MOSt - Big Leap - Errclub - (Thematic) Huge Opportunity, But Challenges Too

Thematic
India Strategy | Get |

onApril 2017!
track please
The Big Leap

to a formal economy
Volume 2.1
Volume 1 Ground Reality
Tiles
Sandeep Gupta (S.Gupta@MotilalOswal.com); +91 22 3982 5544
Somil Shah (Somil.Shah@MotilalOswal.com); +91 22 3312 4975
Mehul Parikh (Mehul.Parikh@MotilalOswal.com); +91 22 3010 2492
The Big Leap | Tiles
Contents: The Big Leap: Tiles

Huge opportunity, but challenges too................................................................................... 3
Indian tiles industry Third largest producer globally .......................................................... 5
Organized market share has been gradually rising ................................................................ 8
GST & demonitization will it change industry dynamics? .................................................. 10
Kajaria Indias largest tiles company ................................................................................ 15
Somany Ceramics outsourcing model worked wonders ................................................... 16
Asian Granito Chasing higher market share ..................................................................... 17
Prism Cement Pioneer of ceranmic tiles in India .............................................................. 18
Tiles manufacturing Process ............................................................................................... 19
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
28 April 2017 2
The Big Leap: Tiles

Huge opportunity, but challenges too
Lower GST rates - the key catalyst
India is set to see a major overhaul in the trade structure in favor of the organized
sector (Refer our inaugural edition of The Big Leap series). Although the
governments initiatives (demonetization, GST, etc.) are in the right direction, we
continue believing that the shift will be prompt for some sectors, gradual for
others and may remain challenging for a few.
In this edition, we will focus on the INR260b Indian tiles industry. We chose to
look at the tiles industry from the trade shift perspective, given that it is highly
fragmented and has presence of numerous unorganized players (accounting for
51% of value and 60% of volume of the industry). Our ground research and
channel checks suggest that the changes in administrative procedures under the
GST using technology platform are unlikely to accelerate the shift trade toward
formal trade in the tiles sector over the medium term. However, a reduction in
indirect taxes (from the current ~25-28% to 18%) could be a key catalyst to
accelerate shift toward formal trade.
Organized market share risingopportunity size still huge

Tiles industry remains highly fragmented. Over the years, high indirect tax
incidence, liberal tax administration/monitoring and a short B2C supply chain
have led the industry to remain dominated by unorganized players, which
account for 51% of value and 60% of volume for the industry.
However, we note that rising per capita income, aspirational buying, brand
awareness and product innovation have led to a gradual increase in value
market share of organized players from 40% in FY08 to 49% now. Furthermore,
the outsourcing model has helped organized players to ramp-up their
businesses faster with minimal investments.
Administrative policy changes unlikely to bring cheers to the sector

Over past few years, the Indian government has been taking a number of
initiatives to curb the shadow economy and shift trade from unorganized to
organized. The government plans to move in this direction by bringing in new
administrative procedures using technological platforms and altering tax rates
under the GST. This will present investors with opportunities to take advantage
of the shift in favor of organized names.
We believe that the tile industry with short B2C supply chain can continue
operating end-to-end in a parallel economy and that the changes in
administrative procedures are unlikely to accelerate the shift to organized trade
in this industry.
28 April 2017 3
Lower effective tax rate can be a driver for the big shift
Indirect tax incidence of ~25-28% for the tiles industry leads to a price
differential of 15%-20% between organized and unorganized players. As a result,
unorganized players are able to attract price-sensitive Indian consumers with
their low-cost offerings.
While the GST rate for the tiles Industry is still not made public, it is expected to
be either at 18% or 28%. Our discussions with various sector participants and
experts suggest that the potential reduction in the GST rate to 18% could aid the
shift away from unorganized trade, with the price gap between organized and
unorganized players lowering to a mere 5-10%.
However, if the GST rate is fixed at 28% (not materially different from current
rates), we believe the industry would miss a much-needed trigger in the form of
a lower effective tax rate to accelerate the shift to formal trade over the
medium term.
Exhibit 1: Unorganized value market share at 60%in FY08.. Exhibit 2: reduced to 51% in FY16
Organized,
40%
Organized, Unorganized,
49% 51%
Unorganized
, 60%
Source: Industry, MOSL Source: Industry, MOSL
Exhibit 3: Narrowing of price differential under GST: Illustrative pricing summary pre and post GST
Current Regime GST Regime @ 18% GST Regime @28%
Unorganized
Particulars Organized Player Organized Player Organized Player player
RM cost + margin (A) 100.0 100.0 100.0 100.0
Excise (Cenvat not available) / GST (cenvat available) (B) 12.5 18.0 28.0 0.0
Cost for the dealer C = (A) + (B - if CENVAT not
available) 112.5 100.0 100.0 100.0
Margin (5%) 5.6 5.0 5.0 5.0
VAT/ GST 14.8 18.9 29.4 0.0
Gross Price 132.9 123.9 134.4 105.0
Other Costs
Additional branding cost (1-2%) 1-2 1-2 1-2
Additional cost to manage trade channels (8-10%) - 0 0 8.5-10.5
Price to the consumer 133.9-134.9 124.9-125.9 135.4-136.4 113.4-115.5
Source: MOSL
28 April 2017 4
Indian tiles industry Third largest producer globally
India is the third largest producer and consumer of tiles in the world. In terms of
volumes, the countrys tiles industry grew at a CAGR (CY08-16) of 9.5% to 763m sq.mt,
outpacing global growth of 5.5%. However, recent slowdown in real estate has led to a
subdued growth over the last two years.
In terms of value, the Indian tiles industry is estimated to have grown at a higher
CAGR of 16% (CY08-16), led by product improvisation and innovation.
Morbi, a small industrial town near Rajkot, is the second largest tiles manufacturing
cluster in the world. Around 60% of tiles manufacturing in India happens at Morbi.
India third largest tiles market globally

India is the third largest producer and consumer of tiles in the world. As at FY16,
Indian tiles industry volumes are estimated at 763m sq.mt., with a market size
of INR260b.
In volume terms, global tiles production CAGR stood at 5.5% over CY08-16. Over
the same period, the Indian tiles industry grew at a healthy CAGR of 9.5%,
overtaking Chinas 8.1% and Brazils 4.4%. However, slowdown in the real estate
sector has impacted growth recent years.
This rapid pace of growth in the Indian tile industry can be ascribed to: (a)
increasing urbanization, (b) real estate sector boom, (c) rising per capita income
and (d) product improvisation.
Further, to protect the domestic tile industry, the government has imposed anti-
dumping duty on tile imports from China, which were priced 30-50% cheaper.
Exhibit 4: Indian tiles industry growth (9.5%) higher than global growth (5.5%) (bn sq. mt.)
China Others India Brazil
12.1 12.2
Indian tiles industry growth 10.5 11.0 10.6
9.5 0.8 0.8
superior to global peers 8.4 8.5 0.7
0.6 0.7
0.6
0.4 0.5
4.0 4.3 4.6 4.9 4.9

2.8 3.0 3.5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15
Source: Ceramic world review, MOSL
Exhibit 5: Indian tiles industry volume CAGR of 9.5%
Indian Tiles Industry (MSM) Growth (%) RHS
22.6
756 763
681 718
625
557
494
403
12.8 12.2
9.0
5.4 5.3 0.9
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15
Source: Ceramic world review, MOSL
26 April 2017 5
Exhibit 6: Share of urban population rising Exhibit 7: Real estate market CAGR of 14%
Urban population (in m) Rurual population (in m) Market size of real estate in India (USD b)
121 126
833 69% 66.8

72% 53.3 55.6
742 50.1
285 28% 377 31%
FY01 FY11 FY08 FY09 FY10 FY11 FY13 FY15
Source: CENCUS,MOSL Source: KPMG, MOSL
Exhibit 8: Growth in per capita income (INR)
Real Income 83,565

77,647
72,054
64,664
57,660
50,625
44,431
39,267
32,819
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: CEIC, MOSL
Change in product mix, focus on innovation drive value growth

Our discussion with sector experts suggest that in value terms, the Indian tiles
Product improvement and industry grew at a CAGR (CY08-16) of 16% to INR260b, with organized players
innovation drives value growing at 20% and unorganized players at 13%.
growth higher than volume
Product improvisation (greater focus on high-end tiles PVT and GVT) and
growth for tiles industry
innovation have led to value growth outpacing volume growth over CY08-16.
Exhibit 9: Structural shift toward better-value products (%)
Ceramic, 44
Ceramic, 53 PVT, 39
PVT, 44
FY10 FY16
GVT, 12
GVT, 8
Source: Industry, MOSL
28 April 2017 6
Morbi the largest tiles manufacturing cluster in India

Morbi, a small industrial town near Rajkot, is home to more than 600 tile
manufacturing units, and is also the second largest tile manufacturing cluster in
the world. Furthermore, 100+ units are under construction at Morbi. Around
60% of tiles manufacturing in India happens at Morbi.
60% of Indian tiles Access to key raw materials (clay, red and black soil, minerals, coal, frits and
manufacturing happens in glazes), availability of dedicated gas lines from Gujarat State Petroleum
Morbi Corporation and strategic location (close proximity to port, making it low-cost
transport hub and facilitation for exports/ imports) have been the key drivers of
the development of this location.
Morbis cumulative industrial investments for the sector amount to more than
INR80b, providing direct/indirect employment to 0.6m people.
Exhibit 10: Indian tiles industry clustered at Morbi (~60% of production)
Source: ICCTAS, MOSL
28 April 2017 7
Organized market share has been gradually rising
The tiles industry in India has for long remained fragmented and dominated by
unorganized players. Unorganized trade in the sector is estimated at 60% by volume
and 51% by value as of FY16.
Tax arbitrage of ~25-28% between unorganized and organized players has primarily
led to a product price differential of 15-20% between these two segments.
Over FY08-16, organized players have been able to increase their value market share
from 40% to 49%, driven by rising per capita income, aspirational buying, brand
awareness and product innovation.
Further, the outsourcing model has helped organized players to ramp-up faster, with
minimal investment in terms of time and capital.
Unorganized players significant participants in fragmented industry

The tiles industry in India is highly fragmented, with small- and mid-sized players
accounting for a significant production market share. The industry has for long
remained dominated by unorganized players.
As at end-FY16, unorganized players accounted for ~51% of value and ~60% of
volumes of the industry.
Exhibit 11: Significant presence of unorganized players

Particulars Organized Unorganized
Unorganized sector Turnover (INR b) 131 129
accounts for 51% of the Production (MSM) 305 458
industry Share in Volume 40% 60%
Share in Value 49% 51%
Key players Kajaria, Somany, HR Johnson Morbi based players
Source: Company, industry data, MOSL
We believe that high indirect tax incidence, liberal tax administration

/monitoring and a short B2C supply chain (wherein end-consumers do not
demand invoices as they cannot claim this as expense) have been among the
key reasons for significant existence of unorganized players.
Tax arbitrage the key price differentiator

The countrys tiles industry is levied with indirect taxes of ~25-28%, comprising
of 12.5% excise (tax on manufacturing), 12.5-14.5% VAT (tax on sale of goods)
and other local taxes.
Current price differential of Players operating in the unorganized market usually skirt indirect taxes, the
15-20% mainly attributed to benefit of which is usually passed on (either partially or wholly) to consumers to
tax arbitrage offer an enhanced value proposition. This increases competitiveness of
unorganized players.
Further, there is high manual intervention/discretion in the current indirect tax
administration, which provides an opportunity for businesses to fare any
objections which arise on opening of a tax scrutiny.
Our discussions with various sector participants/dealers indicate that the price
difference between organized and unorganized players is generally in the range
of 15-20%, which can primarily be attributed to tax arbitrage.
28 April 2017 8
Exhibit 12: Sidestepping indirect tax leads to a big price differential

Particulars Organized Player Unorganized Players
RM cost + margin 100 100
Excise @ 12.5% 12.5 0
Cost for the dealer 112.5 100
Margin @ 5% 5.6 5
VAT on goods @ 12.5% 14.8
Other costs
Additional branding cost (1-2%) 1-2 -
Additional cost to manage trade channels (8-10%) - 8.5-10.5
Price to the consumer 133.9-134.9 113.4-115.5
Source: MOSL
Market share of organized players has been gradually rising

We note that organized players have grown (in volume terms) at a CAGR (over
CY08-16) of 14% v/s 7% for unorganized players.
Volume market share of Higher growth of organized players is mainly due to (a) increased disposable
organized players has income, (b) brand aspirational buying, (c) product innovation and (d) brand
increased to 49% in FY16 awareness led by higher ad spends.
(FY08: 40%)
Further, the outsourcing model has helped organized players to grow faster, as
they are able to increase capacities without investing time or capital.
Consequently, the value market share of organized players increased from 40%
in FY08 to 49% in FY16.
Exhibit 13: Unorganized value market share at 60%in FY08.. Exhibit 14: reduced to 51% in FY16
Organized,
40 % Organized,
49%
Unorganized
, 51%
Unorganized
, 60 %
Source: Industry, MOSL Source: Industry, MOSL
Exhibit 15: Indian tiles industry dominated by three national brands (INR b)
FY16 Market
Company Revenues Share (%)
Kajaria Ceramics 27.0 10.4%
Prism Cement (TBK division)* 24.5 9.4%
Somany Ceramics 18.0 6.9%
Asian Granito 9.6 3.7%
Nitco Tiles 8.6 3.3%
RAK Ceramics* 7.6 2.9%
Highly fragmented industry Orient Bell Ceramics 7.6 2.9%
Varmora* 6.5 2.5%
with unorganized players
Simpolo* 6.0 2.3%
contribute 51% Sun Heart* 4.5 1.7%
Murudeshwar Ceramics 1.2 0.5%
Others (Swastic, Marbomax, Bell Granito etc)* 8.0 3.1%
Unorganized players* 131 50.4%
Total 260
*estimated Source: Industry, MOSL
28 April 2017 9
GST & demonitization will it change industry dynamics?
The Indian government has taken various initiatives (e.g. demonetization and GST) to
shift trade to the formal economy.
Our discussion with sector participants indicates that the administrative/procedural
changes under the GST are unlikely to lead to a shift toward organized trade in the
tiles industry.
However, lowering of indirect tax incidence under the GST to 18% or less (from ~25-
28% currently) can be a significant trigger to drive trade toward the formal economy,
with the product pricing gap between organized and unorganized players reducing to
~5-10% (from 15-20% currently).
GST and demonetization the big drivers to shift trade to formal economy
India is set to see a major overhaul in the trade structure in favor of the
organized (formal) segment, with the government taking a number of initiatives
to curb the shadow economy.
Demonetization of high-value currency notes has created fear among
unorganized players as transactions in this space were mostly cash-based and
unaccounted. Even in the recent Budget announcement, cash transactions of
our discussions with experts INR0.2m or more have been prohibited.
and sector participants Also, with GST implementation nearing reality, the organized segment is well
highlight that the shift will
poised to confront the high presence of unorganized (informal) players.
be prompt for some
sectors, gradual for others We believe this will present opportunities to take advantage of the shift in favor
and challenging for a few. of organized names. However, our discussions with experts and sector
participants highlight that the shift will be prompt for some sectors, gradual for
others and challenging for a few.
Will the drivers be effective for the tiles industry too?

As discussed in our previous report (click here for detailed note), to analyze the
pace of the shift (to organized) for each sector, one has to carefully consider the
administrative/procedure changes and the tax rates decided under the GST.
We believe the following measures can potentially accelerate the shift toward
formal trade: (a) reducing threshold limit for exemption from indirect taxes, (b)
tracking flow of GST credit in the entire value chain by using technology
platforms, (c) ensuring availability of seamless input credit and (d) reducing
overall effective tax rates.
28 April 2017 10
Measures that could lead to shift to organized trade
Better
Reduction in threshold limits
Enforcement
Through technology-enabled platform
Through availability of input credit

Better
Reduction in overall effective tax rate Compliance
Source: MOSL
To estimate the pace of shift to formal economy for each sector, one needs to
look at: (a) supply chain the sector works with, (b) operational nuances of
players in the unorganized segment and (c) how government initiatives will
change the way in which unorganized segment players operate.
Exhibit 16: Critical determinants of shift to organized trade
Source: MOSL
Modalities of circumventing indirect taxes in tiles industry

Unorganized players in the tiles industry operate primarily through modalities of
under-reporting/under-recording of purchases and sales (of raw
material/finished goods) and maneuvering thresholds for circumventing indirect
Under recording of
purchases/ sales facilitates taxes.
unorganized trade in the Raw materials used in the tiles industry are easily available in the unorganized
industry markets. As a result, the whole chain (right from procurement of raw materials
to selling to end-consumer) remains outside organized trade.
28 April 2017 11
Short B2C supply chain may continue to be unorganized under GST

To determine the probability of shift in trade from unorganized to organized, it
is imperative to understand the supply chain in which the entity operates. We
note that any break in the organized chain leads to the beginning of
unorganized trade. We believe that in the GST regime, a conversion to organized
in the B2B chain will be relatively easy than in the B2C chain.
We believe the shift to organized trade in short B2C chains (where
manufacturers/service providers source raw materials/inputs from unorganized
market, and continue supplying in unorganized manner throughout the supply
chain) will be difficult.
This is primarily due to the fact that only businesses can register on the GST
network and claim the benefit of input credit. End-consumers will not have any
direct benefits for being part of the organized chain. Also, most consumers
usually are indifferent to choosing between organized and unorganized players;
the focus is more on pricing.
Tiles: Escape from administrative and technology platform likely

Under the GST, the government intends to employ technology to track end-to-
end credit flow in the value chain. Bilateral validation of invoices, online
integration of data and big data analytics will go a long way in addressing the
loopholes in tax administration.
The IT portal can capture data even if at least one participant in the value chain
it is possible for all sells goods through the organized chain (and hence is a part of the GSTN).
participants to stay outside However, in industries like tiles, it is possible for all participants in the value
formal trade and thus chain to stay outside formal trade and thus escape from data capture by
escape from data capture technology platform.
by technology platform
The tiles industry has a short B2C supply chain, wherein raw materials (primarily
clay, gas, coal, electricity, minerals, etc.) are sourced by the manufacturer and
finished goods are sold to end-consumers/builders via dealers and distributors.
Thus, the end-to-end chain can easily remain outside the GST ambit.
The key inputs required for the manufacture of raw tiles are:
Clay: It is available in abundance and can be easily sourced from the
unorganized market. The unorganized players procure clay without paying
indirect taxes, thereby remaining outside the tax net.
End-to-end chain can easily Power: Electricity can either be sourced from organized channels (as done
remain outside the GST currently through state electricity boards) by managing the input/output
ambit.
ratio or is generated captively (through DG sets, which entail additional
cost).
Fuel: Most tiles manufacturing units have the provision of using piped gas
directly or generating it captively via coal-gasification plants. Coal used for
gasification can be procured from the unorganized channel.
28 April 2017 12
Exhibit 17: Short supply chain of the tiles industry
Clay Power Fuel
Can be sourced Input output Input output

from ratio adjusted or ratio adjusted, or
unorganized Captivity Sourced from
players generated unorganized
players
Manufacturer
Distributor
Dealer
End Consumer/ Builder
Lower effective tax rates can be a big trigger for the shift
As discussed earlier, indirect tax incidence (which is in the range of ~25-28%)
leads to price differential of 15%-20% between organized and unorganized
players.
While GST rates applicable for the tiles industry are yet to be made public, we
believe that they are likely to be either at 18% or 28%.
Our discussions with various sector participants and experts suggest that a
18% GST rate will reduce potential reduction in GST rates to 18% for the tiles sector can be very beneficial
the price differential to 5-
for organized players.
10%
This will primarily be on account of a reduction in the pricing gap between
organized and organized players to 5-10% (from current 15-20%) as organized
players pass on the benefit of lower duties to consumers.
However, if GST rates are fixed at 28% for the tiles industry (not materially
different from the current rates), then the current slow pace of shift to
organized trade may continue, lacking an additional thrust.
28 April 2017 13
Exhibit 18: Narrowing of price differential under GST: Illustrative pricing summary pre and post GST
Current Regime GST Regime @ 18% GST Regime @28%
Unorganized
Particulars Organized Player Organized Player Organized Player player
RM cost + margin (A) 100.0 100.0 100.0 100.0
Excise (Cenvat not available) / GST (cenvat available)
(B) 12.5 18.0 28.0 0.0
Cost for the dealer C = (A) + (B - if CENVAT not
available) 112.5 100.0 100.0 100.0
Margin (5%) 5.6 5.0 5.0 5.0
VAT/ GST 14.8 18.9 29.4 0.0
Gross Price 132.9 123.9 134.4 105.0
Other Costs
Additional branding cost(1-2%) 1-2 1-2 1-2
Additional cost to manage trade channels (8-10%) - 0.0 0.0 8.5-10.5
Price to the consumer 133.9-134.9 124.9-125.9 135.4-136.4 113.4-115.5
Source: MOSL
Outsourcing model to work wonders if trade shifts to organized

We believe that the outsourcing model has worked very well until now in
growing organized trade in the tiles industry. We believe that if there is
accelerated shift to organized trade, then large companies having strong brand
presence will grow faster and the current unorganized players may continue to
function as contract manufacturers.
Organized players benefit as capital employed is much lower than greenfield
expansion and the gestation period is negligible. Outsourcing results in an asset
light model, which boosts return ratios despite slightly lower margins.
This model is also beneficial to unorganized players as they sell on cost plus
basis, eliminating risks and earning fixed RoE.
28 April 2017 14
Kajaria Indias largest tiles company

Kajaria Ceramics (KJCL) was incorporated in 1985 by Mr Ashok Kajaria in
technical collaboration with the worlds second largest tiles manufacturer,
Todagres, SA.
KJCL is Indias largest tiles company with a market share of 10.4% (share of 20%
in the organized market, up from ~14 in FY11). Over FY08-16, it reported
revenue CAGR of 22% and PAT CAGR of 42%.
Focus on brand building, product launches, innovations and large distribution
network have been the key drivers of growth.
KJCLs EBITDA margin of 19% is higher than peers, mainly due to pricing
premium of ~5-6% led by its strong brand equity, aggressive ad spends of ~2.5%
of revenue, higher proportion of manufactured goods at 90%, and 66% of
volumes being high-margin vitrified tiles.
Like peers in the industry, KJCL also follows an outsourcing-based model,
whereby it forms JVs with Morbi-based entities as against the practice of
forming associates by peers. KJCLs revenue mix is skewed toward
manufacturing (owing to JV model) at 90%, which is a higher-margin business.
This proportion is far higher than peers.
Exhibit 19: Revenue mix skewed toward vitrified tiles (FY16) Exhibit 20: Revenue mix skewed toward manufacturing
Others, 3
Manufactured Trading
GVT, 23
Ceramic 20% 17% 10%
24%
tiles, 38 37%
80% 83% 90%

76%
63%
PVT, 36
FY12 FY13 FY14 FY15 FY16
Source: Company, MOSL Source: Company, MOSL

Exhibit 21: Financial snapshot (INR m)
Kajaria Ceramics FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Sales 5,005 6,649 7,355 9,533 13,130 15,833 18,363 21,869 24,185
YoY Change (%) 16.3 32.8 10.6 29.6 37.7 20.6 16.0 19.1 10.6
8YR CAGR (%) 21.8
EBITDA 819 949 1,149 1,489 2,064 2,455 2,858 3,484 4,634
Margin (%) 16.4 14.3 15.6 15.6 15.7 15.5 15.6 15.9 19.2
8YR CAGR (%) 24.2
PAT 150 89 359 606 809 1,045 1,242 1,756 2,292
YoY Change (%) 85 (41) 303 69 33 29 19 41 31
8YR CAGR (%) 41
ROE 10.1 5.6 20.4 27.1 31.9 31.8 28.6 29.1 28.1
ROCE 12.8 14.5 20.0 23.1 30.9 31.6 32.3 33.9 35.4
D/E 2.2 2.0 1.4 1.3 1.0 0.9 0.4 0.3 0.3
Capital Employed 4,922 4,872 4,522 5,166 5,737 7,173 8,157 10,571 13,113
Cash Flow - FCO 46 255 1,077 1,594 909 976 1,661 1,803 2,713
Cash Flow - FCF (20) 134 607 (72) 184 (533) 139 (843) 49
Trailing P/E 28
Source: Capital line, MOSL
28 April 2017 15
Somany Ceramics outsourcing model worked wonders

Set up in 1968 by Mr Hira Lal Somany, Somany Ceramics (SOMC) was formed in
technical collaboration with Pilkingtons Tile Holding (UK) and was named as
Somany Pilkington Limited. Later in 2007, it was renamed as Somany Ceramics
Limited. SOMC started business by setting up a plant to manufacture 0.52msm
ceramic tiles at Kassar, Haryana in 1970.
SOMC is Indias third largest tiles company with a market share of 6.9% (14% of
organized share). Over FY08-16, it reported revenue CAGR of 23% and PAT CAGR
of 41%.
Comprehensive product range, innovative products, aggressive brand spends,
extensive distribution network and outsourcing model have been the major
drivers of growth.
SOMCs main focus was growth via the outsourcing model, where
manufacturing was outsourced to smaller players and the company
concentrated on marketing/distribution. The outsourcing model resulted in
attaining PAT growth on an asset light model, boosting return ratios. We believe
that the low margins of SOMC are because of its outsourcing model (associate-
based) where it holds a 26% stake, but this model is effective in generating high
PAT growth.
Exhibit 22: Revenue mix skewed toward vitrified tiles (FY16) Exhibit 23: Revenue mix skewed toward trading
% Manufactured % Trading
GVT, 17
Ceramic 44% 49% 52% 53%
Others, 7 55%
tiles, 41
56% 51% 48% 47% 45%
PVT, 35
FY12 FY13 FY14 FY15 FY16
Source: Company, MOSL Source: Company, MOSL

Somany Ceramics FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Sales 3,311 4,463 5,423 7,199 8,790 10,539 12,648 15,431 17,177
YoY Change (%) 19.4 34.8 21.5 32.8 22.1 19.9 20.0 22.0 11.3
8YR CAGR (%) 22.8
EBITDA 365 423 558 677 741 857 814 1,076 1,385
Margin (%) 11.0 9.5 10.3 9.4 8.4 8.1 6.4 7.0 8.1
8YR CAGR (%) 18.1
PAT 38 88 204 239 251 320 289 464 647
YoY Change (%) 53 129 133 17 5 27 (10) 61 39
8YR CAGR (%) 42
ROE 6.8 14.3 27.6 25.6 21.9 23.4 14.1 19.1 19.1
ROCE 13.0 15.0 20.0 19.0 18.8 21.2 16.6 20.0 20.4
D/E 2.5 2.1 2.0 1.7 1.3 1.1 0.8 0.7 0.6
Cash Flow - FCO 257 391 414 235 786 707 739 248 596
Cash Flow - FCF (12) 310 (48) (111) 476 330 149 (260) (768)
Trailing P/E 36
28 April 2017 16
Asian Granito Chasing higher market share
Asian Granito Ltd. (Asian) was established in the year 2000. It is Indias fastest-
growing wall/ceramic wall and floor tiles company. Asian is among the top four
ceramic tile brands in India, with a share of 3.7% in the organized tile market.
Over FY08-16, it reported revenue CAGR of 17%. However, PAT almost remained
flat over the same period due to high interest and depreciation.
The company has a strong distribution network of 4,000 dealers and sub
dealers. It sells its products under three brand names: Asian Granito, AGL and
Bonzer7.
The company exports to 50 countries. It plans to increase its export destinations
and also make further inroads into the US.
The company is focusing on increasing its share of retail customers from 35% in
FY16.
Exhibit 25: Revenue mix skewed toward ceramic tiles (FY 16)
GVT, 14%
Marbles, 16%
Others, 8%
PVT, 31%
Ceramics, 30%
Source: Company, MOSL
Exhibit 26: Financial Snapshot (INR m)

Asian Granito FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Sales 2,275 3,320 4,055 4,804 6,238 7,084 7,752 8,460 9,939
YoY Change (%) 27.0 45.9 22.2 18.5 29.9 13.6 9.4 9.1 17.5
8YR CAGR (%) 20.2
EBITDA 535 531 463 581 667 698 632 596 903
Margin (%) 23.5 16.0 11.4 12.1 10.7 9.9 8.1 7.0 9.1
8YR CAGR (%) 6.8
PAT 296 250 190 201 181 171 121 148 243
YoY Change (%) 28 (16) (24) 6 (10) (5) (29) 22 64
8YR CAGR (%) (2.5)
ROE 24.8 14.4 9.6 9.3 7.8 6.5 4.9 4.7 7.3
ROCE 26.9 18.1 11.2 11.2 11.7 9.7 8.3 8.5 10.7
D/E 0.4 0.6 0.7 0.6 0.8 1.0 0.8 0.6 0.9
Cash Flow - FCO 209 35 387 249 23 192 350 1,042 207
Cash Flow - FCF (405) (534) (55) 28 (148) 61 53 668 (2,016)
Trailing P/E 33
28 April 2017 17
Prism Cement Pioneer of ceranmic tiles in India

Prism cement has two major segments with cement contributing 36% and TBK
division (HR Johnson) contributing 41% of revenue.
HR Johnson was incorporated in 1958 with offering wide range of tiles, sanitary
ware, bath fittings, modular kitchens and construction chemicals.
The company has 10 manufacturing plants (including JVs) with capacity of
~58mn m2pa and is ably supported by distribution network of ~1000 dealers
spread across the country.
The company operates through asset light business model as its six JVs account
for ~70% of overall capacity with 4 JVs in Gujarat and 2 JVs in A.P.
HRJ enjoys the reputation of being the only entity in India to offer end-to-end
solutions of tiles, sanitary ware, bath fittings, kitchens, and engineered marble &
quartz. All the products are sold under 4 strong brands, viz. Johnson, Johnson
Marbonite, Johnson Porselano and Johnson Endura.
HRJ has addressed power and fuel issues in southern operations by installing 3
coal gasifies in AP Plants and winning bids for onshore micro gas wells. It has
completed pipeline connectivity for its Karnataka unit.
HRJ margins have been impacted and are lower than industry due to lower
utilization for its own manufacturing.

HR Johnson - TBK division of Prism Cements FY11 FY12 FY13 FY14 FY15 FY16
Sales 14,725 17,111 17,653 18,988 22,099 22,932
YoY Change (%) 24.0 16.2 3.2 7.6 16.4 3.8
6YR CAGR (%) 11.6
EBITDA 1,640 1,184 890 1,863 746 640
Margin (%) 11% 7% 5% 10% 3% 3%
6YR CAGR (%) -15.25
ROCE 15% 8% 3% 11% 2% 1%
Capital Employed 8,106 9,875 11,282 11,504 12,149 10,770
Prism Cements FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Sales 8,763 6,474 28,749 34,474 45,962 48,206 50,266 56,544 56,216
YoY Change (%) 0.1 (0.3) 3.4 0.2 0.3 0.0 0.0 0.1 (0.0)
8YR CAGR (%) 26.2
EBITDA 3,323 1,595 5,200 3,783 3,119 3,116 1,847 3,538 3,850
Margin (%) 37.9 24.6 18.1 11.0 6.8 6.5 3.7 6.3 6.8
8YR CAGR (%) 1.9
PAT 2,390 921 2,598 1,050 (184) (625) (862) 26 33
YoY Change (%) 24 (61) 182 (60) (118) 239 38 (103) 26
8YR CAGR (%) (41.5)
ROE 38.6 18.3 26.1 8.1 NM NM NM NM NM
ROCE 51.3 30.3 30.3 10.6 5.8 4.7 0.3 6.8 6.5
D/E - - 0.5 0.9 1.2 1.5 1.8 2.1 2.1
Cash Flow - FCO 2,424 1,005 3,716 2,884 2,667 2,599 566 1,986 4,379
Cash Flow - FCF 1,714 (275) (2,432) (1,940) (289) (772) (1,463) 291 2,390
Trailing P/E NM
28 April 2017 18
Tiles manufacturing Process

Crushing and Grinding of raw materials Slurry is dried and put on conveyor belts
Shaping of tiles in pressing machines
Removing moisture using driers
Coke gasification plant
Kiln firing
Polishing
Designing and roll out of final product
28 April 2017 19
THEMATIC/STRATEGY RESEARCH GALLERY
NOTES
28 April 2017 21
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MOSt - Big Leap - Errclub - (Thematic) Huge Opportunity, But Challenges Too

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Thematic

India Strategy | Get |

The Big Leap

Volume 1 Ground Reality

Contents: The Big Leap: Tiles

Indian tiles industry Third largest producer globally .......................................................... 5

Organized market share has been gradually rising ................................................................ 8

GST & demonitization will it change industry dynamics? .................................................. 10

Kajaria Indias largest tiles company ................................................................................ 15

Somany Ceramics outsourcing model worked wonders ................................................... 16

Asian Granito Chasing higher market share ..................................................................... 17

Prism Cement Pioneer of ceranmic tiles in India .............................................................. 18

Tiles manufacturing Process ............................................................................................... 19

The Big Leap: Tiles

Organized market share risingopportunity size still huge

Administrative policy changes unlikely to bring cheers to the sector

Source: Industry, MOSL Source: Industry, MOSL

Indian tiles industry Third largest producer globally

India third largest tiles market globally

4.0 4.3 4.6 4.9 4.9

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15

Source: Ceramic world review, MOSL

Exhibit 5: Indian tiles industry volume CAGR of 9.5%

Indian Tiles Industry (MSM) Growth (%) RHS

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15

Source: Ceramic world review, MOSL

833 69% 66.8

285 28% 377 31%

FY01 FY11 FY08 FY09 FY10 FY11 FY13 FY15

Source: CENCUS,MOSL Source: KPMG, MOSL

Exhibit 8: Growth in per capita income (INR)

Real Income 83,565

2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: CEIC, MOSL

Change in product mix, focus on innovation drive value growth

Exhibit 9: Structural shift toward better-value products (%)

Source: Industry, MOSL

Morbi the largest tiles manufacturing cluster in India

Exhibit 10: Indian tiles industry clustered at Morbi (~60% of production)

Source: ICCTAS, MOSL

Organized market share has been gradually rising

Unorganized players significant participants in fragmented industry

Exhibit 11: Significant presence of unorganized players

We believe that high indirect tax incidence, liberal tax administration

Tax arbitrage the key price differentiator

Exhibit 12: Sidestepping indirect tax leads to a big price differential

Market share of organized players has been gradually rising

Source: Industry, MOSL Source: Industry, MOSL

GST & demonitization will it change industry dynamics?

Will the drivers be effective for the tiles industry too?

Measures that could lead to shift to organized trade

Through availability of input credit

Exhibit 16: Critical determinants of shift to organized trade

Modalities of circumventing indirect taxes in tiles industry

Short B2C supply chain may continue to be unorganized under GST

Tiles: Escape from administrative and technology platform likely

Exhibit 17: Short supply chain of the tiles industry

Clay Power Fuel

Can be sourced Input output Input output

End Consumer/ Builder

Outsourcing model to work wonders if trade shifts to organized

Kajaria Indias largest tiles company

80% 83% 90%