-06-19 CRISIL A1+ --
      --   --   --   -- 04-04-19 CRISIL A1+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 75 Punjab National Bank CRISIL AA-/Stable
Cash Credit 35 Kotak Mahindra Bank Limited CRISIL AA-/Stable
Cash Credit 35 HDFC Bank Limited CRISIL AA-/Stable
Cash Credit 15 ICICI Bank Limited CRISIL AA-/Stable
Letter of Credit 35 Punjab National Bank CRISIL A1+
Letter of Credit 15 HDFC Bank Limited CRISIL A1+
Letter of Credit 5 ICICI Bank Limited CRISIL A1+
Letter of Credit 15 Kotak Mahindra Bank Limited CRISIL A1+
Proposed Fund-Based Bank Limits 169.1 Not Applicabe CRISIL AA-/Stable
Term Loan 25.9 HDFC Bank Limited CRISIL AA-/Stable

This Annexure has been updated on 27-Sep-2022 in line with the lender-wise facility details as on 14-Dec-2021 received from the rated entity.

Criteria Details
Links to related criteria
The Rating Process
Understanding CRISILs Ratings and Rating Scales
Rating Criteria for Construction Industry
CRISILs Criteria for Consolidation

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