Rating Rationale
July 26, 2018 | Mumbai
Somany Ceramics Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.425 Crore (Enhanced from Rs.368.48 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

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

The ratings continue to reflect the Somany group's established market position in the domestic tile industry, well diversified geographical and customer base, and strong financial risk profile. These strengths are partially offset by exposure to intense competition from domestic and Chinese products in the tiles segment and vulnerability to fluctuations in the prices of raw material and natural gas.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SCL, its joint ventures and associate companies-Amora Tiles Pvt Ltd, Somany Fine Vitrified Pvt Ltd, Somany Sanitary Ware Pvt Ltd, Amora Ceramics Pvt Ltd, Acer Granito Pvt Ltd (AGPL), Commander Vitrified Pvt Ltd (CVPL), Vicon Ceramic Pvt Ltd (VCPL), Vintage Tiles Pvt Ltd (VTPL) and Sudha Somany Ceramics Pvt Ltd (SSCPL). This is because SCL has investments in all these entities and purchases finished material to market under its own brand under long-term tie ups with all these players. All the entities are collectively referred to as the Somany group.

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 over 64 million square metre (MSM). Over the years, the group's management established several brands'Somany, Somany Vitro, Somany Duragres, Somany VC, and Somany French Collection'catering to various price ranges and having strong brand recall. It had expanded its distribution network to about 10,000 touch points across India, with about 1,800 active dealers and 324 showrooms/experience centres. Furthermore, the group's presence in Tier-II and III cities continuously increased, with rapid urbanisation and enhanced branding and marketing activities.

* Well-diversified geographical and customer base
The group has a well-diversified clientele, comprising dealers and institutional sellers. However, institutional sales constitute 30-35% of the group's sales, which restricts the stretch in the working capital cycle, normally associated with institutional sales. Additionally, in the retail segment, the group sells to about 1,800 active dealers and plans to add 100-150 dealers every year, thereby mitigating customer concentration risk. Hence, the group is not susceptible to risks related to stretched working capital cycle or bad debt.

* Strong financial risk profile, marked by efficient working capital management and asset-light model
Capital structure is robust with total outside liabilities to adjusted networth (TOL/ANW) ratio at 1.48 times as on March 31, 2018. This is because of healthy accretion to reserve, efficient working capital management, and focus on asset-light expansion. The ratio is expected to remain stable over the medium term. Debt protection metrics were also healthy, with interest coverage and net cash accrual to adjusted debt ratios at 4.7 times and 20%, respectively, in fiscal 2018.

Weaknesses
* Exposure to intense competition
The ceramic tiles industry is intensely competitive, with many small and large players. Additionally, the industry is fragmented and dominated by the unorganised sector, which constitutes about half the overall market. Although the Somany group is one of the leading players in the ceramic tiles industry in India, the company faces significant competition from 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 A2+'). Intense competition restricts profitability, given the delay in passing on cost hikes to customers.

* Vulnerability to fluctuations in prices of raw material and natural gas
Despite moderate operating margin (10.9% in fiscal 2018), the group remains vulnerable to fluctuations in prices of key raw materials (clay, feldspar, silica, kaolin, and carbonates) comprising 18-20%, and gas and power costs consisting of 25-30%, of the total cost of sales of tiles. On a consolidated basis, net sales declined to Rs 1,708.2 crore in fiscal 2018, vis-a-vis Rs 1,730.9 crore in the previous year, driven by implementation of Goods and Services Tax and SAP in the group.
Outlook: Stable

CRISIL believes the Somany group will continue to benefit from an established market position, strong distribution network, and enhanced financial risk profile. The outlook may be revised to 'Positive' if better profitability and working capital management strengthen business and financial risk profiles. Conversely, the outlook may be revised to 'Negative', if substantial, debt-funded capital expenditure, large working capital requirement, or significantly low cash accrual and profitability, weakens financial risk profile. 

About the Company

SCL, was originally 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. It has two manufacturing facilities, one each in Kassar, Haryana, and Kadi, Gujarat, with total manufacturing capacity of 25.55 MSM per annum. The company sells products under brands, including Somany, Somany French Collection, Somany Vitro, Somany Duragres, Somany VC, Somany Signature, Somany Glosstra, and Somany Slip Shield.

Key Financial Indicators - (Consolidated)
Particulars Unit 2018 2017
Revenue Rs.Crore 1712.7 1730.9
Profit After Tax (PAT) Rs.Crore 79.10 115.0
PAT Margin % 4.6 6.6
Adjusted debt/adjusted networth Times 0.8 0.8
Interest coverage Times 4.7 6.0

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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.Cr)
Rating Assigned with Outlook
NA Cash Credit NA NA NA 175.0 CRISIL AA-/Stable
NA Letter of Credit NA NA NA 75.0 CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 33.66 CRISIL AA-/Stable
NA Term Loan NA 9.0 Mar-2019 9.0 CRISIL AA-/Stable
NA Term Loan NA 9.75 Jun-2019 47.21 CRISIL AA-/Stable
NA Term Loan NA 9.90 Sept-2021 62.27 CRISIL AA-/Stable
NA Long Term Loan NA 9.90 Sept-2021 22.86 CRISIL AA-/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  350.00  CRISIL AA-/Stable  14-03-18  CRISIL AA-/Stable  16-03-17  CRISIL AA-/Stable  22-11-16  CRISIL A+/Positive      CRISIL A/Stable 
                22-07-16  CRISIL A+/Stable       
                12-02-16  CRISIL A+/Stable       
Non Fund-based Bank Facilities  LT/ST  75.00  CRISIL A1+  14-03-18  CRISIL A1+  16-03-17  CRISIL A1+  22-11-16  CRISIL A1+      CRISIL A1 
                22-07-16  CRISIL A1       
                12-02-16  CRISIL A1       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 175 CRISIL AA-/Stable Cash Credit 150 CRISIL AA-/Stable
Letter of Credit 75 CRISIL A1+ Letter of Credit 90 CRISIL A1+
Long Term Loan 22.86 CRISIL AA-/Stable Proposed Fund-Based Bank Limits 26.44 CRISIL AA-/Stable
Proposed Fund-Based Bank Limits 33.66 CRISIL AA-/Stable Term Loan 102.04 CRISIL AA-/Stable
Term Loan 118.48 CRISIL AA-/Stable -- 0 --
Total 425 -- Total 368.48 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Construction Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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