The 2020 Story: Ceramic Tiles

Increasing
Supply
PMAY Tax
Rising Gas Slowing Evasion
(Urban) Prices Real Estate
The 2020 Story

Ceramic Tiles
Ravi Sodah
ravi.sodah@elaracapital.com
+91 22 6164 8517
Harsh Jhanwar
harsh.jhanwar@elaracapital.com 26 June 2018
+91 22 6164 8546 Elara Securities (India) Private Limited
Elara Securities (India) Private Limited
India | Building Materials 26 June 2018
Initiating coverage
Ceramic Tiles
The 2020 story Vitrified tiles WPI is down 10% YoY
130
PMAY bonanza: double-digit volume growth by FY20 Prices fall due
125 to increased
The ceramic tiles industry is likely to post volume growth of ~8% in 120 supply
FY19E and ~13% in FY20E, due to a 1.6x YoY rise in FY18 projects 115
Global Markets Research
110
under execution under the Pradhan Mantri Awas Yojana (Urban) and
105
42% YoY pre-sales growth in FY18 of listed real estate firms. We expect
100
South India to grow faster than all-India growth, as it accounts for 44%
Jan-16
Jan-17
Jan-18
Sep-16
Nov-16
Sep-17
Nov-17
Mar-16
Jul-16
Mar-17
Jul-17
Mar-18
May-16
May-17
of projects under execution. Hence, firms with a higher presence
there, like Prism Johnson & Asian Granito India, are likely to benefit.
Source: Centre for Monitoring Indian Economy (CMIE), Elara
Securities Research
Coming on stream: incremental demand to exceed supply
Adj for opportunity cost of WC, Kajaria
Our channel checks show 50 new plants are expected to come on posts highest margin contraction
stream next year, primarily at Morbi in Gujarat. If we assume a plant (%) FY15 FY16 FY17 FY18
manufactures 7,000-10,000 meters of tiles per day, this would lead to Reported EBITDA margin
increased supply of 128-183mn sqm. Incremental demand is likely to Kajaria Ceramics 16 19 19 17
be 189 mn sqm over the next two years (FY19E: 70mn sqm & FY20E: Somany Ceramics 6 8 11 11
119mn sqm). Most new units are exports-oriented; if the INR continues Asian Granito India 7 9 12 12
to depreciate, excess supply from existing units too could be diverted EBITDA margin adjusted for working capital
overseas, and this may not impact margin of domestic companies. Kajaria Ceramics 15 18 18 15
Turning tide: favors low- to mid-priced products in PVT & ceramics Somany Ceramics 5 6 9 8
Asian Granito India 4 6 9 9
Around 62% of incremental demand in FY20E would come from price-
Source: Company, Elara Securities Research
sensitive segment (PMAY [U] & Swachh Bharat Abhiyaan (Rural) [toilet
building scheme]). This should result in higher demand for low- to mid- South with the highest share in PMAY - U
priced products, such as polished vitrified tiles (PVT) and ceramic tiles. 50 44
We believe PVT and ceramic tiles prices are at close to the bottom, 40
(%)
because at current prices, plant ROCE would be hovering around the

30 24
risk-free rate. Despite a ~20% fall in glazed vitrified tiles (GVT) prices on 19
increased supply, the price fall in PVT and ceramic tiles was marginal. 20
12
The recent ban on coal gasifier plants in Gujarat could improve prices 10
in the range of ~5-7% in these product categories. Among listed firms,
0
Prism Johnson and Somany Ceramics have the highest capacity mix West East North South
in favor of PVT and ceramic tiles products. Source: Ministry of Housing and Urban Affairs, Elara
Securities Research
Our top picks: Prism Johnson and Somany Ceramics on low valuation
Valuation shrinks in line with margin
While Kajaria Ceramics is the market leader (~9% as on FY18) and 60
EBITDA Margin 11% 15% 11.5%
margin leader (~17% as on FY18) in the ceramic tiles industry, it does
not enjoy pricing power, given dominance of unorganized companies. 40
Market leaders in other building materials, such as plywood & sanitary

(x)
20
ware, where unorganized firms have a higher market share trade at a
P/E of 23-25x vs Kajaria’s 24x. Thus, there is limited possibility of 0
Jan-08
Jan-11
Jan-14
Jan-17
Apr-07
Apr-10
Oct-08
Jul-09
Oct-11
Jul-12
Apr-13
Oct-14
Jul-15
Apr-16
Oct-17
rerating. Firms with a higher proportion of low- to mid-priced products

in their product basket could see a multiple rerating, due to revival in
Kajaria Ceramics Somany Ceramics
profitability in PVT and ceramic tiles segments. Thus, our preferred Asian Granito India
picks are Prism Johnson and Somany Ceramics on low valuation and a Source: Company, Elara Securities Research
higher ratio of low- to mid-priced products in their portfolio.
Valuation matrix
MCAP TP CMP* Upside P/E (x) ROE (%) PEG (%) Target P/E
Company Ticker Rating
(INR mn) (INR) (INR) (%) FY18 FY19E FY20E FY18 FY19E FY20E FY20E (x) FY20E
Kajaria Ceramics KJC IN Reduce 80,772 529 508 4 34.4 29.3 24.0 17.4 17.6 18.5 1.2 25
Prism Jhonson PRSMJ IN Buy 50,839 148 101 46 119.6 25.8 14.3 4.2 17.0 24.2 0.1 NA
Somany Ceramics SOMC IN Accumulate 22,345 611 527 16 31.7 23.4 17.3 12.1 14.1 16.1 0.5 20
Asian Granito ASIAN IN Accumulate 10,079 356 335 6 19.2 15.5 11.3 12.2 13.5 16.2 0.4 12
Note: *pricing as on 21 June 2018; Prism Johnson TP based on a SOTP method; Source: Company, Elara Securities Estimate
Ravi Sodah • ravi.sodah@elaracapital.com • +91 22 6164 8517
Harsh Jhanwar • harsh.jhanwar@elaracapital.com • +91 22 6164 8546
Ceramic Tiles
Table of Content
The 2020 story …………………………………………………………………………………………………………………………… 1
Worst behind us ………………………………………………………………………………………………………………………… 3
Industry Annexure …………………………………………………………………………………………………………………….. 15
Company Section
Kajaria Ceramics: Premium valuation (KJC IN, Reduce, CMP INR 508, TP INR 529) ………….. 19
Prism Johnson: Well placed for growth (PRSMJ IN, Buy, CMP INR 101, TP INR 148) ……….. 25
Somany Ceramics: One-off to go off (SOMC IN, Accumulate, CMP INR 527, TP INR 611) .. 29
Asian Granito India: Shifting orbit (ASIAN IN, Accumulate, CMP INR 335, TP INR 356) ….. 35
2 Elara Securities (India) Private Limited

Ceramic Tiles
Worst behind us
 PMAY (Urban) to accelerate demand growth to ~13% by FY20E
 Ceramic tiles & PVT demand and prices to improve
 Limited impact in the near term from eWay Bill
Double-digit demand growth in FY20 Exhibit 3: India production growth 560bp higher
than the World
PMAY (Urban) is key catalyst for growth
Building Materials
India posted a ceramic tiles production CAGR of 11% Italy (3.1)
Spain (2.1)
over CY06-16. The country accounts for 7% of global
Turkey 2.2
ceramic tiles production as on CY16, and among major
Brazil 2.9
ceramic tiles production countries, India’s production
Iran 4.9
growth is the highest. World 5.3
Exhibit 1: India accounts for 7% of global production Indonesia 7.8
China 8.0
Vietnam 9.3
Others
18% India 10.9
Turkey (5) 0 5 10 15
2%
Iran (%)
3%
Note: CY16; Source: Industry, Elara Securities Research
Indonesia China
3% 50% Higher exports but imports fall on anti-dumping duty
Italy
3%
However, the past 10 years’ consumption CAGR has
Vietnam been at a mere 8%. As production growth outpaced
4%
Spain Brazil
consumption, exports rose at a CAGR of 136% over
4% 6% India FY07-17, and most of the exports went to the Middle
7% East. On the other hand, there has been a sharp decline
in imports at 8.5mn sqm in FY17 from its peak level of
Note: CY16; Source: Industry, Elara Securities Research 30.0mn sqm in FY12, given the anti-dumping duty
imposed by India on China products (USD 1.87 per sqm
on glazed, unglazed porcelain & vitrified tiles with
polished or unpolished finish and less than 3% water
absorption), a depreciating INR and an increase in cost
competiveness of the domestic industry.
Exhibit 2: India reports ~11% production CAGR over the past 10 years
(mn sqm) CY 06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CAGR (%)
China 3,000 3,200 3,400 3,600 4,200 4,800 5,200 5,700 6,000 5,970 6,495 8.0
India 340 385 390 490 550 617 691 750 825 850 955 10.9
Brazil 594 637 713 715 753 844 866 871 903 899 792 2.9
Spain 608 585 495 324 366 392 404 420 425 440 492 (2.1)
Vietnam 199 254 270 295 375 380 290 300 360 440 485 9.3
Italy 569 559 513 368 387 400 367 363 382 395 416 (3.1)
Indonesia 170 235 275 278 287 317 360 390 420 370 360 7.8
Iran 210 250 320 350 400 475 500 500 410 300 340 4.9
Turkey 265 260 225 205 245 260 280 340 315 320 330 2.2
World 7,760 8,252 8,520 8,515 9,515 10,626 11,226 11,961 12,377 12,357 13,056 4.9
Source: Industry, Elara Securities Research
Elara Securities (India) Private Limited 3

Ceramic Tiles
Exhibit 4: India posts ~8% consumption CAGR over CY06-16

(mn sqm) CY 06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CAGR (%)
China 2,450 2,700 2,830 3,030 3,500 4,000 4,250 4,556 4,894 4,885 5,475 8.4
India 350 397 403 494 557 625 681 748 756 763 785 8.4
Brazil 484 535 605 645 700 775 803 837 853 816 706 3.8
Vietnam 145 210 220 240 330 360 254 251 310 400 412 11.0
Indonesia 148 178 262 297 277 312 340 360 407 357 369 9.6
US 308 249 211 173 186 189 204 230 231 254 274 (1.2)
Saudi Arabia 95 110 136 166 182 203 230 235 244 263 248 10.1
Mexico 167 174 177 163 168 177 187 187 197 218 235 3.5
World 7,420 8,060 8,350 8,460 9,350 10,370 10,964 11,582 12,081 12,177 12,783 5.6
Exhibit 5: India consumption ~280bp higher than the

Exhibit 7: Exports rises by 17x in the past 10 years
world
60
US (1.2)
50
Mexico 3.5
(mnsq meters)
Brazil 3.8 40
World 5.6
30
India 8.4
China 8.4 20
Indonesia 9.6
10
Saudi Arabia 10.1
Vietnam 11.0 0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
(5) 0 5 10 15
(%)
Source: CMIE, Elara Securities Research
Note: CY16; Source: Industry, Elara Securities Research
Exhibit 8: Saudi Arabia accounts for one-fourth of
Exhibit 6: India accounts for 6% of global
exports from India
consumption
Nepal Egypt UK Iraq
Mexico Sri Lanka 2% 2% 1% 2%
2% Others 3% Others
Saudi 33% Argentina 17%
Arabia 2%
2% Poland
4%
US Taiwan
2% 3%
Indonesia Saudi
3% Kuwait Arabia
Vietnam 5% 24%
3% Brazil Oman
6% 6% UAE
6%
India China Brazil Mexico
6% 43% 7% 16%
Note: CY16; Source: CMIE, Elara Securities Research

Note: CY16: Source: Industry, Elara Securities Research

Ceramic Tiles
Exhibit 9: Imports declines due to anti-dumping duty Exhibit 11: Consumption to grow by ~8% in FY19E
imposed on China by India 10 821
900 128
35 288
750 (33)
30 600 428
25
(bps)
450
(mn sq mt)
20 300
15 150
10 0
Non PMAY
All India
Rural Swach
Commercial
PMAY Urban
Replacement
Growth
housing
5
demand
Bharat
Building Materials
0
FY10
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
China Italy Spain Others
Source: Elara Securities Estimate
Source: CMIE, Elara Securities Research
Exhibit 12: Consumption to grow by ~13% in FY20E
Consumption trends hit a trough in CY16…
1,800 132 4
Our analysis of consumption trends shows a gradual 1,500 357 1,298
(153 )
decline in the three-year moving average consumption (bps) 1,200 960
growth. India’s three-year average consumption growth 900
peaked in CY11 at 15%; since then, it has been on a 600
declining trend, with CY16 growth at a mere 2% and 300
likely to have inched up to 3% in CY17, as per our 0
Non PMAY
Rural Swach
Commercial
All India
Replacement
PMAY Urban
channel checks.
Growth
housing
demand
Bharat
According to industry sources, FY18 India consumption
was 850mn sqm (9,149 sqft) of overall tiles. Out of total
demand, ~79% was from housing (3% by PMAY, 2% by
Source: Elara Securities Estimate
Rural Swachh Bharat & 74% by others), 17% from
replacement and 4% from commercial & others. In terms of demand, we expect PMAY (U) to contribute
428bp in FY19E and 960bp in FY20E.
Exhibit 10: Consumption growth on a declining trend
900 18 As on 2 April 2018, cumulatively, PMAY (U) sanctioned
15
houses were up 150% YoY at 4.4mn, houses undergoing
750 13 12 15
11 construction increased by 260% YoY to 1.9mn and
(mn sq ft)
600 10 12
houses completed rose by 333% YoY to 0.4mn.
(%)
450 6 9
Exhibit 13: PMAY (U) contribution to total demand to
300 4 3 6 increase by ~3.7x by FY20E
150 2 3
100
0 0
80
CY17E
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
60
(%)

40
3 7 14
…but there are signs of a reversal 20
However, our bottoms up analysis reveal the trend is 0

FY18 FY19E FY20E
likely to reverse in FY19. We expect FY19E consumption
Non PMAY Rural Swachh Bharat Abhiyan
growth of ~8% and ~13% in FY20E, due to acceleration PMAY (U) Commercial & others
in execution under PMAY (U). Replacement
Source: Industry, Elara Securities Estimate

Ceramic Tiles
Exhibit 14: Houses sanctioned in the past three years Exhibit 17: Houses under construction goes up 1.6x
are 3x of the past 10 years in FY18
5 4.44 2.5
4
2.0
(mn houses)
(mn houses)
3
1.5
1.93
2
1.23 1.0 1.93
1.00
1 0.40 1.41
0.14 0.02 0.5 1.22
0.99
0 0.44 0.54
JnNURM FY06- RAY FY10-FY16 PMAY-U FY16- 0.0
Jun-17
Apr-17
May-17
Dec-17
Apr-18
Aug-17
Sep-17
Feb-17
Jul-17
Nov-17
Mar-17
Oct-17
Jan-18
Feb-18
Mar-18
FY16 FY18
Sanctioned Completed Houses under construction
Source: Ministry of Housing and Urban Affairs, Elara Securities Research
In FY18 alone, 2.7mn new houses were sanctioned,
1.4mn houses are undergoing construction and 0.3mn South India with 44% houses under construction
houses have been completed. Region-wise, South, North, East and West India account
for 44%, 24%, 19% and 12%, respectively, for the number
Exhibit 15: Completed houses at 3x of FY17
of houses under construction. As South India account for
3 2.66 250
233 most houses under construction, companies with a
200 robust distribution network in these regions could
benefit, namely Prism Johnson and Asian Granito India.
(mn houses)
2 160 150
(%)
144 1.40
1.09 Exhibit 18: South with the highest share in PMAY – U
100
1 50
0.54 44
0.31 50 45
0.09
40
0 0
(%)
35
Sanctioned Completed Houses under
construction 30
24
25
FY17(LHS) FY18(LHS) YoY(RHS) 19
20
Source: Ministry of Housing and Urban Affairs, Elara Securities Research 15 12
While the number of houses completed is low, what has 10

5
been encouraging is the sharp increase in houses under
0
construction as this will translate into rise in demand of West East North South
ceramic as well as PVT tiles in the medium term.
Exhibit 16: Use of PVT tiles in PMAY (U) project in
Price-sensitive PMAY (U) projects turn bonanza
Andhra Pradesh
As PMAY (U) projects are price-sensitive, a majority of the
benefits could percolate to unorganized companies and
listed firms with a higher share of low- to mid-priced
products in their baskets, such as Prism Johnson and
Asian Granito India. Even if unorganized firms take away
a bigger slice of the volume share, it would lead to lower
price aggression by them in the open market.
Recently, two listed companies received a huge order

from two contractors of Andhra Pradesh government
(Shapoorji Pallonji [Not listed]; & L&T [LT IN, CMP: INR
1,290, Not Rated]) under the PMAY (U). We believe
demand from Andhra Pradesh government will be more
front-ended compared to other States, as it is making use
of Sheer Wall technology, which results in house
completion within 15 months vs 24 months and higher
Source: Ministry of Housing and Urban Affairs, Elara Securities Research under conventional technology.

Ceramic Tiles
Exhibit 19: Andhra Pradesh with the highest share in PMAY (U) houses
As on 2 April 2018 Physical Progress (no) % of the total
Houses Houses under Houses Houses Houses under Houses
State & UT Major Players
sanctioned construction completed sanctioned construction completed
North
Haryana 216,595 5,552 2,981 5 0 1
Himachal Pradesh 8,302 1,631 223 0 0 0
Jammu & Kashmir 14,554 1,492 216 0 0 0
Madhya Pradesh 467,579 279,799 41,800 11 14 10
Punjab 44,270 16,102 2,049 1 1 1
Building Materials
Rajasthan 108,469 49,118 19,242 2 3 5 Kajaria Ceramics
Uttar Pradesh 374,597 98,766 11,328 8 5 3
Uttarakhand 19,216 5,730 2,754 0 0 1
Delhi (UT) 2,730 2,730 2,730 0 0 1
Chandigarh (UT) 62 62 62 0 0 0
North total 1,256,374 460,982 83,385 28 24 21
East
Bihar 144,956 54,358 4,550 3 3 1
Chhattisgarh 119,712 34,052 4,014 3 2 1
Jharkhand 154,956 87,670 28,275 3 5 7
Orissa 85,442 46,417 3,415 2 2 1
West Bengal 207,167 76,543 32,724 5 4 8
Arunachal Pradesh 6,093 2,502 16 0 0 0
Assam 69,451 22,553 269 2 1 0
Somany Ceramics
Manipur 26,463 3,438 193 1 0 0
Meghalaya 783 79 49 0 0 0
Mizoram 29,713 1,632 257 1 0 0
Nagaland 13,565 3,192 464 0 0 0
Sikkim 518 22 3 0 0 0
Tripura 78,885 41,194 7,468 2 2 2
East total 937,704 373,652 81,697 21 19 20
West
Gujarat 252,138 160,780 74,861 6 8 19
Maharashtra 194,183 78,890 38,301 4 4 10
Asian Granito India &
D&N Haveli (UT) 3,081 1,065 422 0 0 0
Somany Ceramics
Daman & Diu (UT) 492 152 68 0 0 0
West total 449,894 240,887 113,652 10 12 28
South
Kerala 87,348 26,334 3,732 2 1 1
Andhra Pradesh 685,513 304,357 27,379 15 16 7
Goa 170 110 110 0 0 0
Karnataka 382,843 119,212 45,493 9 6 11
Tamil Nadu 435,722 279,200 41,130 10 14 10 Asian Granito India &
Prism Johnson
Telangana 191,655 122,980 3,431 4 6 1
A&N Island (UT) 609 0 0 0
Lakshadweep (UT) 0 0
Puducherry (UT) 7,831 3,130 65 0 0 0
South total 1,791,691 855,323 121,340 40 44 30
All India 4,435,663 1,930,844 400,074 100 100 100

Ceramic Tiles
Non-PMAY housing also shows signs of recovery Thus, we expect demand from non-PMAY housing to
The non-PMAY housing projects are showing signs of grow by 4% in FY18 and 5% in FY19E.
recovery. Aggregate pre-sales of top six real estate firms Replacement demand another positive
have increases by 42% YoY in FY18. DLF (DLFU IN, CMP:
We expect replacement demand to grow in line with
INR 199, Not Rated), the largest real estate firm in
GDP growth at 7.5% in FY19E and 7.8% in FY20E.
Northern Capital Region (NCR), cited positive
Organized ceramic tile firms are likely to be key
commentary in its FY18 results press release.
beneficiaries in this segment. As replacement demand is
Exhibit 20: Top six real estate companies’ pre-sales up primarily for value-added products, such as GVT, marble
42% YoY in FY18 and quartz, growth would be determined by
50 improvement in lifestyle. Growth trends in super
compact four-wheeler sales (seven-year CAGR of 15% vs
industry CAGR of 1%) are another indicator of strong
(INR bn)
40
growth, underscoring changing preferences and lifestyle
improvement. This augurs well for replacement demand
30 for ceramic tiles.
Exhibit 23: Super compact and compact four-wheeler

20 segment growing well above the industry average
Q4FY17
Q1FY17
Q2FY17
Q3FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
1.2
1.0
0.8
(mn cars)
Source: Company; Elara Securities Research

0.6
Exhibit 21: DLF cites recovery in real estate market
0.4
The Company witnessed increased interest in the
0.2
residential business, especially in its luxury portfolio
0.0
located in DLF 5, Gurugram. The markets are
FY13
FY11
FY12
FY14
FY15
FY16
FY17
FY18
expected to have bottomed out and a revival is on
the cards in the medium term. The Company plans to Mini Compact Super Com
continue to focus on the premium and luxury Mid Size Premium
segment to garner healthy margins. In the last 2 Source: SIAM, Elara Securities Research
quarters, the Company has achieved Net Sales of

approximately Rs 1000 crore, and expects to sustain
similar momentum in the current fiscal.
Source: DLF press release FY18 results, Elara Securities Research
Apart from this, subdued real estate prices and a low

interest rate have increased affordability to a two-decade
high.
Exhibit 22: Improved affordability to lead to recovery in the real estate market
Property value (INR 100,000) &
60 16
(Annual income (INR 100,000)
14
50
12
Affordability
40
10
30 8
6
20
4
10
2
0 0
2011
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2016
2017
2018
Property cost Affordability Annual income
Source: HDFC, Elara Securities Research

Ceramic Tiles
Toilet building scheme may lose steam over FY19-20 Exhibit 25: Demand to grow by ~8% in FY19E
In case of Swachh Bharat Abhiyaan (Rural), the Central Urban PMAY
government had original targets of stopping open Weighted average houses under construction (no) 9,65,422
defecation in India by 2 October 2019, but the deadline Average size of house (sq ft) 350
has been advanced to 31 March 2019. Under the
Construction (mn sq ft) 338
scheme, the government has cumulatively built 73mn
toilets (68 mn at March FY18, 81.8% of target) from 2 Tiles consumption multiple (x) 1.15
October 2014 to date, of which 30mn were built in FY18 Estimated floor tiles demand for FY19 (mn sq ft) 389
alone. The government has achieved 84.3% of its Estimated wall tiles demand for FY19 (mn sq ft) 260
cumulative target.
Building Materials
Total tiles demand (FY19) 649
Our recent rural survey across 20 States also indicates Estimated tiles demand for FY18 (mn sqft) 258
that among government schemes, Swachh Bharat
Tiles demand delta (mn sq ft) 391
Abhiyaan, has seen the best implementation. Thus,
Market size (sq ft) 9,146
under the scheme, toilets constructed in FY19 are
expected to decline by 18% to 25mn. If the government Demand delta (%) 4.28
is able to achieve its new target of open defecation free Rural Swachh Bharat Abhiyaan
by end-FY19, nil toilets will be built in FY20, Thus, the Toilets to be constructed in FY19 2,53,00,000
scheme will generate negative delta in ceramic tiles
Average size (sq ft) 15
demand of 33bp in FY19E and ~153bp in FY20E. This
deployment is expected to impact adversely firms which Construction (mn sq ft) 380
manufacture low-priced sanitary ware. Tiles consumption multiple (x) 0.4

Estimated floor tiles demand for FY19 (mn sq ft) 152
Exhibit 24: Toilet construction under Swachh Bharat
Abhiyaan to decline by 18% in FY19E Estimated tiles demand for FY18 (mn sqft) 182
35 Tiles demand delta (mn sq ft) (30)

30
30 Market size (sq ft) 9146
25
Demand delta (%) (0.33)
(mn toilets)
25 22
20 Commercial
15 13 Construction (mn sq ft) 32
10 Tiles consumption multiple (x) 1.2

6
5 Estimated floor tiles demand for FY19 (mn sq ft) 38
0
0 Total tiles demand (FY19) 38
FY15 FY16 F17 FY18 FY19E FY20E Estimated tiles demand for FY18 (mn sqft) 29
Source: Ministry of Drinking Water and Sanitation, Elara Securities Estimate

Tiles demand delta (mn sq ft) 10
Market size (mn tonne) 9146
Demand delta (%) 0.10
Replacement demand
% of all-India demand 17
Growth in replacement demand (%) 7.5
Non PMAY housing demand
Growth (%) 4
All-India growth rate (%) 8

Ceramic Tiles
Exhibit 26: Demand to grow by ~13% in FY20E Exhibit 27: Industry reaches peak margin in FY17
Urban PMAY 25
Weighted average houses under constructions (no) 23,78,631 20
Average size of house (sq ft) 350
(%)
15
10
Tiles consumption multiple (x) 1.15
Estimated tiles demand for FY20 (mn sq ft) 957 5
Estimated wall tiles demand for FY20 (mn sq ft) 641 0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Total tiles demand (FY20) 1,599
Estimated tiles demand for FY19 (mn sq ft) 649 Kajaria Ceramics Somany ceramics
Tiles demand delta (mn sq ft) 950 Asian Granito India Average
Market size (sq ft) 9,897 Source: Company, Elara Securities Research
According to industry sources, 50 new units came on
Rural Swachh Bharat Abhiyaan
stream in FY17 while 100 new plants came on stream in
Toilets to be constructed in FY20 0 FY18. This along with convergent of old ceramic & PVT
Average size (sq ft) 15 capacity led to a 300% increase in production of GVT at
Construction (mn sq ft) 0 Morbi, Gujarat.
Tiles consumption multiple (x) 0.4
Gujarat Gas (GUJS IN, Buy, CMP: INR 775, TP: INR 1,115)
Estimated tiles demand for FY20 (mn sq ft) 0 supplies natural gas in Morbi at a discount of ~INR 2 per
Estimated tiles demand for FY19 (mn sq ft) 152 SCM under minimum guaranteed offtake (MGO)
Tiles demand delta (mn sq ft) (152) compared to non-MGO. Most new units that were added
Market size (sq ft) 9,897 in the past two years entered into MGO to keep their
Demand delta (%) (1.53) cost low. Thus, to consume MGO, the units were forced
Commercial to ramp up utilization. This has resulted in a crash in
prices of GVT by ~20% in the past 15 months.
Tiles consumption multiple (x) 1.2 Exhibit 28: WPI of vitrified tiles is down 10% YoY
Estimated floor tiles demand for FY19 (mn sq ft) 42 130
Total tiles demand (FY19) 42 125
Estimated tiles demand for FY18 (mn sq ft) 38
120
Tile demand delta (mn sq ft) 4
115
Market size (mn tonne) 9,897
110
Replacement demand 105
% of all-India demand 17 100

May-16
May-17
Sep-16
Sep-17
Jan-16
Nov-16
Jan-17
Nov-17
Jan-18
Jul-16
Jul-17
Mar-16
Mar-17
Mar-18
Growth in replacement demand (%) 7.8

Non-PMAY housing demand Source: CMIE, Elara Securities Research
The declining trend in prices also was cause for concern
Growth (%) 5 for some organized companies which grew above the
Demand delta (%) 4 industry average. This was because dealers were stuck
All-India growth rate (%) 13 with high price inventory and executives found it difficult
Source: Industry, Elara Securities Estimate to market new consignments to the same dealers at
lower prices.
What leads to the margin crack?
This concern is visible in FY18 balance sheet of
The ceramic tiles industry in India was on an uptrend
companies. Most firms saw an increase in receivable days
between FY15 and FY17, driven by an increase in share
and found it difficult to retain their market share.
of GVT sales, low gas prices and creation of joint venture
with companies based in Morbi, Gujarat.

Ceramic Tiles
Exhibit 29: Adj for opportunity cost of working capital, Kajaria Ceramics with the sharpest margin contraction
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Receivable days
Kajaria Ceramics 36 37 34 31 30 30 31 37 43 59
Somany Ceramics 66 68 66 58 61 62 62 68 83 108
Asian Granito India 53 55 58 67 78 81 65 66 100 125
Cash conversion cycle
Somany Ceramics 70 65 61 44 38 28 37 45 49 88
Building Materials
Reported EBITDA margin (%)
Somany Ceramics 9 10 9 8 8 6 6 8 11 11
EBITDA margin (%)
Somany Ceramics 8 9 7 7 7 5 5 6 9 8
If the industry is unable to pass on gas price, it would

Exhibit 30: Asian Granito India is the only major
impact EBITDA margin by125-190bp.
listed firm which gained market share in FY18
(sq m) FY17 FY18 FY19E FY20E If crude continues to hover at USD 75 per barrel, then no
All-India 785 850 920 1,039 future gas price increase is likely. Our analysis shows that
Kajaria Ceramics 68 72 80 93
for every USD 5.0 per barrel increase in crude oil prices
will raise gas cost by INR 1.5 per SCM (EBITDA margin
Somany Ceramics 50 50 55 62
impact of 110-160bp)while every INR 1 depreciation vs
Asian Granito India 28 36 40 46
the USD will increase cost by INR 0.4 per SCM (EBITDA
Prism Johnson 39 39 45 52
margin impact could be 30-40bp).
Orient Bell (NR) 26 27 - -
Firms with plants outside Gujarat could face margin
Market share (%)
pressure as gas price hike in others States have been
Kajaria Ceramics 8.6 8.5 8.7 8.9
sharper than in Gujarat.
Somany Ceramics 6.3 5.8 6.0 6.0
Asian Granito India 3.6 4.2 4.3 4.4 Exhibit 31: Gas prices to inch up by 6% YoY
Prism Johnson 5.0 4.6 4.9 5.0 34
Orient Bell (NR) 3.3 3.2 - - 32

30
(Per scm)
Note: NR is Not Rated; Source: Industry, Elara Securities Estimate

28
Can margin worsen from the current levels?
26
Natural gas cost is ~20% of net sales for the industry. As 24
Morbi(Gujarat) accounts for ~80% of production, any 22
change in prices of gas there are easier to pass through.
20
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19E
Morbi gas price is determined by a three-month average

price of RAS gas (weight 19%), six-month average BG
gas (weight 53%) and prevailing spot price (weight
28%). Prices of RAS gas and BG gas are linked to Bent Source: Elara Securities Estimate
Crude oil prices. Gujarat Gas had hiked gas prices by INR
1.75 per 29.95 per SCM on 6 June 2018.

Ceramic Tiles
Incremental demand to exceed supply Coal gasifier crackdown at Morbi to turn humdinger
Industry sources say about 50 new units are expected to Moreover, in 2017, pollution board members of
come on stream in the next year. Taking into account the Gujarat and the Central government had inspected
standard size of plant of 7,000-10,000 meters per day, eight coal gasifier units at Morbi and found six were
this would lead to increase in supply of 128-183mn sqm. non-compliant with conditions laid out post removal
Our analysis shows incremental demand for the next of ban on coal gasifiers in 2015. The Gujarat High
two years will be 189mn sqm (FY19E: 70mn sqm & Court has issued an order mandating shutdown of
FY20E:119mn sqm). If the INR continues to depreciate, units found non-compliant with defined pollution
excess supply could get diverted to the international norms. As per industry sources, delivered Indonesia
market, and, thus, this may not meaningfully impact coal prices (gas equivalent adjusted for lower
margin of domestic firms. efficiency) have increased by 44% over the past two
Morbi gaining in prominence years to ~INR 23/scm and are currently at 23%
discount over industrial PNG. We highlight coal
Exports from Morbi have been increasing rapidly. About
gasifiers are used only for manufacturing ceramic and
35% of production there is exported vs 22% in the past
year. Morbi’s awareness has increased in the PVT tiles and they cannot be used to manufacture
international markets after the Vibrant Ceramic Expo in GVT. Thus, the stricter implementation of the recent
2016 and 2017. Apart from this, anti-dumping duty order would lead to price hike in ceramic and PVT
imposed by the EU in September 2011, Brazil in segments in the range of 5-7%. Among listed firms,
December 2014, Mexico in May 2016, Argentina in Prism Johnson and Somany Ceramics have higher
February 2018 and other small nations also has helped percentage of capacity in the PVT segment.
Morbi-based companies to increase market share in the
Introduction of natural gas in GST could be positive
international markets.
To date, natural gas has been kept outside the GST
If the INR continues to depreciate, its share in the exports regime. Hence, ceramic tiles manufacturers have to
market could further increase. Apart from this, Morbi absorb VAT in GST. While the VAT rate on natural gas
firms have a long-term plan to market their products has been reduced from 15% to 6% in Gujarat
under a uniform umbrella brand. This also should help immediately after GST implementation in August 2017,
Morbi-based companies to strengthen their presence in Uttar Pradesh VAT was reduced from 10% to 5% (still has
the international market. an entry tax of 5%) in January 2018 and Haryana in April
Prices close to bottoming in PVT & ceramics segments 2018. Reduction in VAT rates in Haryana should improve
margin of Somany Ceramics by 50bp.
In the past 15 months, the GVT segment saw a price
decline of close to 20%. However, the price fall in PVT If VAT on natural gas gets subsumed in GST, it would
and ceramics segments was marginal. Our analysis improve margin of industry by 120bp if the industry is
shows that based on existing margin, PVT and ceramic able to retain the benefits. In the event, benefits are
tiles would have earnings ROCE of 8% and 7%, passed on to end-consumers then prices of ceramic tiles
respectively. As returns have fallen closer to the risk-free would reduce by 1.2%.
rate, possibility seems low of further correction in prices.
Why organized firms are unable to reap GST benefits
On a positive note, strong execution of PMAY (U) should Post GST, tax evasion by Morbi cluster increased, as
improve demand sharply in this segment. Our unorganized firms were able to create an entire value
interactions show contractors with the AP State chain in cash and inter-State check posts were
government have already given huge orders to two discontinued. Even after implementation of the eWay
listed firms. With volume improvement, operating bill, there has been no major impact on prices, as the
leverage also should support margin. same eWay invoices were used by multiple trucks to
Exhibit 32: Return ratio of low- to mid-priced products fall close to risk-free rate
EBITDA Selling price EBITDA per Volume @ Total Capex per
Total EBIT Cash ROCE ROCE Payback
margin per sq ft sq ft 85% EBITDA 2.5mn sqm
(INR mn) (%) (%) years
(%) (INR) (INR) utilization (INR mn) plant
GVT 17 70 12 2,27,37,500 271 236 700 39 34 3

PVT 10 28 3 2,27,37,500 63 38 500 13 8 8
Ceramic tiles 7 35 2 2,27,37,500 56 33 450 12 7 8

Ceramic Tiles
dispatch different consignments. While the industry has ware, where unorganized firms have a higher market
made representations to the tax authority for creation of share have a P/E of 23-25x vs Kajaria’s 24x. Thus, we
check posts at Morbi where eWay bill data could be believe there is limited possibility of rerating. While firms
captured, under-invoicing could be used by unorganized with low- to mid-priced products in their product basket
firms to reduce tax incidences. The GST rate on finished could see multiple rerating, due to revival in profitability.
ceramic tiles industry products is 18% and input tax Thus, we are positive on Prism Johnson and
credit for the industry is in the range of 4-8%. Thus, in Somany Ceramics.
case of 100% of tax compliance, unorganized firms may
Exhibit 34: Even after factoring in superior
have to take a price increase of 10-14% and in case of
fundamentals, Kajaria Ceramics is overvalued
50% under invoicing, benefits may be restricted to 5-7%..
Building Materials
1.6 Kajaria
Our top picks: Prism Johnson & Somany Ceramics Ceramics
1.2
We believe EV/EBITDA may not be accurate way of
PEG (x)
valuing the stocks as most ceramic tiles companies have 0.8
Somany
joint ventures, which involve line items, such as share of Ceramics
0.4 Prism
associates and minority adjustments below EBITDA. Johnson
0.0 Asian
Thus, we arrived at our target prices based on P/E. Granito
For arriving at a fair P/E, we look at the PEG ratio and (0.4)
0 5 10 15 20 25 30
ROE, margin and working capital. While Kajaria Ceramics
is the market and margin leader in the ceramic tiles
ROE (%)
industry, it does not enjoy pricing power, due to
Note: size of bubble represents market cap; Source: Company, Elara Securities
dominance of unorganized firms. The market leaders in Estimate
other building products, such as plywood and sanitary
Exhibit 33: Margin fall leads to cracks in valuation

Margin Q4FY18
expansion of margin
15% due to low crashes to
Average industry gas prices, 11.5% due
margin 11% increase in sale drop in prices
of GVT and of GVT, as
import duty GVT capacity
imposed on in Morbi
50 China clustrer
triples
45
40
35
30
(x)
25
20
15
10
0
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Dec-15
Aug-07
Dec-07
Aug-08
Dec-08
Aug-09
Dec-09
Aug-10
Dec-10
Aug-11
Dec-11
Aug-12
Dec-12
Aug-13
Dec-13
Aug-14
Dec-14
Aug-15
Aug-16
Dec-16
Aug-17
Dec-17
Kajaria Ceramics Somany Ceramics Asian Granito India

Ceramic Tiles
Valuation matrix
Exhibit 35: Prism Johnson has the most attractive valuation among peers
MCAP TP CMP* Upside P/E (x) ROE (%) PEG (%) Target P/E
Company Ticker Rating
(INR mn) (INR) (INR) (%) FY18 FY19E FY20E FY18 FY19E FY20E FY20E (x) FY20E
Kajaria Ceramics KJC IN Reduce 80,772 529 508 4 34.4 29.3 24.0 17.4 17.6 18.5 1.2 25
Prism Jhonson PRSMJ IN Buy 50,839 148 101 46 119.6 25.8 14.3 4.2 17.0 24.2 0.1 NA
Somany Ceramics SOMC IN Accumulate 22,345 611 527 16 31.7 23.4 17.3 12.1 14.1 16.1 0.5 20
Asian Granito ASIAN IN Accumulate 10,079 356 335 6 19.2 15.5 11.3 12.2 13.5 16.2 0.4 12
Note: *pricing as on 21 June 2018; Prism Johnson TP based on a SOTP method; Source: Company, Elara Securities Estimate

Ceramic Tiles
Industry annexure Exhibit 38: Kajaria Ceramics has the highest selling
price
The ceramic industry is broadly classified under ceramic
tiles, sanitary ware and crockery. The overall industry is 100
estimated to be around INR 270bn as on March 2017, Kajaria
95 Ceramics Somany
according to industry sources. Ceramic tiles accounts for Ceramics
Selling price
90 Prism
~85% of the industry, while sanitary ware and crockery Johnson Asian
constitute the balance 15% 85 Granito
Exhibit 36: Ceramic tiles accounts for 85% of the 80

industry
Building Materials
75 Morbi
Ceramic tiles and Sanitary ware 70

0 2 4 6
Note: prices indexed to Kajaria Ceramics; Source: Industry, Elara Securities

Ceramic tiles Sanitary ware Crockery Research
Based on the type of tile, the industry can be classified

under three segments:
Ceramic floor & wall tiles segment: Accounts for 42.5% of

Glazed ceramic Polished vitrified Glazed vitrified
tiles tiles tiles total market value; estimated at INR 115bn of market size
Polished vitrified tiles segment: Accounts for 42.5% of

Source: CRISIL, Elara Securities Research
total market value; estimated at INR 115bn of market
size.
Ceramic tiles are used in residential and commercial
spaces, primarily for flooring purposes. They are also Glazed vitrified tiles segment: Accounts for 15% of total
used for covering walls. The ceramic tiles industry is market value; estimated at INR 40bn of market size
classified under ceramic and vitrified tiles, and further Exhibit 39: GVT segment with the highest margin
divided into glazed vitrified and polished vitrified tiles.
National brands contribute to ~50% of the industry. The
rest is represented by other regional brands and Market size: 80 MSM /INR 40bn
Imports: 6%
unbranded firms present at Morbi and Himmatnagar in GVT Price range: INR 40-100/sq ft
Gujarat. EBITDA margins: 15-20%
Capex for 2.5 MSM plant: INR 0.7bn
Exhibit 37: Kajaria Ceramics is the market leader
Murudeshwar
Others *
Ceramics Market size: 275 MSM/INR 115bn
5%
Sun Heart * 1% Kajaria
Ceramics Imports: 11%
5% PVT
Varmora * 22% Price range: INR 20-70/sq ft
5% EBITDA margin: 7-14%
Orient Bell Capex for 2.5 MSM plant: INR 0.5bn
Ceramics
5%
Nitco Tiles Market size: 430MSM/INR
6% Somany 115bn
Ceramics Imports: 2%
Simpolo * Ceramic wall & Price range: INR 20-50/sq ft
15%
6% Floor tiles EBITDA margin: 3-9%
RAK Ceramics Capex for 2.5mn sqm plant:
*
6% Asian Granito Prism Cement INR 0.4-0.45bn
(TBK Division)
9% 15%
Note: *Others include Swastik, Restile, Marbomax, Bell Granito (estimated); Source: Industry, Elara Securities Research

Ceramic Tiles
Exhibit 40: Tiles account for 8% of cost of construction

Building requirement for 1000 sqft. Construction Area
Material Quantity
1 sqft. 1000 sqft.

Window: 3%
Doors: 3.4%
Plumbing: 5.5% 0.4 Bag 400 Bag
Fittings
22.8% Electrical: 6.8%
Steel CP+Sanitary: 4.1% 1.8 CFT. 1800 CFT.
24.6%
1.35 CFT. 1350CFT.
100 Sqft.
(Build-up 4.0 kg. 4000 kg.
Aggregates / Area) Paint: 4.1%
Gravel Finishers
INR 731,700 Tiles: 8.0%
7.4% 16.5% 0.18 LTR 180 LTR
Bricks: 4.4%
Sand 1.45 sqft. 1450 sqft.

12.3%
Cemet
16.4% 1.3 sqft. 1300 sqft.
Monthly cash outlflow for building material Basic rate of material
INR
Cement Per bag
160,268 Total Cash Outflow - INR 300
134,653 INR
129,975 Sand Per Cft.
123,825 50
(INR)
101,700 INR
Gravel Per Cft.
81,280 30
INR
Steel Per kg
45
INR
Bricks Per No.
45
INR
1st 2nd 3rd 4th 5th 6th Tiles Per Sft.
Month
7
INR
Paint Per Ltr.
250
Source: HAPPHO, Elara Securities Research

Ceramic Tiles
Exhibit 41: Classification of products

Type Characteristics Uses
Classification based on Uses
Wall tiles Wall tiles are a type of ceramic tiles ,which are thinner, lighter and more fragile than floor tiles Wall (40-45%)
Floor tiles Floor tiles have higher porosity & water absorption rate and are stronger and harder than wall tiles Floor (55-60%)
Classification based on manufacturing process

Ceramic tiles are flat slabs manufactured from ceramic materials such as clay, feldspar and quartz and certain other
additives. These tiles are used in a range of applications, including flooring, as countertops, for roofing and as wall
Ceramic Tiles
Building Materials
coverings.
Polished vitrified tiles are flat slabs manufactured from ceramic materials such as clay, feldspar and quartz and certain
Polished Vitrified
additives. These tiles are fired at high temperatures to ensure high strength and low water absorption, and after such
Tiles
firing these tiles are polished with several series of abrasives to produce an excellent glossy exterior.
Glazed vitrified tiles are flat slabs manufactured from ceramic materials such as clay, feldspar and quartz and other
Glazed Vitrified
additives and fired at high temperatures to ensure high strength and low water absorption. These tiles are coated with
Tiles
glaze materials prior to the firing process.
Preparation of raw materials: The first stage involves

Exhibit 42: Production process
selection and preparation of raw materials. Basic input
comprises different kinds of clay, carbonates, feldspars,
Raw materials Dry milling /
Spray drying kaolin and sand. These materials, most of which are used
preparation Wet milling
in raw state, are homogenized to ensure consistency in
composition.
Drying of the green Milling: Once the raw materials are mixed, the mixture is
Mixing Tile forming
ceramic bodies
usually dry-milled or wet-milled (continuous or batch ball
mills)
Glazing Firing
Additional treatments Spray drying: Wet-milling and subsequently, spray-drying
for porcelain
are the most widely implemented methods while
manufacturing ceramic floor and wall tiles, by the single-
fire process. These methods ensure significant technical
Sorting and packing improvements. Part of the water content in the resulting
suspension is removed by spray drying to obtain a
Source: Crisil, Industry, Elara Securities Research product with required moisture content, for each stage.
Manufacturing process  Mixing: During this stage, water and raw materials,
The following are steps in manufacturing of ceramic tiles: which form the body composition, are closely mixed
into a consistent paste that can be molded by
Exhibit 43: Raw material cost breakdown extrusion
Chemicals
& others,  Formation of tiles: Dry pressing (at 5-7% moisture
12% content) with hydraulic presses is the most common
Glaze frit
Pigment, and
3% method for forming tiles. Forming is one of the most
additive,
30% cost-efficient methods to make ceramic ware with a
Packing regular geometry and takes place mechanically by
materials,
15% compressing the paste in the die. Tile forming by
extrusion processes basically comprises putting the
plastic body through a die that produces a constant
Wallostonit,
Clay, 15% tile cross section
18%
Sillca sand,
7%  Drying of the green body: Once formed, the body of
Source: Crisil, Industry, Elara Securities Research the tile is dried to reduce moisture content (0.2-
0.5%) to required levels for the eventual firing and
glazing stages. In the dryers, which are commonly
used in the ceramics industry, heat is transferred

Ceramic Tiles
mainly by convection from hot gases to the tile Expo held in 2016 and 2017. A bout 5,000 customs visit
surface, and also by a slight radiation from these Morbi every month compared to only 1,000 two years
gases and from the dryer walls to the tile surface. ago. About 35% of Morbi production is exported.
 Use of dryers: Vertical or horizontal dryers can be In recent years, Morbi also has become an important
used for drying the green body. Horizontal dryers zone for outsourcing of tile manufacturing. Large firms
are considered superior to vertical ones because like Prism Johnson, Kajaria Ceramics and Somany
they generate higher temperature, shorten the Ceramics outsource their requirements from Morbi.
drying cycles and consume less energy
The Morbi cluster has emerged as the lowest cost
 Glazing: This process is applicable only for glazed producer in India. This is largely because of easy
tiles. Glazing involves applying one or more coats of availability of raw material required for manufacturing
glaze to make tiles impermeable, cleanable and ceramic products. Raw material cost accounts for ~50%
chemical resistant of the cost of sales of ceramic products. Plants closer to
the source of raw materials (especially China clay, which
 Components of glaze: Silica is the prime component
is bulky) gain by way of lower freight cost. This cluster,
of glaze. Other materials like alkalis and zinc act as
and its adjoining areas, is rich in red soil — a basic raw
fluxes or pacifiers. Tiles can be offered in various
material needed for manufacturing China clay. In
colors, using a wide variety of glazes
addition, raw materials, such as quartz and feldspar, are
 Firing: Firing is the most important part of the also available in adequate quantities. Supply of
process, because it determines mechanical strength, uninterrupted industrial gas by pipeline by GSPC was a
dimensional stability, chemical and fire resistance, milestone that revived the region's extinct ceramic
and ease of maintenance. Unglazed tiles are fired business.
once, while glazed tiles are fired once (monocottura)
Morbi has built an ecosystem for ceramics and sanitary-
after the glaze is applied to the raw tile body.
ware production, which makes low-cost production with
Alternatively, the body can be fired and a second
world class technology possible. The community of Patel
firing (bicottura) can be applied, following
factory owners is a tightly knit network. Most are co-
application of glaze. Subsequent firing can take
owners in multiple factories. So, utilization and sharing of
place to add more color
resources (logistics, labor, production knowledge and
 Additional treatments: In some cases, particularly in vendors) is highly efficient and cost-effective. Also, now
porcelain tiles, the fired tile surface is polished to all raw material vendors, logistic service suppliers and
produce a shiny unglazed homogeneous tile machinery, plant consultants & fabricators are based in
Morbi. There is a huge network of traders which is based
 Sorting & packing: The ceramic tile manufacturing
in Morbi apart from hundreds of retailers, showroom
process ends with sorting and packing processes.
owners and traders from across India and even outside
Sorting is done through automatic systems, with
India who visit Morbi.
mechanical equipment and tile surface inspection.
The result is a controlled product with regard to Morbi has offices and representatives from globally
dimensional regularity, appearance of the surface renowned Italian & Spanish tiles machinery
and mechanical and chemical characteristics manufacturers and design studios which provide
technical assistance and training to tiles manufacturing
Morbi Cluster: Tale of Patel unity
companies. For example, Calabria, a leading Italy-based
The Morbi cluster, which accounts for 80% of India's total company, has set up its office in Morbi to provide after-
production, is spread across a 10km stretch on the Morbi- sales service to customers. Manufacturing units in Morbi
Dhuva highway in Gujarat. Most units operating in this have set up digital printing and other technically
cluster are family-run. Morbi is one of the three big advanced machinery, which has led to production of
clusters across the world. improved quality ceramic tiles and sanitary-ware across
Manufacturing companies in Morbi cater to demand India and the neighboring markets.
from the domestic as well as exports markets. The The vicinity of Morbi city with major ports (such as
awareness of Morbi in the domestic market and Kandla and Mundra) also lowers transportation cost,
international market has increased after Vibrant Ceramic thereby helping exporters of ceramics from the region.

India | Building materials 26 June 2018
Initiating Coverage
Kajaria Ceramics
Premium valuation Rating: Reduce
Losing its mojo: margin unlikely to reach peak anytime soon Target Price: INR 529
Upside: 4%
Kajaria Ceramics (KJC IN) achieved peak margin of 20% in CY17 on
CMP: INR 508 (as on 21 June 2018)
low gas prices and increased contribution of sales from the high
margin GVT segment. Since then, gas prices have gone up by ~22% Key data
while GVT prices have sunk ~20%. Given 3x increase in GVT capacity Bloomberg /Reuters Code KJC IN/KAJR. BO
in the Morbi cluster, we believe the company’s moat has been Current /Dil Shares O/S (mn) 159/159
replicated by others. Mkt Cap (INR bn/USD mn) 81/1,184
Daily Volume (3M NSE Avg) 37,996
Relationship hiccups: friction with JV may restrict volume growth Face Value (INR) 1
In FY18, Taurus Tiles with capacity of 5.0mn sqm at Morbi ceased to be 1 US$= INR 68.1
the company’s JV. KJC still has a 29% stake in the JV in the Morbi Note: *as on 21 June 2018; Source: Bloomberg
cluster and another 4% in Andhra Pradesh. If the company is unable to
mend its relationship, volume and cost competency may be under Price & Volume
800 8
threat, as ceramics plants in other parts of India usually have a higher
cost structure than Morbi’s. 700 6
600 4
Increased competition: loss in market share to unorganized firms
500 2
The company’s market share has fallen from ~8.9% in FY16 to ~8.5%
in FY18 as it was eaten away by unorganized firms in the Morbi 400 0
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
cluster. This is despite liberal credit terms extended by the company to
Vol. in mn (RHS) Kajaria (LHS)
its dealers, which is visible in the increase in receivable days from 30 Source: Bloomberg
days in FY14 to 59 days in FY18. Morbi’s awareness in the domestic
Shareholding (%) Q1FY18 Q2FY18 Q3FY18 Q4FY18
market has increased after Vibrant Ceramic Expo held in 2016 and
Promoter 47.4 47.6 47.6 47.6
2017.If we adjust for opportunity cost of higher working capital, the Institutional Investor 29.3 33.8 36.1 37.0
company has seen the highest fall in EBITDA margin among listed Other Investor 11.7 6.8 4.5 4.4
peers of 290bp vs 20bp for peers. About 5,000 customers visit Morbi General Public 11.6 11.8 11.8 11.0
every month compared to only 1,000 two years ago. Increased Source: BSE
awareness of Morbi-based brand has affected the company’s market Price performance (%) 3M 6M 12M
share. Despite being a market leader in the ceramic tiles industry, it Sensex 6.9 5.0 13.3
does not have pricing power as ~50% of the market is unorganized Kajaria Ceramics (11.8) (30.0) (27.1)
and the company has a single-digit market share. Asian Granito India (27.0) (37.7) (18.8)
Somany Ceramics (20.1) (42.2) (32.5)
Prism Johnson (12.7) (14.6) (13.8)
Source: Bloomberg
Valuation
We initiate coverage of Kajaria Ceramics with a Reduce rating and a Price performance
price target of INR 529 based on 25x FY20E earnings (PEG of 1.3x). 130
At a CMP of INR 508, the stock is trading at 24x FY20E P/E. Market
Rebased to 100
leaders in other building products where unorganized firms have a 110
high market share, such as plywood and sanitary ware, with a P/E
90
of 23-25x. Also, if we adjust EBITDA margin for interest cost of
working capital, the company’s margin at 15% is similar to what it 70
used to earn during FY15 when it used to trade at 25x.
Kajaria Ceramics Sensex
Source: Bloomberg
Key Financials
YE Revenue YoY EBITDA EBITDA Adj PAT YoY Fully DEPS RoE RoCE P/E EV/EBITDA
March (INR mn) (%) (INR mn) margin (%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY17 25,496 5.7 4,963 9.4 2,538 10.3 15.9 21.5 27.1 31.9 16.6
FY18 27,106 (2.4) 4,564 (8.1) 2,279 (7.1) 14.8 17.4 22.7 34.4 17.8
FY19E 30,638 10.1 5,169 13.3 2,766 17.3 17.3 17.6 23.6 29.3 15.6
FY20E 35,920 17.2 6,100 18.0 3,376 22.1 21.2 18.5 25.4 24.0 13.2
Note: pricing as on 21 June 2018; Source: Company, Elara Securities Estimate

Kajaria Ceramics
Valuation trigger Investment summary

 Margin unlikely to reach its peak due to
Volume growth
Range-bound increased capacity in the GVT segment
less than the
margin
800
industry by the industry
 Deterioration of relations with JV may

700 restrict volume growth
 Loss of market share to unorganized

600
firms
1 2
500 Valuation trigger
1. Volume growth less than the industry
400
Jun-17
Apr-19
Jun-19
Dec-17
Apr-18
Jun-18
Dec-18
Aug-17
Aug-18
Feb-19
Oct-17
Feb-18
Oct-18 2. Range-bound margin

Key risks
Source: Bloomberg, Elara Securities Estimate  Sharp increase in prices of GVT
Our assumptions
Valuation overview
(INR mn)  Revenue to grow by 10% and 17% in
PAT for FY20E 3,366 FY19E and FY20E, respectively
P/E for FY20E earnings 25
 EBITDA margin to remain range-bound
Target market cap 84, 158
at 16-17% over FY19-20E
No of shares (mn) 159
Target price (INR) 529
Note: pricing as on 21 June 2018; Source: Elara Securities Estimate
Valuation driver: PE shrinks in line with margin

50
40
(x)
30
20
10
0
FY13
FY18
FY08
FY09
FY10
FY11
FY12
FY14
FY15
FY16
FY17
FY19E
FY20E
Source: Company, Elara Securities Estimate
Valuation driver: Margin on declining trend

35
30
25
(%)
20
15
10
5
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
EBITDA Margin ROE

Kajaria Ceramics
Financials (YE March)

Income Statement (INR mn) FY17 FY18 FY19E FY20E Revenue & margin growth trend
Net Revenues 25,496 27,106 30,638 35,920 40,000 19.5 20
EBITDA 4,963 4,564 5,169 6,100
19
Add:- Non operating Income 154 108 112 115 30,000
(INR mn)
OPBIDTA 5,117 4,672 5,280 6,215 18
17.0
(%)
20,000 16.8 16.9
Less :- Depreciation & Amortization 814 885 963 1,038
17
EBIT 4,303 3,787 4,318 5,177
10,000
Less:- Interest Expenses 340 241 127 62 16
PBT 3,963 3,546 4,191 5,116
Building Materials
0 15
Less :- Taxes 1,425 1,267 1,425 1,739 FY17 FY18 FY19E FY20E
Adjusted PAT 2,538 2,279 2,766 3,376 Net Revenues EBITDA Margin
Minority Interest 10 (64) 10 10
Adjusted PATafter Minority Interest 2,528 2,342 2,756 3,366
Balance Sheet (INR mn) FY17 FY18 FY19E FY20E
Share Capital 159 159 159 159
Adjusted profit growth trend
Reserves 11,592 13,351 15,473 18,065
Minority Interest 760 661 671 681 4,000 40
Borrowings 3,339 2,502 2,002 1,502 3,000 22.1 30

17.3
(INR mn)
Total Liabilities 15,851 16,673 18,305 20,407
2,000 20
Gross Block 17,329 17,893 19,393 20,893 10.3
(%)
Less:- Accumulated Depreciation 5,557 6,442 7,404 8,442 1,000 10
Net Block 11,773 11,451 11,988 12,451 0 0

Add:- Capital work in progress 83 176 141 141 (7.1)
(1,000) (10)
Investments 1 4 4 4 FY17 FY18 FY19E FY20E
Net Working Capital 3,994 5,042 6,171 7,811 Adjusted PAT PAT Growth
Total Assets 15,851 16,673 18,305 20,407
Cash Flow Statement (INR mn) FY17 FY18 FY19E FY20E
Cash profit adjusted for non cash items 3,379 3,119 3,607 4,289
Add/Less : Working Capital Changes (980) (794) (925) (1,977)
Operating Cash Flow 2,399 2,325 2,682 2,312
Return ratios
Less:- Capex (1,386) (657) (1,465) (1,500) 30 27.1
25.4
Free Cash Flow 1,013 1,668 1,217 812 22.7 23.6
25
(%)
Financing Cash Flow (862) (1,469) (1,124) (1,264)

Investing Cash Flow 154 105 112 115 20
21.5
Net change in Cash 305 304 205 (338)
15 17.6 18.5
Ratio Analysis FY17 FY18 FY19E FY20E 17.4
Income Statement Ratios (%) 10
Revenue Growth 5.7 (2.4) 10.1 17.2 FY17 FY18 FY19E FY20E
EBITDA Growth 9.4 (8.1) 13.3 18.0 ROE ROCE (%)
PAT Growth 10.3 (7.1) 17.3 22.1
EBITDA Margin 19.5 16.8 16.9 17.0
Net Margin 9.9 8.7 9.0 9.4
Return & Liquidity Ratios
Net Debt/Equity (x) 0.1 0.0 (0.0) (0.0)
ROE 21.5 17.4 17.6 18.5
ROCE (%) 27.1 22.7 23.6 25.4
Per Share data & Valuation Ratios
Diluted EPS (INR/Share) 15.9 14.8 17.3 21.2
EPS Growth (%) 10.3 (7.1) 17.3 22.1
DPS (INR/Share) 3.0 2.9 3.4 4.2
P/E Ratio (x) 31.9 34.4 29.3 24.0
EV/EBITDA (x) 16.6 17.8 15.6 13.2
EV/Sales (x) 3.2 3.0 2.6 2.2
P/BV (x) 6.9 6.0 5.2 4.4
Dividend Yield (%) 0.7 0.7 0.8 1.0

Kajaria Ceramics
Company Description
Kajaria Ceramics is the largest manufacturer of ceramic and vitrified tiles in India and is the ninth largest in the
world. It has an annual aggregate capacity of 68.37mn sqm, distributed across eight plants: Sikandrabad in Uttar
Pradesh, Gailpur & Malootana in Rajasthan, four plants in Gujarat and one at Vijayawada in Andhra Pradesh. In
2011, Kajaria shifted its focus on an asset-light model for future growth. It entered into joint venture agreement with
Soriso Ceramics, Jaxx Ceramics, Vennar Ceramics and Cosa ceramics. In 2014-15, KJC forayed into sanitary ware and
faucet manufacturing through its subsidiary, Kajaria Bathware, to emerge as a holistic bathroom solutions provider.
KJC‘s extensive range of products includes ceramic wall & floor tiles, polished vitrified tiles, glazed vitrified tiles,
digital tiles, sanitaryware and bathware fittings. In FY18, KJC started trading in plywood to understand the industry
and latter on shift to manufacturing. KJC see huge growth potential in all of its products with the shift from
unorganized to organized firms.
Board of Directors & Management

Ashok Kajaria, Chairman & Managing Director Exhibit 2: Top Institutional Holdings
Ashok Kajaria is the founder of Kajaria Ceramics and has Holding
Institutions
(%)
38 years of experience in the tiles industry, global
Franklin India Smaller Companies Fund 1.01
marketing and business related to the construction
Franklin Templeton Mutual Fund a/c Franklin India
industry. He holds an engineering degree from California 1
Prima Fund
University. Fidelity Investment Trust Fidelity International Discovery
1..54
Fund
Chetan Kajaria, Joint Managing Director Government Pension Fund Global 3.14
Chetan Kajaria is a gold medalist in engineering from Franklin Templeton Investment Funds 1.41
Pune University and holds a master’s degree in Business Goldman Sachs India 1.29
Administration from Boston University. He has 14 years JP Morgan Funds 1.14
of experience in the ceramics industry. Steadview Capital Mauritius 1.1
Rishi Kajaria, Joint Managing Director BNP Paribas Arbitrage 1.21
Abu Dhabi Investment Authority - Behave 1.04
Rishi Kajaria has been associated with the company since
2004, and he holds a bachelor’s degree in business Source: Company, Elara Security Research
Administration from Boston University. Exhibit 3: Shareholding pattern (March 2018)

Exhibit 1: Board of Directors Public,
Name Designation 15.44%
Ashok Kajaria Chairman & Managing Director

Chetan Kajaria Joint Managing Director Promoter &
Rishi Kajaria Joint Managing Director Promoter
Group,
Dev Datt Rishi Director –Technical (Executive) 47.58%
FII, 28.09%
Basant Kumar Sinha Director –Technical (Executive)
Raj Kumar Bhargava Director (Independent Non-Executive)
Ram Ratan Bagri Director (Independent Non-Executive) DII, 8.89%
Debi Prasad Bagri Director (Independent Non-Executive)
Source: Company, Elara Security Research
H Rathnakar Hedge Director (Independent Non-Executive)
Sandeep Singhal Director (Independent Non-Executive)
Sushmita Shekhar Director (Independent Non-Executive)
Ram Ratan Bagri Director (Independent Non-Executive)
Debi Prasad Bagri Director (Independent Non-Executive)

Kajaria Ceramics
Coverage History
800
750
700
650
600
Building Materials
550 1
500
450
Jun-17
Apr-18
Jun-18
Dec-17
May-18
Aug-17
Sep-17
Nov-17
Jul-17
Feb-18
Oct-17
Jan-18
Mar-18
Not Covered Covered
Date Rating Target Price Closing Price

1 21-June-2018 Reduce INR 529 INR 508
Guide to Research Rating

BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%

Kajaria Ceramics
Notes

Company Update
Prism Johnson
Well placed for growth Rating: Buy
Turnaround in the TBK business Target Price: INR 148
Upside: 46%
Prism Johnson’s (PRSMJ IN) tiles, bath & kitchen (TBK) business
CMP : INR 101 (as on 21 June 2018)
enjoyed leadership position over FY03-12. During the same period,
sale CAGR was at 17%. The division’s consolidated margin was also in Key data*
FY10 in line with margin leaders at 14.6%. However, FY11-14 were Bloomberg /Reuters Code PRSMJ IN/PRIS.BO
challenging years as sizable percentage of total capacity in Andhra Current /Dil. Shares O/S (mn) 503/503
Pradesh and Karnataka suffered on account of power and fuel Mkt Cap (INR bn/USD mn) 51/750
availability. The company has addressed power & fuel issues in South Daily Vol. (3M NSE Avg.) 427,039
Face Value (INR) 10
India by installing three coal gasifiers in the AP plant (2 plants),
1 USD = INR 68.1
winning bids for onshore micro gas wells and natural gas pipeline
Note: * as on 21 June 2018; Source: Bloomberg
connectivity completed for Karnataka plant. The company also took
steps to arrest decline in volume by expanding its product portfolio, Price & Volume
new product launches, focusing on display centers and connecting
170 15
with influencer (Artistic). Thus, consolidated EBITDA of the TBK
150
business increased by 6x to INR 0.6bn in FY18. Consolidated EBITDA
10
margin in Q4FY18 stood at 8.9% vs 0.5% in FY17. 130
110
Tiles volume CAGR of 14% over FY18-21E on capacity addition 5
90
In FY18, the company has added ~7.0mn sqm of GVT capacity at
70 0
Morbi, thereby increasing total capacity to ~68mn sqm. We believe a Jun-17 Oct-17 Feb-18 Jun-18
tiles volume CAGR of 14% over FY18-21E on capacity addition in GVT Vol. in mn (RHS) Prism Cement (LHS)
and ideal capacity in PVT and ceramic tiles. Source: Bloomberg
Share holding (%) Q1FY18 Q2FY18 Q3FY18 Q4FY18

Enjoy location advantage to serve PMAY (U) demand
Promoter 74.9 74.9 74.9 74.9
Sizable percentage of total ceramic tiles capacity of the company is in
Institutional Investors 15.8 15.8 15.9 12.1
Andhra Pradesh. The State has the highest share (16%) in houses
Other Investors 1.4 1.7 2.1 3.1
under construction. Thus, due to proximity of the plant, Prism Johnson
General Public 7.9 7.7 7.2 9.9
will be better place to cater to the PMAY (U) demand than its peers.
Source: BSE
We highlight that in Andhra Pradesh demand will be more front-
Price performance (%) 3M 6M 12M
ended than other States, as houses in AP are built with “shear wall”
Sensex 6.9 5.0 13.3
technology, which has reduced execution period to 15 months vs 24
Prism Johnson (12.7) (14.6) (13.8)
months and higher using conventional technology.
Heidelberg Cement (9.7) (16.2) 1.9
Valuation: recommend Buy with a TP of INR 148 Birla Corporation (6.4) (39.6) (21.9)
At a CMP of INR 101, the stock is trading at 14x FY20E P/E. Apart from Kajaria Ceramics (11.8) (30.0) (27.1)
the recovery in profit of the TBK business, the cement business is also Source: Bloomberg
expected to report improvement in profitability. The central region in
which the plants are based is attractive from a long-term perspective.
In the next few years, only one major integrated plant is likely to come
on-stream there. As a result, margin is likely to improve further. Thus,
we recommend Buy with a TP of INR 148 based on a SOTP valuation.
Key Financials
YE Revenue YoY EBITDA EBITDA Adj PAT YoY Fully DEPS RoE P/E EV/tonne EV/EBITDA
March (INR mn) (%) (INR mn) Margin (%) (INR mn) (%) (INR) (%) (x) (USD) (x)
FY17 50,113 (4.1) 3,555 7.1 (18) (130.4) (0.0) (0.2) (2,824.4) 144.5 19.5
FY18 55,069 9.9 4,422 8.0 425 (2,461.1) 0.8 4.2 119.6 124.2 15.8
FY19E 65,242 18.5 6,127 9.4 1,973 364.1 3.9 17.0 25.8 104.3 11.1
FY20E 73,779 13.1 8,386 11.4 3,545 79.7 7.0 24.2 14.3 84.3 7.6
Ravi Sodah•ravi.sodah@elaracapital.com•+91 22 6164 8517

Harsh Jhanwar• harsh.jhanwar@elaracapital.com•+91 22 6164 8546

Prism Johnson

Net Revenues 50,113 55,069 65,242 73,779 90,000 11.4 12
EBITDA 3,555 4,422 6,127 8,386 9.4
80,000 8.0
Add:- Non operating Income 931 666 468 482 7.1
(INR mn)
8
OPBIDTA 4,486 5,089 6,595 8,867 70,000
(%)
Less :- Depreciation & Amortization 1,918 1,844 1,805 1,880
60,000
EBIT 2,568 3,245 4,791 6,988 4
Less:- Interest Expenses 2,166 2,270 2,178 1,878 50,000
PBT 402 975 2,612 5,110
40,000 0
Less :- Taxes 260 457 513 1,437 FY17 FY18 FY19E FY20E
Adjusted PAT 142 518 2,099 3,673 Net Revenues (LHS) EBITDA Margin (RHS)
Minority interest 161 125 126 128
Profit from Associates 15 32 - -
Adjusted after Minority interest & asso (18) 425 1,973 3,545
Add/Less: - Extra-ordinaries - - - -
Reported PAT (18) 425 1,973 3,545
Adjusted profit
Balance Sheet (INR mn) FY17 FY18 FY19E FY20E 4,000
Share Capital 5,034 5,034 5,034 5,034
3,000
(INR mn)
Reserves 4,916 5,345 7,781 11,394
Minority Interest 2,694 2,727 2,853 2,980 2,000
Borrowings 19,337 19,994 17,994 14,994
1,000
Deferred Tax (Net) (506) (443) (443) (443)
Total Liabilities 31,475 32,657 33,219 33,960 0
Gross Block 28,629 32,020 33,920 35,920 FY17 FY18 FY19E FY20E
Less:- Accumulated Depreciation 4,475 6,005 7,810 9,689 Adjusted PAT
Net Block 24,155 26,015 26,111 26,231

Add:- Capital work in progress 1,966 997 1,006 1,016
Investments 3,387 4,106 4,106 4,106
Net Working Capital 1,967 1,539 1,996 2,607
Miscellaneous Expenses not written off 0 0 0 0
Return ratios (%)
Total Assets 31,475 32,658 33,219 33,960 30
24.2
25
Cash Flow Statement (INR mn) FY17 FY18 FY19E FY20E 17.0
20
15 19.0
Add/Less : Working Capital Changes 2,334 393 (192) 109 7.9
(%)
10 4.9 12.9
Operating Cash Flow 6,756 4,993 5,890 7,540 5
Less:- Capex 1,873 2,423 1,909 2,009 0
4.2
Free Cash Flow 4,883 2,570 3,980 5,531 (0.2)
(5)
Financing Cash Flow (4,606) (1,613) (4,178) (4,878) FY17 FY18 FY19E FY20E
Investing Cash Flow (488) (914) (227) (227) ROE (%) ROCE (%)
Net change in Cash (211) 42 (426) 425
Ratio Analysis FY17 FY18 FY19E FY20E
Income Statement Ratios (%)
Revenue Growth (4.1) 9.9 18.5 13.1
EBITDA Growth 4.3 24.4 38.6 36.9
PAT Growth (130.4) (2,461.1) 364.1 79.7
EBITDA Margin 7.1 8.0 9.4 11.4
Net Margin@ 7.2 7.2 7.2 7.2
Net Debt/Equity (x) 1.5 1.5 1.0 0.6
ROE (%) (0.2) 4.2 17.0 24.2
ROCE (%) 4.9 7.9 12.9 19.0
Diluted EPS (INR/Share) (0.0) 0.8 3.9 7.0
EPS Growth (%) (130.4) (2,461.1) 364.1 79.7
DPS (INR/Share) - - - -
P/E Ratio (x) (2,824.4) 119.6 25.8 14.3
EV/EBITDA (x) 19.5 15.8 11.1 7.6
EV/Sales (x) 1.4 1.3 1.0 0.9
EV per tonne (USD) 144.53 124 104 84
Dividend Yield (%) - - - -

Prism Johnson
Coverage History
160
140
9
10
120 4
7
1
100 3 8
5
6
Building Materials
80
60
2
40
May-15
May-16
May-17
May-18
Sep-15
Sep-16
Sep-17
Jul-15
Nov-15
Jul-16
Nov-16
Jul-17
Nov-17
Jan-15
Mar-15
Jan-16
Mar-16
Jan-17
Mar-17
Jan-18
Mar-18
Not Covered Covered

1 15-May-2015 Buy INR 122 INR 102
2 11-Feb-2016 Buy INR 98 INR 60
3 26-May-2016 Buy INR 114 INR 95
4 9-Aug-2016 Accumulate INR 125 INR 110
5 2-Dec-2016 Buy INR 118 INR 88
6 14-Feb-2017 Accumulate INR 113 INR 98
7 25-May-2017 Accumulate INR 136 INR 120
8 9-Oct-2017 Accumulate INR 119 INR 109
9 14-Feb-2018 Accumulate INR 148 INR 138
10 31-May-2018 Buy INR 148 INR 115


Prism Johnson
Notes

Initiating Coverage
Somany Ceramics
One-off to go off Rating: Accumulate
Muted show: FY18 profit depressed due to one-off Target Price: INR 611
Upside: 16%
Somany Ceramics (SOMC IN) FY18 volume contracted by 0.4% YoY
due to plant shutdown for upgradation (five out of 20 lines), SAP
implication issues and change in top management. We expect the Key data
company to post volume growth of 12% over FY19-20E on low base. Bloomberg /Reuters Code SOMC IN/SOCE. BO
Strong volume growth should enable better fixed cost absorption, Current /Dil Shares O/S (mn) 42/42
and, hence, we expect margin to expand by 100bp over FY18-20E. Mkt Cap (INR bn/USD mn) 22/327
Daily Volume (3M NSE Avg) 1,671
Tailor-made: Better product mix to cater to PMAY demand Face Value (INR) 2
Around 79% of the company’s capacity is in PVT and ceramic tiles 1 US$= INR 68.1
category. We expect demand in this category to accelerate due to Note: *as on 21 June 2018; Source: Bloomberg
strong execution of PMAY (U), and increase in launches in the

Price & Volume
affordable housing segment by real estate firms. We believe PVT and
1,000 1.0
ceramic tiles prices are at close to the bottom, because at current
prices, plant ROCE for the industry would be close to risk-free rate. 800
Despite a ~20% fall in glazed vitrified tiles (GVT) prices on increased 600 0.5
supply, the price fall in PVT and ceramic tiles was marginal. The recent 400
ban on coal gasifier plants in Gujarat could improve prices in the range 200 0.0
of 6-9% in these product categories. Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
Vol. in mn (RHS) Somani (LHS)
VAT rescue: Cut by Haryana to lead to margin expansion of 50bp Source: Bloomberg
About 38% of the company’s capacity is in Haryana. In April 2018, Shareholding (%) Q1FY18 Q2FY18 Q3FY18 Q4FY18
Haryana government has cut its VAT rate on natural gas from 12.5% Promoter 51.5 51.5 51.5 51.5
to 6.0%. This should result in savings of ~INR 8mn per month, which Institutional Investor 24.9 25.7 25.4 25.6
should result in margin expansion of 50bp. Other Investor 8.9 8.2 8.9 8.9
General Public 14.7 14.6 14.2 14.0
More in store: expanding portfolio to sanitary ware & bath fittings
Source: BSE
The company has entered into sanitary ware and bath-fitting Price performance (%) 3M 6M 12M
segments initially through outsourcing in FY08. However, looking at Sensex 6.9 5.0 13.3
strong growth potential, the company has added its own capacity. Somany Ceramics (20.1) (42.2) (32.5)
Utilization of the sanitary ware plant was only 60% in FY18. With Asian Granito (27.0) (37.7) (18.8)
revival of the real estate market, we believe utilization of the plant Kajaria Ceramics (11.8) (30.0) (27.1)
should improve in the upcoming years. Prism (12.7) (14.6) (13.8)
Source: Bloomberg
Valuation
We initiate coverage of Somany Ceramics with an Accumulate Price performance
rating with a price target of INR 611 based on 20x FY20E earnings 140
(PEG of 0.6x). At a CMP of INR 527, the stock is trading at 17x FY20E
Rebased to 100
120
P/E. We expect earnings to recover on the back of margin
100
expansion, volume growth and deleveraging of the balance sheet.
The company is expected to have the highest earnings CAGR of 80
36% over FY18-20E among our coverage universe of pure ceramic 60

tile companies. Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
Somany Ceramics Sensex
Source: Bloomberg
Key Financials
March (INR mn) (%) (INR mn) Margin (%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY17 18,110 5.9 1,915 41.5 940 42.3 21.7 17.7 20.3 24.3 12.2
FY18 17,082 (5.7) 1,814 (5.3) 791 (23.5) 16.6 12.1 12.8 31.7 14.2
FY19E 20,311 18.9 2,267 25.0 1,071 35.4 22.5 14.1 14.6 23.4 11.2
FY20E 23,859 17.5 2,782 22.7 1,454 35.8 30.5 16.1 17.5 17.3 8.9

Somany Ceramics
Margin expansion of Deleveraging of  Volume ramp-up from idle capacity

100bp from FY18-FY20E balance sheet by INR
on operating leverage ~1bn over FY18-20E
 Increase in price and demand in PVT
1,000
and ceramic tiles
900
Valuation trigger
800
1. Margin expansion of 100bp from FY18-
700
FY20E on operating leverage
600 2
1 2. Deleveraging of balance sheet by INR
500 ~1bn over FY18-20E
400 Key risks
Jun-17
Dec-17
Apr-18
Jun-18
Dec-18
Apr-19
Jun-19
Aug-17
Aug-18
Oct-17
Feb-18
Oct-18
Feb-19
 Demand slowdown following lower-
than-expected recovery in the real
Source: Bloomberg, Elara Securities Estimate estate market
 Fall in prices of PVT, GVT and ceramic

Valuation overview tiles
(INR mn)
PAT for FY20E 1,295 Our assumptions
P/E for FY20E earnings (x) 20  Revenue CAGR of 18% over FY18-20E
Target market cap 25,904 based on tiles volume CAGR of 12%
No of shares (mn) 42
Target price (INR) 611
Note: pricing as on 21 June 2017; Source: Elara Securities Estimate
Valuation driver: Trading at ~32% discount to Kajaria Ceramics

50
40
(x)
30
20
10
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
Valuation driver: Return ratio and margin to improve

30
25
20
(%)
15
10
5
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
EBITDA Margin ROE

Somany Ceramics

Net Revenues 18,110 17,082 20,311 23,859 30,000 12.0
11.7
EBITDA 1,915 1,814 2,267 2,782
Add:- Non operating Income 151 226 249 274 11.2 11.5
(INR mn)
20,000
OPBIDTA 2,066 2,040 2,516 3,056
(%)
11.0
Less :- Depreciation & Amortization 350 413 538 569 10.6 10.6
EBIT 1,716 1,627 1,977 2,486 10,000
10.5
Less:- Interest Expenses 233 399 378 316
PBT 1,483 1,228 1,599 2,171
Building Materials
0 10.0
Less :- Taxes 502 393 528 716 FY17 FY18 FY19E FY20E
Exceptional item (41) (44) 0 0 Net Revenues EBITDA Margin
Adjusted PAT 940 791 1,071 1,454
Minority Interest 19 87 117 159
Adjusted PATafter Minority Interest 921 704 954 1,295
2,000 60
Reserves 5,128 5,722 6,676 7,971 42.3
1,500 35.4 35.8 45
Minority Interest 271 959 1,076 1,236
(INR mn)
Borrowings 2,988 5,595 5,345 4,595 1,000 30
Total Liabilities 8,471 12,361 13,183 13,887 500 15
(%)
Gross Block 7,112 9,912 10,448 11,048 0 0
Less:- Accumulated Depreciation 2,986 3,393 3,931 4,501 (500) (15)
(23.5)
Net Block 4,126 6,519 6,517 6,547 (1,000) (30)
Add:- Capital work in progress 357 279 279 279 FY17 FY18 FY19E FY20E
Investments 34 0 0 0 Adjusted PAT PAT Growth
Total Assets 8,471 12,361 13,183 13,887
Cash Flow Statement (INR mn) FY17 FY18 FY19E FY20E
Return ratios
Add/Less : Working Capital Changes (339) (1,693) (676) (782)
22 20.3
Operating Cash Flow 969 (227) 1,112 1,338
Less:- Capex (427) (2,972) (664) (600) 20
17.5
(%)
Free Cash Flow 542 (3,199) 449 738 18

Financing Cash Flow (212) 2,030 (782) (1,066) 16 17.7 14.6
Investing Cash Flow (467) 1,402 263 219 14 12.8 16.1
Net change in Cash (137) 233 (71) (108) 12 14.1
12.1
Ratio Analysis FY17 FY18 FY19E FY20E 10
Income Statement Ratios (%) FY17 FY18 FY19E FY20E
Revenue Growth 5.9 (5.7) 18.9 17.5 ROE ROCE (%)
EBITDA Growth 41.5 (5.3) 25.0 22.7
PAT Growth 42.3 (23.5) 35.4 35.8
EBITDA Margin 10.6 10.6 11.2 11.7
Net Margin 5.1 4.1 4.7 5.4
ROE 17.7 12.1 14.1 16.1
ROCE (%) 20.3 12.8 14.6 17.5
EPS Growth (%) 42.2 (23.5) 35.4 35.8
DPS (INR/Share) 0.0 0.0 0.0 0.0
P/E Ratio (x) 24.3 31.7 23.4 17.3
EV/EBITDA (x) 12.2 14.2 11.2 8.9
EV/Sales (x) 1.3 1.5 1.3 1.0
P/BV (x) 4.3 3.8 3.3 2.8
Dividend Yield (%) 0.0 0.0 0.0 0.0

Somany Ceramics
Company Description
Somany Ceramics is the second-largest manufacturer of ceramic and vitrified tiles in India. The company was
incorporated in 1968, as Somany Pilkington, which was later changed to Somany Ceramics in 2007. It has
manufacturing facilities at Kadi in Gujarat, Kassar in Haryana and other JV plants. It has tiles capacity of 64mn sqm,
comprising own capacity of 29mn sqm, JV capacity of 26mn sqm and outsourcing capacity of 9.0mn sqm. Somany
also operates sanitary ware with 1.2mn pieces per year and bath fittings. Its extensive range of products include
ceramic wall & floor tiles, polished vitrified tiles, glazed vitrified tiles, digital tiles, and sanitaryware & bathware
fittings. Somany Ceramics sees huge growth potential in all of its products with the shift from unorganized to
organized firms and its focus on an asset-light business model.
Board of Directors & Management

Shreekant Somany, Chairman & Managing Director Exhibit 2: Top Institutional Holdings
Shreekant Somany has won the American Ceramic Holding
Institutions
(%)
Society’s corporate technical achievement award. His
DSP Blackrock Midcap fund 5.63
achievements include former chairman of Indian Council
Franklin India Smaller Companies Fund 4.75
of Tiles and Sanitaryware, and president of
Confederation of Construction. Shreekant has a degree L&T Mutual Fund Trustee -L&T India Prudence Fund 4.29
in science. Aditya Birla Sun Life Trustee Private Limited A/C Aditya
2.51
Birla Sun Life Balanced
Abhishek Somany, Managing Director Tata Mid Cap Growth Fund 1.59
Abhishek Somany is a member of the National Kotak Mahindra Life Insurance 2.94
Committee on Family Business Network. He holds a Kirtivardhan Finvest Services 1.02

bachelor’s degree in Business Administration from the Hind Strategic Investments 2.53
Richmond University, the UK, with specialization in Source: Company, Elara Security Research
finance & marketing.
Exhibit 3: Shareholding pattern (March 2018)
Exhibit 1: Board of Directors
Name Designation
Public,
Shreekant Somany Chairman and Managing Director 23.53%
Abhishek Somany Managing Director
Anjana Somany Whole-Time Director
Promoter &
RK Daga Independent Director
FII, 4.18% Promoter
GL Sultania Non-Executive Director Group,
51.53%
Salil Singhal Independent Director
Ravinder Nath Independent Director
DII, 20.76%
YK Alagh Independent Director
Siddharath Bindra Independent Director
Narayan Anand Non-Executive and Nominee Director Source: Company, Elara Security Research

Somany Ceramics
Coverage History
1,050
950
850
750
Building Materials
650
1
550
450
Jun-17
Jun-18
Dec-17
Apr-18
May-18
Aug-17
Sep-17
Nov-17
Jul-17
Feb-18
Oct-17
Jan-18
Mar-18
Not Covered Covered

1 21-June-2018 Accumulate INR 611 INR 527


Somany Ceramics
Notes

Initiating Coverage
Asian Granito India

Shifting orbit Rating: Accumulate
Double or nothing: expand capacity in high margin quartz space Target Price: INR 356
Upside: 6%
Asian Granito India (ASIAN IN) has a 40% market share in high margin
business of quartz manufacturing. The EBITDA margins in quarts
business are 20-25%. Currently, there is a 40% import duty on quartz Key data
from China, which makes it 15% costlier than domestic quartz. Apart Bloomberg /Reuters Code ASIAN IN / ASGI.BO
from India, a court case has been filed in the US by Cambria for anti- Current /Dil Shares O/S (mn) 30/30
dumping & countervailing duty on imports from China. If the US Mkt Cap (INR bn/USD mn) 10/148
imposes the anti-dumping duty, it could be a big boost to India’s firms. Daily Volume (3M NSE Avg) 6,960
China exports ~INR 35bn of quartz to the US vs India’s INR 2.0-2.5bn. Face Value (INR) 10
Hence, quartz production is ASIAN’s key focus for expansion. In 1 US$= INR 68.1
Note: *as on 21 June 2018; Source: Bloomberg
Q1FY18, it had doubled capacity in quartz to 1,600 sqm per day with
an investment of INR 2.0bn at its Dalpur plant in Gujarat. The company
Price & Volume
plans to further expand quartz capacity by 5,600 sqm per day by July
700 2.0
2018. The new plant will primarily focus on exports.
600 1.5
Choose the asset-light way: Patels go for a professional approach 500
1.0
ASIAN is increasingly focused on asset-light model to expand capacity 400
0.5
with its rich experience and connectivity with Morbi-based firms in 300
Gujarat. The company also outsourced 5.94mn sqm with Morbi-based 200 0.0
firms. While other listed firms have lost market share in the past two
Vol. in mn (RHS) Asian (LHS)
years due to breaking of a JV, ASIAN has gained a market share of
Source: Bloomberg
60bp in FY18. It is planning to set up a new facility in South India as
well as in Morbi, Gujarat, both through the JV model. Shareholding (%) Q1FY18 Q2FY18 Q3FY18 Q4FY18
Promoter 32.4 32.3 32.7 32.5
Focus on B2C: widen retail pie to improve margin, working capital Institutional Investor 9.8 10.3 12.4 13.8
The company is increasing its focus from B2B to B2C segment through Other Investor 25.1 24.2 20.2 18.5
General Public 32.6 33.2 34.7 35.1
increase in the distribution network. In the past three years, it has
Source: BSE
increased its dealer strength by 50% to 6,000. Thus, contribution of the
retail segment has gone up from 30% in FY15 to 39% in FY18. Price performance (%) 3M 6M 12M
Sensex 6.9 5.0 13.3
Increased share in the retail segment will not only improve margin by
Asian Granito India (27.0) (37.7) (18.8)
but also reduce working capital. The company has vision of increasing Kajaria Ceramics (11.8) (30.0) (27.1)
retails sales to more than 50% and to reduce working capital to 60 Somany Ceramics (20.1) (42.2) (32.5)
Prism Johnson (12.7) (14.6) (13.8)
days by 2021 (from present 94 days).
Source: Bloomberg
Valuation
We initiate coverage of Asian Granito India with an Accumulate Price performance (%)
rating with a price target of INR 356 based on 12x FY20E earnings 160
(PEG of 0.4x). At a CMP of INR 335, the stock is trading at 11x FY20E
Rebased to 100
140
earnings, the lowest in the ceramic tiles industry. Taking into
120
account possible margin expansion from quartz manufacturing and
reduction in working capital due to increased focus on retail sales, 100
we expect ROCE and ROE to improve by 460bp and 400bp to reach 80

19% and ~16% in FY20E, respectively. Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
Asian Granito Sensex
Source: Bloomberg
Key Financials
March (INR mn) (%) (INR mn) margin (%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY17 10,639 4.7 1,271 44.6 479 85.8 15.0 11.2 13.0 22.3 21.5
FY18 11,556 3.0 1,390 9.3 544 16.7 17.5 12.2 14.4 19.2 19.3
FY19E 13,397 14.4 1,622 16.7 708 24.0 21.7 13.5 16.4 15.5 16.5
FY20E 16,373 22.2 2,003 23.5 970 37.0 29.7 16.2 19.0 11.3 13.3

Asian Granito India

 Shift to retail sales to improve working
700 Ramp up of Reduction in
the quartz working
capital and margin
plant capital
600  Expansion in high margin quartz
business to further boost margin.
500
 Companies focus on incremental capex
via an asset-light model and reduction
400
in the working capital cycle to improve
1 2
balance sheet
300
Valuation trigger
200
1. Ramp up of the quartz plant
Jun-17
Dec-17
Apr-18
Jun-18
Apr-19
Jun-19
Dec-18
Aug-17
Aug-18
Feb-19
Oct-17
Feb-18
Oct-18
2. Reduction in working capital
Source: Bloomberg, Elara Securities Estimate Key risks

 Low promoter stake (32%)
Valuation overview
 High related party transactions
(INR mn)
PAT for FY20E 894 Our assumptions
P/E for FY20E earnings (x) 12  Revenue CAGR of 19% over FY18-20E
Target market cap 10,725
based on a volume CAGR of ~14%
No of shares (mn) 30.0874
Target price (INR) 356  EBITDA margin expansion by 20bp
Note: pricing as on 21 June 2018; Source: Elara Securities Estimate from FY18-20E
Valuation driver: the lowest P/E among peers

20
15
(x)
10
0
FY09
FY18
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19E
FY20E
Valuation driver: second-highest margin in the industry

20
15
(%)
10
0
Net Margin ROCE (%)

Asian Granito India

Net Revenues 10,639 11,556 13,397 16,373 20,000 12.5
EBITDA 1,271 1,390 1,622 2,003 12.2
16,000
Add:- Non operating Income 35 29 32 36 12.1
(INR mn)
12.0
OPBIDTA 1,306 1,419 1,654 2,039 12,000 11.9
(%)
12.0
Less :- Depreciation & Amortization 242 254 272 291
8,000
EBIT 1,064 1,165 1,382 1,748
Less:- Interest Expenses 396 365 326 300 4,000
PBT 669 800 1,056 1,448
Building Materials
0 11.5
Less :- Taxes 190 256 349 478 FY17 FY18 FY19E FY20E
Adjusted PAT 479 544 708 970 Net Revenues EBITDA Margin
Minority Interest 43 43 56 76
Adjusted PATafter Minority Interest 436 501 652 894
Reserves 3,710 4,016 4,518 5,206
Minority Interest 201 324 379 455 1,200 85.8 100
Borrowings 4,021 3,438 3,354 3,354 1,000 80

Total Liabilities 8,232 8,079 8,552 9,317
(INR mn)
800
60
Gross Block 6,651 7,048 7,548 8,048
(%)
600 37.0
Less:- Accumulated Depreciation 2,389 2,730 3,002 3,293 24.0 40
400 16.7
Net Block 4,262 4,317 4,546 4,755
200 20
Add:- Capital work in progress 11 115 115 115
Investments 165 225 225 225 0 0
FY17 FY18 FY19E FY20E
Adjusted PAT PAT Growth
Total Assets 8,232 8,079 8,552 9,317
Cash Flow Statement (INR mn) FY17 FY18 FY19E FY20E Source: Company, Elara Securities Research
Add/Less : Working Capital Changes (463) 392 (287) (554)
Operating Cash Flow 652 1,526 986 971 Return ratios
Less:- Capex (410) (413) (500) (500)
20 19.0
Free Cash Flow 243 1,113 486 471
Financing Cash Flow (258) (944) (676) (506) 18 16.4 16.2
(%)
Investing Cash Flow 28 (31) 32 36 16 14.4

Net change in Cash 13 138 (157) 0 13.5
14 13.0
Ratio Analysis FY17 FY18 FY19E FY20E 12.2
Income Statement Ratios (%) 12 11.2
Revenue Growth 4.7 3.0 14.4 22.2
10
EBITDA Growth 44.6 9.3 16.7 23.5 FY17 FY18 FY19E FY20E
PAT Growth 85.8 16.7 24.0 37.0 ROE (%) ROCE (%)
EBITDA Margin 11.9 12.0 12.1 12.2
Net Margin 4.2 4.6 4.9 5.5
ROE (%) 11.2 12.2 13.5 16.2
ROCE (%) 13.0 14.4 16.4 19.0
EPS Growth (%) 39.4 16.7 24.0 37.0
DPS (INR/Share) 3.0 3.4 3.4 3.4
P/E Ratio (x) 22.3 19.2 15.5 11.3
EV/EBITDA (x) 21.5 19.3 16.5 13.3
EV/Sales (x) 2.6 2.3 2.0 1.6
P/BV (x) 2.5 2.3 2.1 1.8
Dividend Yield (%) 1.1 1.2 1.5 2.0

Asian Granito India
Company Description
Established in year 2000, Asian Granito India is the fourth-largest manufacturer of ceramic and vitrified tiles in India.
It has manufacturing facilities at Dalpu, Idar & Dholka in Gujarat) and other JV plants. It has tiles capacity of 32mn
sqm comprising own capacity of 15mn sqm, JV capacity of 11mn sqm and outsourcing capacity of 6mn sqm as on
March 2018. The company also operates quartz manufacturing with 0.53mn sqm capacity and marble capacity of
0.73mn sqm. ASIAN’s extensive range of products includes ceramic wall & floor tiles, polished vitrified tiles, glazed
vitrified tiles, digital tiles, and marble & quartz manufacturing. The company has more than 6000 dealers and sub
dealers, including 231 exclusive franchise showrooms and 16 company-operated display centers across India. ASIAN
sees huge growth potential in all products, with the shift from unorganized to organized firms and its focus on an
asset-light business model.
Exhibit 2: Top Institutional Holdings

Board of Directors & Management Institutions
Holding
(%)
Kamlesh Patel, Chairman & Managing director Sundaram Mutual Fund A/C Sundaram Smile Fund 3.48
Kamlesh Patel has 23 years of experience in the tiles Sundaram Alternative Opportunities Fund - Nano Cap
1.65
Series I
industry. He holds a bachelor’s degree in Arts from GMO Emerging Domestic Opportunities Fund, A Series
Sardar Patel University, and is an active member of 1.85
Of GMO Trust
ICCTAS. Donroy Ceramics LLP 5.48
Vignaharta Ceramics LLP 3.11
Mukesh Patel, Managing Director
Kajaria Portfolio 2.00
Mukesh Patel has 23 years of experience in the tiles
industry. He is also a director of ICCTAS.
Exhibit 3: Shareholding pattern (March 2018)
Exhibit 1: Board of directors
Name Designation
Promoter &
Kamlesh Patel Chairman & Managing director
Promoter
Mukesh Patel Managing Director Group,
32.53%
Suresh J Patel Non-Independent
Bhavesh V Patel Non-Independent
Public,
Kanu B Patel Non-Independent 54.37%
Bhogi B Patel Non-Independent
Maganlal Prajapati Independent and Non-Executive DII, 6.71%
Shankarlal Patel Independent and Non-Executive FII, 6.39%
Hemendrakumar Shah Independent and Non-Executive

Satish Y Deodhar Independent and Non-Executive
Amrut Patel Independent and Non-Executive
Ajendra Patel Independent and Non-Executive
Indira Nityanandam Independent and Non-Executive
PR Chaudhari Independent and Non-Executive

Asian Granito India
Coverage History
650
600
550
500
450
Building Materials
400
1
350
300
250
Jun-17
Apr-18
Jun-18
Dec-17
May-18
Aug-17
Sep-17
Nov-17
Jul-17
Feb-18
Oct-17
Jan-18
Mar-18
Not Covered Covered

1 21-Jun-2018 Accumulate INR 356 INR 335


Disclosures & Confidentiality for non U.S. Investors

The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this
Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in
understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of
companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent
evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own
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any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the
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change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this
document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India)
Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or
derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her
personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly
related to specific recommendations or views expressed in this report.
Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private
Limited.
Elara Securities (India) Private Limited was incorporated in July 2007 as a subsidiary of Elara Capital (India) Private Limited.
Elara Securities (India) Private Limited is a SEBI registered Stock Broker in the Capital Market and Futures & Options Segments of National Stock Exchange of India
Limited (NSE) and in the Capital Market Segment of BSE Limited (BSE).
Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.
The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in
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Elara Securities (India) Private Limited offers research services primarily to institutional investors and their employees, directors, fund managers, advisors who are
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Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.
Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial
interest in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial
ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara
Securities (India) Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately
preceding the date of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or
more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her
relative or Elara Securities (India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the
Research Report.
Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.
Research analyst or Elara Securities (India) Private Limited have not received any compensation from the subject company in the past twelve months. Associate
entities of Elara Securities (India) Private Limited may have received compensation from the subject company in the past twelve months. Research analyst or Elara
Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve
months. Research analyst or Elara Securities (India) Private Limited or its associates have not received any compensation for investment banking or merchant
banking or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate
entities may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject
company or third party in connection with the Research Report in the past twelve months.
40
Disclaimer for non U.S. Investors
The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although
we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation.
Disclosures for U.S. Investors

The research analyst did not receive compensation from Kajaria Ceramics Limited, Somany Ceramics Limited, Asian Granito India Limited and Prism Johnson
Limited.
Elara Capital Inc.’s affiliate did not manage an offering for Kajaria Ceramics Limited, Somany Ceramics Limited, Asian Granito India Limited and Prism Johnson
Limited.
Elara Capital Inc.’s affiliate did not receive compensation from Kajaria Ceramics Limited, Somany Ceramics Limited, Asian Granito India Limited and Prism Johnson
Limited in the last 12 months.
Elara Capital Inc.’s affiliate does not expect to receive compensation from Kajaria Ceramics Limited, Somany Ceramics Limited, Asian Granito India Limited and
Prism Johnson Limited in the next 3 months.
Disclaimer for U.S. Investors
This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it
should not be relied upon as such.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or
strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice,
and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the
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note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a
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decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation
of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is
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Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not
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future performance could differ materially from these “forward-looking statements” and financial information.
41
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Gangadhara Kini US, Australia gangadhara.kini@elaracapital.com +91 22 6164 8558
Quantitative, Alternatives, Sales Trading & Dealing
Sunil Jain Quantitative & Alternates sunil.jain@elaracapital.com +91 22 6164 8531
Manan Joshi India manan.joshi@elaracapital.com +91 22 6164 8555
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Nupur Barve India nupur.barve@elaracapital.com +91 22 6164 8532
Ravi Sunder Muthukrishnan Ph D Head - Institutional Equity Research ravi.muthukrishnan@elaracapital.com +91 22 6164 8572
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The 2020 Story: Ceramic Tiles

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The 2020 Story: Ceramic Tiles

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Increasing

The 2020 Story

because at current prices, plant ROCE would be hovering around the

Market leaders in other building materials, such as plywood & sanitary

rerating. Firms with a higher proportion of low- to mid-priced products

Worst behind us ………………………………………………………………………………………………………………………… 3

Industry Annexure …………………………………………………………………………………………………………………….. 15

2 Elara Securities (India) Private Limited

Elara Securities (India) Private Limited 3

Exhibit 4: India posts ~8% consumption CAGR over CY06-16

Exhibit 5: India consumption ~280bp higher than the

Note: CY16; Source: CMIE, Elara Securities Research

4 Elara Securities (India) Private Limited

Source: Industry, Elara Securities Research

However, our bottoms up analysis reveal the trend is 0

Elara Securities (India) Private Limited 5

While the number of houses completed is low, what has 10

Recently, two listed companies received a huge order

6 Elara Securities (India) Private Limited

Elara Securities (India) Private Limited 7

Exhibit 23: Super compact and compact four-wheeler

Source: Company; Elara Securities Research

quarters, the Company has achieved Net Sales of

Source: DLF press release FY18 results, Elara Securities Research

Apart from this, subdued real estate prices and a low

Property cost Affordability Annual income

Source: HDFC, Elara Securities Research

8 Elara Securities (India) Private Limited

manufacture low-priced sanitary ware. Tiles consumption multiple (x) 0.4

35 Tiles demand delta (mn sq ft) (30)

15 13 Construction (mn sq ft) 32

10 Tiles consumption multiple (x) 1.2

Source: Ministry of Drinking Water and Sanitation, Elara Securities Estimate

Elara Securities (India) Private Limited 9

% of all-India demand 17 100

Growth in replacement demand (%) 7.8

10 Elara Securities (India) Private Limited

If the industry is unable to pass on gas price, it would

Orient Bell (NR) 3.3 3.2 - - 32

Note: NR is Not Rated; Source: Industry, Elara Securities Estimate

Morbi gas price is determined by a three-month average

Elara Securities (India) Private Limited 11

GVT 17 70 12 2,27,37,500 271 236 700 39 34 3

12 Elara Securities (India) Private Limited

Exhibit 33: Margin fall leads to cracks in valuation

Kajaria Ceramics Somany Ceramics Asian Granito India

Source: Company, Elara Securities Research

Elara Securities (India) Private Limited 13

14 Elara Securities (India) Private Limited

Exhibit 36: Ceramic tiles accounts for 85% of the 80

Ceramic tiles and Sanitary ware 70

Note: prices indexed to Kajaria Ceramics; Source: Industry, Elara Securities

Based on the type of tile, the industry can be classified

Ceramic floor & wall tiles segment: Accounts for 42.5% of

Polished vitrified tiles segment: Accounts for 42.5% of

Elara Securities (India) Private Limited 15

Exhibit 40: Tiles account for 8% of cost of construction

1 sqft. 1000 sqft.

Sand 1.45 sqft. 1450 sqft.

Monthly cash outlflow for building material Basic rate of material

Source: HAPPHO, Elara Securities Research

16 Elara Securities (India) Private Limited