“Deep Dive into Indian Ceramic Sector –

An Equity Research Perspective”

Summer Internship Report

Submitted in partial fulfilment of the requirements
For
2 Years Full Time MMS Course
(Academic Year 2018-19)

SUBMITTED BY

Name: Hitesh Anand Singh

MMS Roll No. MG1820-B50

(Batch year 2018- 2020)

N. L. Dalmia Institute of Management Studies & Research

Mumbai

1
Acknowledgements

The success and final outcome of this project required a lot of guidance and assistance
from many people and I am extremely privileged to have got this all along the completion
of my project. All that I have done is only due to such supervision and assistance and I
would not forget to thank them.

It gives me immense pleasure to express my deepest sense of gratitude and sincere thanks
to my guide, Mr Gaurav C. Jain (Sr. Group Vice President – Institutional sales, Motilal
Oswal Financial Services Ltd.) for his guidance, suggestions and support for this work. His
valuable feedbacks and encouragements have helped me enhancing my knowledge about
project as well as the areas outside the purview of my project.

I extent my sincere gratefulness towards Ms Pradnya Ganar (Institutional Research,

Motilal Oswal Financial Services Ltd.), for sharing her insights about the industry and
helping me structuring my project as per the industry needs.

I owe my deep gratitude towards my internal guide, Prof. Khushboo Vora, who helped me
on critical parts of project and suggested some valuable approach for valuation. She has
always made sure to keep a follow-up on the projects & suggest changes if needed.

I consider myself fortunate enough to get an opportunity to work with Motilal Oswal
Financial Services Ltd. which is India‟s leading financial services company. This has given
me great exposure on financial markets and investment opportunities in India.

(Hitesh A. Singh)

2
3
Executive Summary

The Project report exhibits the analysis of Indian ceramic sector and assessment of
financial performance of various listed companies in ceramic sector.This report outlines
the details and information from all sector related macro parameters to company‟s core
performance and also comment on valuation and future outlook of company.

Chapter 1 gives brief understanding of the ceramic product, its characteristics,

manufacturing process and product segment in ceramic industry, raw material
requirements and how to choose tiles depending on various parameters. With knowledge of
all these product related parameters one can understand the ceramic industry in better way.

Chapter 2 & 3 states that why ceramic industry looks an attractive option for investment
and what all factor drives the growth of this industry. Ceramic industry has seen sluggish
phase in last 5 years and strong revival is waiting. Formalization of economy which
causing shift from unorganised to organised sector and key growth drivers such as growing
real estate market, govt. policies of “Pradhan Mantri Awas Yojana”, “Swatchh Bharat
Abhiyan” and building of 100 smart cities/townships across India, low per capita
consumption of tiles in India, levy of anti-dumping duty on imports from China, and
Regulatory development in Industry by RERA, GST and E-way bill. On the other hand
volatility in fuel prices is the major constraint of industry.

Chapters 5 case study shows how Jewellery industry has grown by leaps and bounds. How
demonetization, GST and mandatory hallmarking has shifted the industry structure from
unorganised to organise. Titan has given around 300% return in last 3 years. Similar effect
of unorganised to organised shift can be observed in ceramic sector due to implementation
of GST and NGT‟s order on ban of coal gasifier.

Chapter 6 & 7 is analysis of different companies in ceramic sector on the basis of various
parameters. Chapter 6 states the porter‟s five forces and analyse all companies for their
competitive intensity. Comparison on the basis of market share, geographical presence,
distribution network, advertisement and promotional spending and sales value of major
Indian players with capacity expansion plans. Chapter 7 analyses companies based on
input cost driver in production process and shows which company is working efficiently.
Comparison on the basis of cost of material consumed as a % of sales, cost of power and
fuel as % of sales and employee cost as a % of sales.

Chapter 8 & 9 is about the main essence of this report, where financial analysis of
companies and valuation are done. In financial analysis companies are compared on the
basis of their past performance, Ratio analysis and Altman Z-score for bankruptcy. After
rigorous financial analysis and different assessments two companies, Kajaria ceramics and
Cera sanitary ware are selected for valuation out of 8 companies taken for analysis. Based
on average of last 5 year‟s 1 year forward PE valuation of both the companies are done and
target price for 12 months is calculated.

4
TABLE OF CONTENT (Hyperlinked)

Chapters Page
no.
1. Introduction to MOFSL 6
2. Understanding the ceramic products 8
3. What are the key growth drivers and constraints for ceramic industry? 11
i. Key growth drivers 11
ii. Key constraints 16
4. Breaking down the last 5 years of ceramic industry 17
5. GST: Boon or bane for the industry? Role of unorganised sector 20
6. Case study: Jewellery Industry has grown by leaps and bounds 21
7. Porter’s 5 force analysis 24
i. Market share 25
ii. Geographical presence 29
iii. Distribution network 30
iv. Advertisement and promotion spending 31
v. Sales volume of major Indian players and capacity expansion plans 34
8. Analysis of cost drivers in production process 37
i. Cost of material consumed as % of net sales 37
ii. Cost of power and fuel as % of net sales 38
iii. Employee cost as % of net sales 40
9. Financial analysis of all companies 41
i. Assessment of past performance (Horizontal analysis) 42
ii. Ratio analysis 49
iii. Prediction of bankruptcy by Altman Z-score 53
10. Valuation of company and recommendation 56
i. Kajaria ceramics 58
ii. Cera sanitary ware 65
11. Reference & bibliography 71

5
Introduction to Motilal Oswal Financial Services Ltd.

About MOFS

The company was formed by Motilal Oswal and Ramdeo Agrawal in 1987 after acquiring
membership of Bombay stock exchange. Motilal Oswal Financial Services is
headquartered in Mumbai and as of March 2018 it had a network spread over 600 cities
and towns comprising 2400+ Business Locations and more than 9 lakh registered
customers.

Motilal Oswal Securities is a depository participant of the NSDL and the Central
Depository Services Limited (CDSIL) in 2010. In 2011, the company started offering
advisory services and derivatives on NSE as well as BSE. Company stepped into private
equity and investment banking in 2006. In the same year, the company acquired peninsular
capital markets, South Indian brokerage firm. In 2006 and 2007 company tied up with SBI
and PNB to offer online trading to its customers. In 2008 company created one of India‟s
largest Equity dealing and advisory rooms, spread over 26000 sq. ft. in Malad, Mumbai.

To set up a Mutual Fund business, Motilal Financial Services (through its subsidiary
Motilal Oswal Securities Ltd.) received the final certificate of registration approval from
SEBI in January 2010.

Investment management and advisory services is provided by Motilal Oswal Asset

Management Company (which is 100% subsidiary of Motilal Oswal Securities Ltd) to
Investors based within and outside India having portfolio management services business,
ETFs and Mutual fund. MOAMC is one of the fasted growing asset management
companies in India and has assets crossed the $1billion mark in June 2015.

Aspire Home Finance Corporation Ltd. is a subsidiary of Motilal Oswal Securities Ltd.
AHFCL is a professionally managed housing finance company.

Awards and recognition

 Mr Motilal Oswal, Chairman & MD is awarded as Outstanding Institution Builder

of the year in The AIMA Managing India Awards
 Motilal Oswal Financial Services Ltd wins the Brand of the Year Award at the
CNBC TV18 - India Business Leadership Awards
 MOFSL has been featured in Forbes Super 50 Companies 2017
 Motilal Oswal Securities was awarded with Best Performing National Financial
Advisor Equity Broker Award in 2012, second time in succession
 Motilal Oswal Securities Ltd. rated as No.1 Broker in ET Now – Starmine Analyst
Awards 2009

6
Board of Directors

Name Designation
Mr. Motilal Oswal Chairman & M. D. & CEO
Mr. Ramdeo Agrawal Joint Managing Director
Mr. Ajay Menor Whole Time Director
Mr. Vivek Paranjpe Independent Director
Mr. Ashish Somaiya CEO – Asset Management Business
Mr. Vishal Tulsyan CEO – Private Equity Business
Mr. Rajat Rajgarhia CEO – Institution Equities

Diversified Business

Motilal Oswal Financial Services Ltd (MOFSL) is a well-diversified financial services

company offering a range of financial products and services mentioned below.

Retail broking
& distribution

Home Institutional
Finance Equities

MOFSL
Asset Private
Management Equity

Private
Investment
Wealth
Banking
Management

7
Chapter 1
Understanding the ceramic products

What is Ceramic?

The word ceramics is derived from the Greek term keramos, means “potter‟s clay” or
keramikos means “clay products”. Traditional use of ceramic started with the use of clay
and converting this raw material i.e. clay into some tangible product. A ceramic is
an inorganic non-metallic solid made up of compounds that have been shaped and then
hardened by heating to high temperatures.

Characteristics of Ceramics

 Brittle in nature
 Chemically inert (Do not react with other chemical, not affected by environment)
 Long life
 High strength (Strong compressive load but weak for tensile and bending load)
 Hard, wear resistant, thermally insulating and non-magnetic

Manufacturing process of ceramics

Mixing and
Batching Grinding Spray drying
(Wet or Dry)

Forming
Glazing Drying (Dry pressing or
Extrusion)

Testing of final
Kiln Firing product and
packing

Production process of ceramics can be divided in following steps shown above.

8
In the very first step of manufacturing, ceramics raw materials are identified and depending
on the requirement of final product they are classified. Raw material also determines the
colour of tile body, which can be red or white in colour depending on amount of iron
oxide. Batch calculations are thus required to obtain the desired product from raw material.
In order to control the purity, particle size and heterogeneity of product it is necessary that
naturally occurring rocks and minerals which are used as raw material should go under
special processing. Chemically prepared powders also are used as starting materials for
some ceramic products. These synthetic materials can be controlled to produce powders
with precise chemical compositions and particle size. Sometimes to improve the mixture it
is necessary to add water and then it is called wet milling. If wet milling is used than it is
followed by spray drying process to remove the excess water content.

The next step is to form the ceramic particles into a desired shape. This is accomplished by
the addition of water and/or additives such as binders, followed by a shape forming
process. Some of the most common forming methods for ceramics include extrusion, slip
casting, pressing, tape casting and injection moulding. After the particles are formed, these
"green" ceramics undergo a heat-treatment (called firing or sintering) to produce a rigid,
finished product.

Major product segment of ceramic industry

Indian ceramic industry which constitute mainly tiles, sanitary ware and crockery. Out of
which major chunk is contributed by Tiles segment which alone account for around 85-
87% of total industry value and rest accounted by sanitary ware and crockery.

Ceramic
Industry

Tiles Sanitaryware Crockery

Vitrifies
Wall Floor (Glazed or Porcelain
polished)

9
Vitrified
(Glazed or
polished)

Saluble salt Double charged Full body

Major raw material required

 Clay
 Feldspar (This improves product‟s hardness, durability and resistance to chemical
reaction)
 Pottery stone
 Silica sand
 talc

How to Choose and Maintain Ceramic Tiles

There are different types of ceramic tiles available in market which serves different
purposes. It is important for one to understand the classification of tiles before studying the
industry. There are some key factors to consider when specifying / buying ceramic tiles.

 Area of use: when specifying tiles it becomes important to consider the area of use
i.e. floor or wall. Wall tiles are often lighter and thinner than floor tiles; the glazes
used in manufacturing of wall tiles are also different than floor tiles. Floor tiles are
designed to resist abrasive forces from foot traffic.
 Condition of use (wet or dry, traffic condition, exposure to stress): weather,
sun, big temperature change, prolonged contact with water, etc. Tiles differ in their
capacity to absorb water, depending on water absorption capacity they are used for
specific purpose. For instance the bathroom tiles absorb less water and they are
resistant to stain and chemicals. Bathrooms floor tiles are also slip resistant.
 Depending on amount of traffic: For floor tiles subjected to high amount of
traffic such as public areas in shopping centres, restaurants, meeting halls,
hospitals, offices and factories, the tiles chosen must be hard, high in mechanical
strength, show high resistant to abrasion and slip as well as resistant to stain and
chemical attack. For public areas, heavy duty tiles such as porcelain tiles are
preferred to glazed tiles because they are more compact and possess higher
mechanical strength.

10
Chapter 2
What are the key growth drivers and constraints for ceramic industry?

Key growth drivers

Growing real estate market:-

It is expected that India‟s Real estate sector will reach US$ 1 trillion by 2030. It will
contribute 13 per cent of the India‟s GDP by 2025. In June 2018, RBI included housing
loans up to Rs 3.5 million (US$ 54,306) in priority sector lending in metro cities, this was
done to boost affordable real estate. Loans under priority sector lending are relatively
cheaper.

For real estate, growth in urban population is the key element. And rapid urbanisation in
past decade bodes well for this sector. With migration of around 10 million people every
year to cities it is expected that urban population will reach 543 million by 2025.

India's Real Estate Market Urban population in India

(US$ billion) (millions)
1200 600 543
1000 461 483
1000 500 429
800 650 400
600 300
400 200
120
200 100
0 0
2017 2025 2030 2015 2018 2020F 2025F

 Residential space: Residential segment contributes 80 per cent of the real estate
sector. Housing launches across top eight Indian cities increased by 75 per cent in
2018 to 182,207 units. In Oct-Dec 2018 quarter year-on-year increase in home
loans in India by 17.1 per cent.

 Commercial space: With growth in ITeS/IT, BFSI, consulting and manufacturing

it leads to growth in office market. Recent relaxation in FDI norms and huge
potential of Indian market is attracting new companies to foray into Indian market.
Co-working space across top seven cities has increased sharply in 2018 (up to
September), reaching 3.44 million square feet, compared to 1.11 million square feet
for the same period in 2017.

11
 Retail space: We all are aware of boom of consumerism in India; organised retail
sector is growing 25-30 per cent annually. Retail shopping malls are projected to
expand up to 12-15 billion square feet by 2020 with around 32 new malls are
expected to start their operation in 2019.

 Hospitality space: Government is coming with numerous initiatives to promote

tourism in India. Majorly tier II and tier III cities under such initiatives are
generating high demand for hotels. Mumbai and NCR are by far the largest
hospitality market in India followed by other metro cities. Hotel room supply in the
country increased 7.5 per cent in FY18

Government policies such as “Pradhan Mantra Awas Yojana (PMAY)”, “Swatchh

Bharat Abhiyan” and building of 100 smart cities/township across India.

 Pradhan Mantri Awas Yojana (PMAY): It is an initiative by Government of

India in which affordable housing will be provided to the urban poor with a target
of building 20 million affordable houses by 31 March 2022. This project will be
completed in three phase.

Phase1 - From April 2015 to March 2017 to cover 100 cities.

Phase2 - From April 2017 to March 2019 to cover additional 200 cities.
Phase3 - From April 2019 to March 2022 to cover the remaining cities.

It is estimated that in Urban India there is housing shortage of around 10million units, this
issue is being addressed through Housing for all initiative. Under this initiative more than
6.85 million houses have been sanctioned up to December 2018. This talks about the
volume of business which is available for ceramic industry in coming years. Affordable
Housing through Credit Linked Subsidy offers interest subsidy to low income and medium
income group. In union budget of 2018-19, Rs. 27,505 crore has been allotted for PMAY.

 Swatchh Bharat Abhiyan: In a mission to make India open defecation free

(ODF), Government of India launched SBA in 2014. Under SBA, GoI has target to
build toilets across the country, more than 9 crore toilets have been built across the
country. This initiative helped sanitary ware industry in India. From 2014 to till
date there has been approx. 53% rise in individual household toilets built in the
country. Government allocated Rs. 17843 crore in union budget 2018-19.

 Smart cities project: Development of 100 smart cities as satellite towns of larger
cities. Accelerate urbanization; improve quality of life through development of
infrastructure. Rs. 6169 Crore allocated in union budget 2018-19.

12
Per capita consumption of tiles in India is low as compare to other developing
countries

Low per capita consumption speaks about the ample amount of scope for the Indian
ceramic industry. India‟s per capita consumption stood at 0.59 SQM which when
compared to other developing nations is very low. Below graph demonstrate the per capita
consumption of few developing countries. Even world average per capita consumption is
1.50 SQM. Though ICTI (Indian Ceramic Tile Industry) has reported a substantial growth
in terms of production and consumption in the last decade still we can say that there is
tremendous opportunity for companies to penetrate more in future.

Per capita consumption (in SQM)

5 4.4
3.9
4
3.39
3

2 1.41
0.59
1

0
Veitnam China Brazil Indonesia India

Favourable demographic profile along with increase in disposable income

With increase in population it is expected that India will be most populous country by
2022. But with majority of population belonging to youth and working age it is certain that
India will be one of the fastest growing economies in the next decade. Over the years
disposable income of an individual has increased and we can observe in society that trend
of nuclear families are on rise. All these factors with demand for aesthetic flooring are
expected to augur well for ICTI.

Growth in household income in Indian cities (CAGR 2011-18)

12%
10%
10% 9% 9%
8% 8% 8% 8%
8%
6%
4%
2%
0%
Mumbai Kolkata Pune Hyderabad Chennai Banglore Delhi/NCR

13
Replacement demand

Replacement demand will be another area which the ceramic manufacturers will be
concentrating to expand their revenue. Replacement demand is expected to grow in line
with estimated GDP growth of 7.5% in FY19 and 7.8% in FY20. As replacement demand
is primarily for value-added products, such as GVT, marble and quartz, growth would be
determined by improvement in lifestyle.

Levy of anti-dumping duty on imports from china and huge export potential of India

In FY17 out of total imports of ceramic tiles in India, china alone contributed to 80% of
imports followed by Italy, Spain and UAE. China, the world‟s largest manufacturer of
ceramic tiles contributing around 48% of world‟s tile production, has a unique advantage;
that, of access to cheaper mode of transport (through sea) to southern India. However, on
the basis of trade data of imports of ceramic tiles after the withdrawal of anti-dumping duty
in May 2013 and other findings, the government found that the ceramic tiles that were
exported to India were below normal value and the ICTI has been impacted on account of
this dumping from China. Consequently, the Government of India imposed an anti-
dumping duty on soluble salt double charge, GVT and PVT, porcelain and vitrified tile
from China, for 5 years from March 2016, to a tune of USD 1.87 per SQM, depending on
the exporting company.

Other countries such as Taiwan, Chile, Korea, Brazil and the European Union (EU) also
imposed anti-dumping duty on the import of ceramic tile from china. After reviewing the
impact of this dumping by china, EU in November 2017 imposed for another 5 year anti-
dumping duty on china between (13.9% to 69.7%) depending on the exporting company.

Being the second largest manufacturer of tile in world, India tapped this deficit. India was
4th largest exporter of ceramic tile in CY18 as compared to 11th in CY13. Export accounted
for around 21% of total tiles production in India in CY18.

Regulatory developments in industry such as “Real estate regulation act (RERA)”,

Goods and service tax, E-way bill.

With almost 50% of the industry comprising of the unorganised segment with a high
dependence on the real estate sector, with revision in the GST rates, from 28 % to 18 % in
November 2017, the indirect tax rate is largely in line with the rates prevalent during the
earlier tax structure. GST has created a level playing field as a nationwide levy and has
helped the organised sector, which was facing issues due to a slowdown in the real estate
industry. The implementation of GST is a welcome change for organised sector, as it will
lay the path for formalisation of the sector which in turn will increase the share of
organised sector in the total market.

14
The real estate sector has benefitted by RERA, which was implemented from May 01,
2017, despite it being subdued for a few months as developers put their operations on hold,
to understand and comply with all the regulations. In the long run, RERA makes the real
estate sector more transparent and process driven. RERA has a direct implication on the
ceramic sector as well. In a medium time frame, RERA is expected to bode well for the
organised real estate sector as well as the ICTI.

15
Key Constraints

Volatility in fuel prices and high transportation cost

Natural gas price is one of the major contributors in total cost of production which
accounts for 15-25% of total cost. Volatility in fuel prices affects the cost of natural gas
because price of natural gas is linked to oil and any sharp increase in oil prices intern
affects the cost of production of ceramics and this can hit the margin of tile makers and
results in lower earnings estimates. Being power intensive industry natural gas is required
to fire the kiln. After raw material, electricity and fuel cost account for second largest cost
element.
In Morbi, world‟s second largest ceramic cluster situated in Gujarat use either gasification
plants or natural gas. Considering the fluctuation in gas prices most of the ceramic
manufacturer in Morbi uses gasification plants, which burn coals to generate gas. These
gasification plants are banned but still operational in Morbi cluster, considering the ease of
availability of coal at lower cost.
Although with NGT‟s order in March 2019 to discontinue usage of all types of coal
gasifier considering its adverse effect on environment.

Gujarat Gas Limited is the sole supplier of PNG in the ceramic cluster of Morbi, which
consumes about three million SCM (Standard Cubic Meter) a day. Now after NGT‟s order
all units have no option but to shift to PNG for fuel requirements. This will increase the
production cost since coal was cheaper form compare to natural gas. This production cost
cannot be easily transferred to end user and profit of companies will get affected by this in
short run. However in long run this shift to PNG will be beneficial for the industry with
stable or not very high fluctuations in fuel prices in international market. Few players in
the organised segment have entered into a minimum guaranteed off take agreement, for
supply at a discounted rate to reduce the total cost of production to a certain extent.

Gulf may slap CVD on imports from Morbi

Gulf cooperation council (GCC) is currently probing petition from local companies
seeking anti-dumping duty on Indian ceramic tiles. Under the foreign policy of GoI for
2015-20 gives 3% incentives to exporters under Merchandise exports from India scheme
and 2% duty draw back. The GCC will also be hearing argument over imposing of CVD to
cover MEIS and duty draw back offered by GoI to tile exporters. Each year Morbi ceramic
units export goods worth Rs. 10,000 crore, of which 33% will be exported to gulf
countries.

16
Chapter 3
Breaking down last 5 years of ceramic industry

In last 5 years domestic consumption of tiles has increased but not on par with the capacity
addition and increase in production. In CY17 total production of India had touched 1080
MSM (Million Square Meter) whereas consumption is 760 MSM. Saving grace has been
export which has grown manifold in last 5 years. Most of the export went to the Middle
East and Saudi Arabia which account for 1/4th of India‟s export.

In last 5 years production of Indian ceramics tiles has increased by CAGR 9.34% whereas
consumption in last 5 years has merely grown at CAGR 2.22%. Of total production share
of export is increasing YOY. Export of Indian ceramic tiles from CY12 to CY17 has
grown by CAGR of 47.19% and India is 2nd largest producer and 4th largest exporter of
ceramic tiles in the world. However there is a huge difference between China‟s production
and export compare to India‟s. China is currently producing around 47.23% of world‟s
ceramic production.

Production of ceramic tiles in India

1200 1080
955
1000 850
825
750
800
in MSM

691
600
400
200
0
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Data from April to March

Consumption of ceramic tiles in India

1000
756 763 785 760
800 681 718
in MSM

600

400

200

0
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Data from April to March

17
The top four export countries comprise 70% of total world exports, out of which China has
a largest share of around 40% of the total world exports. While exports have grown
substantially during the last three years ending CY17, total imports of ceramic tiles in
India, reduced sharply by 64% to 10.84 MSM on account of levy of antidumping duty on
soluble salt double charge, porcelain and vitrified tiles from China for 5 years from March
2016.
Out of total import by India, Chinese tiles account for around 80% of the total imports and
imposition of anti-dumping duty on Chinese tiles has resulted in a reduction of import by
more than 50%.

Export of ceramic tile from India

250 228
200 186
in MSM

150 134
102
100 55
50 33
0
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Data from April to March

There are many reasons behind the slow consumption in past 5 years.

Sluggishness in Indian real estate: Currently Indian real estate market is going through
time correction phase after exponential growth from 2003 to 2013. Since real estate is main
driver of ceramic industry and it is going through sluggish phase it does affect the ceramics
consumption in India.

On above of this some decision made by NDA Govt. had affected the industry. There will
be no exaggeration to say this that Demonetization and GST had hampered the growth of
economy to some extent in short term. And it will take time to reach the normalcy.

Demonetization: Announced towards the end of 2016, had disrupted the demand situation
in the country due to liquidity crunch and while industry was trying to overcome this
disruption then new tax regime of GST was implemented from July 2017.

18
High production cost: Higher production cost due to fluctuation in natural gas price
haunted the tile manufacturer most. Also depreciation of rupee in some period affected the
industry. There is a set formula to determine the gas price in Morbi region which take into
account following factors; Three month average of RAS gas (weight 19%), six month
average of British gas (weight 53%) and prevailing spot price (weight 28%). These prices
are linked to Brent crude oil prices. Gujarat gas supplier of natural gas to Morbi ceramic
cluster has hiked gas prices by Rs. 1.75 from 29.95 per SCM in June, 2018.

It is estimated that for every $5 per barrel increase in crude oil prices, there will be
corresponding increase in gas cost by Rs 1.5 per SCM. Further every depreciation of
Rupee by 1 against USD will increase the cost of gas by Rs 0.4 per SCM. Although we
have seen that in recent time crude oil prices have decreased and even rupee appreciated,
this will help the industry and industry will hope that this stability remains in coming
future.

Indian realty sector is in sluggish condition and ceramic industry too should have been in
bad shape since realty sector is the main driver of domestic ceramic demand. Although we
have seen that effect on ceramic industry is not as bad as on real estate. Several
government initiatives like Housing for all (PMAY) and Swatchh Bharat Abhiyan are
major reason behind the better shape of ceramic industry. These initiatives in last 5 years
have contributed up to 60% of incremental demand for low to mid prices products.
However having a closure look says that Swatchh Bharat Abhiyan which drove the
demand of sanitary ware in Indian market and especially in rural India has already seen its
peak and will not contribute much in coming years. On the other hand PMAY will help
this industry for coming 5 years at least since houses has been sanctioned but construction
for all have not taken place.

Overall in last 5 years due slow growth in real estate and some decision of government has
impacted ceramic sector but in medium term there are many positive growth drivers for
this industry as compare to constraints.

19
Chapter 4
GST: boon or bane for industry?
Role of unorganized sector

In the pre-GST era, up to a turnover of Rs 1.5 crore, manufacturing enterprises were not
required to charge and deposit tax. But because of this, whatever taxes you paid on inputs
become part of your cost. Now, that has changed in the post-GST regime and that has
become a problem. Implementation of GST was expected to shift the odds in favour of
organised players by eliminating the pricing advantage (because of tax evasion) enjoyed by
unorganised players. However, poor ground-level implementation, tax compliance
regulation and increased tax differential led to the opposite effect; wherein unorganised
players increased their value and volume share from 49% and 67% in FY14 to 50% and
69% in FY18, respectively.
However, the government has started tackling the problems and reduced GST on tiles from
initial 28% to 18% in November 2017. This has lowered the tax arbitrage enjoyed by
unorganised players. Due to GST distributors started de-stocking the products in market due to
confusion and uncertainty about the impact of GST on business. Since GST was made applicable to
all types of manufacturers hence unorganized players started dumping products in the market
before the new tax law became applicable. This led to excess supply in market.

Un-billed transaction jumped up immediately after the implementation of GST as proper

surveillance was not there in place. Since after GST check posts at the state borders were
removed and manufacturer in unorganized sector now could freely move the products from
one state to another. It was expected that this inter-state movement of goods would be
monitored well with an introduction of E-way bill from 1st April 2018 but there have been
no major impact on prices even after that. While industry has made representation to the
tax authority for creation of check post at Morbi where E-way bill data could be captured.
Supplier in unorganized sector had started dumping the products fearing the E-way bill and
proper surveillance. This led to price crash in the market because of oversupply and most
of the tiles manufacturer registered volume growth (in single digit) their margins got hit
due to price war.

If proper surveillance mechanism is in place it will lead to 10-14% increase in prices of

unorganized sector‟s products. This in turn may bring them on par with branded product‟s
price range and shift of consumer from local to branded product may observed in near
future. According to the government, the number of registered taxpayers have jumped from
64 lakh under the earlier tax regime to over 1.12 crore, a 40 per cent increase. This means
that as many as 48.40 lakh new dealers have entered the new tax regime indicating
formalisation of the economy. we expect ceramic industry to benefit due to implementation
of GST on a longer run, the organised players may feel the pinch in terms of business
slowdown on account of trade disruption at dealer level due to de-stocking for some time.

20
Chapter 5
Case study: Jewellery industry has grown by leaps and bounds

On a trusted path:

Will the shift from unorganised to organised sector benefit ceramic industry and organised
players?

This question can be certainly be answered with an example of Industry which has
observed this shift in recent years and companies like Titan (Tanishq) has grown
tremendously. Jewellery industry which is said to be dominated by unorganised players has
seen Industry dynamics oscillating towards organised brand names post Demonetization
and GST.

•Demonetization Biffurcation of Jewellary

market in %

•Goods and Service Tax Organised* Unorganised

•Mandatory hallmarking of gold

ornaments

58.3
61.5
64.4
69.1
70.8

•Cash transaction upto 2lakh and

67
75.7
76.8

mandatory of pencard above 2lakh in

cash

41.7
38.5
35.6
30.9
29.2

•Contemporary design, lightweight

33
24.3
23.2

jewellery, assured resale value and trust.

2016 2017 2018 2019 2020 2021 2022 2023

Organised Jewellery Industry in India is mostly dominated by SUPER17 (17 organized

jewellery chains that will grab ~42% share in the next five years). The SUPER17 has
significant diversity – in current operations as well as growth strategies. India‟s jewellery
market has actually remained flat at Rs 2.7tn over FY14-18 as both volume and price have
remained stable. However, these 17 companies are estimated to have grown at ~11%
CAGR, implying a clear shift of business towards the organized trade as the latter
aggressively expanded its footprint by an estimated 2mn sq. feet.

21
 Demonetization: Before demonetization almost 85-90 per cent of transactions in
the unorganised jewellery market in India used to take place in cash as opposed to
the organised market where cash transactions were to the extent of 40 per cent.
Unorganised players, who had to switch to credit card-based sales, as was the trend
on the organised side. Now cash crunch in market has affected unorganised
business. Money lending business of unorganised player was their greatest profit
contributor and it has come under pressure in last 3 years.

 GST: Post implementation of Goods and services tax transparency and

accountability in transaction has improved and customers are looking forward to
more organised brand name since unorganised players are not completely GST
compliant. Earlier the tax structure on gold was 1% service tax and 1% VAT which
amounts to 2%. Now GST rates are 3% on gold and change in structure in very
marginal since input tax credit is available to companies. Due to ITC this entire 3%
is not passed on to customers.

 Adoption of mandatory hallmarking policy: Organised retail chains' players

have adopted voluntarily for mandatory hallmarking of gold ornaments and this has
helped them gain consumers‟ trust - a major driver for jewellery purchase - over the
past one year. Mom-and pop jewellers across India suggests that while hallmarking
is yet not mandatory, consumers are increasingly insisting on hallmarked jewellery.
This has increased the cost of procurement for jewellers and the ~25-30% pricing
arbitrage between jewellery chains and standalone jewellers is shrinking.

 Assured resale value: Assured resale value and continuous offer of discounts on
making charges have also seen customers shift to branded retail stores from their
perennial local jewellers. Apart from these there are various advantages in design
offering and weight of jewellery with organised brand names.

Titan Company has skyrocketed:

Titan (Tanishq) is the best example which showcases the shift that has happened in
jewellery sector. In last 3 years Tanishq (Jewellery segment of Titan) is growing by 20-
22% YOY despite slow growth in jewellery industry. This clearly means that Tanishq has
gained market share from unorganised sector and currently organised sector‟s share is 29-
30% which was around 21-22% one year back.

Below graph depicts Titan‟s performance in market. Company has given around 300%
returns in last 3 years. This will continue to grow since the shift from unorganised to
organised sector is still as the rudimentary stage and with stricter policy and compliance
unorganised sector will face more difficulty.

22
Titan's revenue from Tanishq
(Jewellery) in crore

16030

13126

10509
8,717

2016 2017 2018 2019

Given the current design/capital arbitrage, Titan will have a head-start on the customer
acquisition race over FY18-21E. Company is confident on achieving its aspired 25%
jewellery revenue growth further.

Role of custom duty: This industry and big players like Tanishq, TBJ, Kalyan and
Malabar jewellers will get more benefited in future if the custom duty on gold is reduced.
Currently custom duty on gold is 10% and because of this to get the tax arbitrage many
unorganised player import gold through illegal routes of smuggling. As per Gold council of
India, around 150 tonnes of gold is coming through these illegal routes.

All these go through without paying taxes. If the custom duty is reduced and compliance
are much higher than this smuggling of gold will reduce and all gold will come through
official routes. This in future will benefit more to organised sector.

With this case study of Titan (Tanishq) and overall jewellery industry, we can estimate the
benefit of shift from unorganised to organised and same benefit will be there for Ceramics
sector since ceramics sector has not witnessed the shift yet and is on the path of it.

23
Chapter 6
Porter’s 5 force analysis

It is very important to understand porter‟s 5 forces to analyse any industry. All these forces
shape competition in market. We will try to understand and analyse ceramic sector based
on all these forces mentioned below.

Threat of
new entrant

Bargaining Bargaining
Competitiv
power of power of
e Intensity
supplier customer

Threat of
substitutes

Threats of New Entry

Setting a new business or manufacturing plant in ceramic sector is capital intensive. Huge
amount of initial capital is required which restrict the new entrant to some extent.
Customer in this sector prefers quality to some extent because they don‟t frequently change
household products. With increasing trend customers prefer branded product which are
already established in market. The buyer would not believe in new entrant, therefore new
entrant will take time to reach break-even.

Threat of Substitute

Tile‟s Substitute: Hardwood floors, Bathroom carpet, Cement flooring, etc.

Bargaining Power of Suppliers

Abundance of raw material and easy availability in most part of the country gives
advantage and buying power to manufacturers of ceramic product. Due high competition in
suppliers of raw material, buyer‟s i. e. manufacturer of ceramic products gets pricing
advantage.

24
Bargaining Power of Customers

Indian ceramic sector is mixture of organised and unorganised players. These regional and
unorganised players contribute around 45% of total industry. There is price difference
between organised and unorganised sector, this gives the end consumer bargaining power.
High competition amongst players helps the end customer to bargain the price.

Competitive Intensity

In strategy, competitive intensity is defined as the extent to which companies within a

specific industry exerts pressure on one another. Some level of competition is healthy
because it acts as an impetus for organizations. Competition, whether in an industry or
another setting, drives teams and individuals to give their best. In fact, such rivalry is what
keeps a majority of firms on their toes, propelling them to do better than their competitors.

To understand the competitive intensity in ceramic sector we will look at the following
parameters and compare few major organised companies on that basis.

 Market share
 Geographical presence
 Distribution network
 Advertisement and promotion spending as a percentage of total sales turnover
 Sales volume of major Indian players and capacity expansion plans

Market share
Market share in Tile segment
RAK*
3%
AGL
Orient bell
Somany 5%
Nitco 3%
7%
3%

Prism
Unorganised Organised 7%
50% 50% Simpolo*
2%
Kajaria Varmora*
10% 3%
Sun Heart*
2%
Others Murudeshwar
2% 3%

25
Market is a pie and the bigger the slice of the pie the more profit potential. If a business is
growing efficiently and continues to increase its market share they are keeping their
competitors from taking business from them.

During the last decade, organised players have been able to gain a sizable market share on
account of their focus on product innovation, adoption of latest technologies, development
of nation-wide distribution channels, aggressive branding campaigns and robust capacity
expansion projects.

From above pie chart we can observe that Kajaria ceramics, Prism Johnson and Somany
ceramics together have approx. half of organised sector market share.
KCL has been the frontrunner in terms of industry growth, both in volume and value terms.
KCL‟s strategy to differentiate its products in terms of design, pattern and size has helped
attract customers and increase market share. It is also ahead of the curve in introducing
new products like GVT, which has increased the reach to all segments of the market.
Additionally, intelligent marketing and branding campaign and strong relationship with
distributors also resulted in higher mindshare among its prospective customers.
KCL has gained share in terms of volume sold. In the overall industry volume, KCL
increased its share from 7% to 9% between FY14 and FY18. In value terms KCL has 10%
market share with sales value of 2711 crore out of total industry of 27000 crore. Somany
and Prism Johnson stand at 2nd and 3rd spot in market share with sales value of 1712 crore
and 1685 crore respectively in FY18. AGL has 5% of market share with sales value of
1158 crore.

As a business increases their market share their reputation should grow attracting new
business, their sales should increase, their customer base should increase and depending
upon how they manage their cash flow their bottom line profitability should ideally
increase over time. In tiles segment we can say that with major market share and strong
dealer network Kajaria is leading the market.

Market share sanitary ware segment

Parryware
15%

Uroganised Organised
43% 57%
HSIL Cera
15% 24%

Other
organised
3%

26
Indian sanitary ware industry is currently valued at Rs3600 crore. Organised players held
57% of the market share in March 2019. Unorganised players were benefitted from high
rural demand under Swachh Bharat Mission. With 82% of the targeted toilets already
constructed and GST/e-way bill system being effectively implemented, we expect
organised players to recoup market share.
Market share gain for the unorganised segment is largely because of the government‟s
push for toilet construction, especially in the hinterlands.
Indian government launched Swachh Bharat Mission in October 2014, and since then has
built more than 78mn toilets across India at an unprecedented pace. We expect the pace of
the mission to reduce going forward as 87% of the targeted 90mn toilets (to be constructed
by October 2019) are already complete.
Higher rural demand has increased the share of low-priced products in the overall market.

Low end product segment with price range of Rs.500-2000 is completely dominated by
unorganised players and there share has increased from 35% in FY16 to 40% in FY18 due
to Swatchh Bharat initiative. Mid/premium product segment in price range of Rs. 2000-
10,000 is dominated by Cera and HSIL with presence of other companies like Parryware,
Kerovit (Kajaria) & somany. Whereas luxury segment is strongly dominated by Parriware,
this product segment contribute 15% of overall sanitary ware industry with price range Rs.
10,000 to 20,000+

Going forward, we expect the branded/organised players to regain lost market share as the
demand from rapid urbanisation takes over from rural areas.

Market share of Faucet segment

Cera
3%

Jaquar
31%

Unorganised Organised
Others (HSIL,
50% 50%
Kohler, Grohe etc)
16%

The Rs8500 crore Indian faucet industry continues to grow. The higher growth rate is
supported by replacement demand which is more than 2x the institutional market. This
immunes the business from cyclical nature of the real estate sector and provides much
consistent earnings profile with better pricing power. However, the unorganised segment
controls 50% of the total market and has gained small share because of high rural demand

27
in recent years. Jaquar continues to rule the market with over 30% share in the faucet
segment with sales value of 2600 crore followed by fierce competition between Parryware,
HSIL, Cera, Kohler, Grohe, etc.

Cera entered the faucet business in 2011 with 0.9mn capacity. Today, the company has
total capacity to manufacture 3.7mn units, 50% of which is outsourced. The company
recently commissioned its zamac plant to manufacture faucets in-house which will reduce
its dependence on outsourcing. With zamac plant, it seems the company is targeting mid-
income consumers who seek quality assurance by buying a branded commodity at a
slightly higher price.

28
Geographical presence Haryana
Kasar (Somany) – 19.63 MSM

Bahadurgah (sanitary ware HSIL) – 2 mn

unit
Galipur (Kajaria) – 31 MSM
Malutana (Kajaria) – 6.5 MSM
Sikandarabad (Kajaria) – 8.4 MSM
Kaharani and bhiwadi (Faucets
HSIL) – 2.5 mn units Sikandarabad (Orient bell) – 2.55
MSM

Kajaria JV in Morbi
Jaxx pvt Ltd – 10.5 MSM
Cosa pvt Ltd – 5.7 MSM
Tauras pvt Ltd– 5 MSM
Soriso Pvt Ltd– 3.7 MSM

AGL JV/outsourced in
Morbi
(AGL outsourced) – 5.4
Mehsana – 8.91MSM
Dalpur – 1.98 MSM
Dalpur – 13.8 MSM
Idar – 2.64 MSM Bibinagar (sanitary ware HSIL) – 2.2 mn
units
Somany JV in Morbi
Amora tiles – 4.58 Centini cermmica Pvt Ltd(H&R JV)
Somany fine vitrified – 4.29
Vintage tiles pvt ltd – 4.8
Acer granito – 3.3 MSM Kajaria JV
Commandar vitrifies – 4.76 Floera ceramics – 5 MSM
Vicon – 3.98 MSM Vennar ceramics – 2.9 MSM
Kadi(own) – 6.65MSM
Somany -3.5 MSM
Milo Tile LLT(Cera JV)
Anjani tiles (Cera JV)
Vardhaman vitrifies
tiles(Nitco JV) - 8 MSM
Nitco vitrified tile
Orient bell own mnfg and mosaic tile Silvasa
Dora divisiom Hoskote (Orient bell)
Orient bell JV in Morbi Nitco Marble manufacturing
Corial ceramic pvt ld -5.2 Mumbai (Nitco)
MSM (kanjurmarg and
Proton granito alibaug)

H&R Johnson JV in Morbi

Antique marbonite pvt Ltd.
Spectrum Johnson pvt Ltd
Coral gold pvt Ltd.

29
Distribution network:
Kajaria Somany AGL Nitco Cera HRJ
Active Dealers 1945+ 1837+ 1200+ 1050+ 2841+ 1000+
Display centres 38 15 14 13
SKU 2800+ 1400+

Kajaria Somany Nitco For any business “Reach” is the most

Andaman & Nicobar 1 2 1 important parameter. If product or
Andhra Pradesh 57 46 30 service is not easily available in
Arunachal Pradesh 2 market to end consumer than
Assam 28 9 27 company start to lose market share.
Bihar 60 52 54 To gain market share and maintain
Chandigarh 13 6 3 the same, geographical presence of
Chhattisgarh 42 29 26 company is important. Above map
Dadra Nagra Haveli 1 shows how various companies in
Daman and Diu 1 ceramic sector have set up their
Delhi 46 85 18
manufacturing units or Joint ventures
Goa 14 14 9
on various locations. Setting up a
Gujarat 55 127 58
manufacturing unit is largely
Haryana 101 92 31
dependent on few factors, such as,
Himachal Pradesh 51 5 17
J&K 55 54 28
easy availability of raw material,
Jharkhand 49 35 31 easy and cheap availability of labour,
Karnataka 101 104 36 state government policies,
Kerala 163 168 98 atmospheric conditions and good
Madhya Pradesh 80 53 59 transportation facility and easy reach
Maharashtra 165 95 132 to dealers and retailers.
Manipur 2 2 1
Meghalaya 2 2 Even though ceramic clusters are
Mizoram 1 1 present across different states in
Nagaland 2 1 India, Morbi region In Gujarat alone
Nepal 2 28 accounts for 70% of the market share of
Odisha 45 61 39 ceramic production in country. But in
Pondicherry 5 12 7 recent time‟s higher demand in south
Punjab 72 79 45 region, companies are starting
Rajasthan 75 93 29 manufacturing plants or entering into JV
Sikkim 4 with regional players to cater this
Tamil Nadu 138 126 104 demand easily. Southern India is
Telangana 54 57 26 growing at a faster pace as compared to
Tripura 4 3 5 the national growth rate on account of a
Uttar Pradesh 276 245 66 large number of real-estate projects
UttaraKhand 83 44 9 under execution. Furthermore, the
West Bengal 102 103 58 Southern region is the second highest
Total 1945 1837 1050 consumer of ceramic tiles, while
production is largely concentrated in the
western region.

30
Considering the above factors and availability of natural resources & clay (primary raw
material) in abundance in the Godavari district, the AP government has established a
dedicated ceramic cluster at Thatiparthi in Thottambedu mandal of Chittoor district. In
above map we can see that companies like Kajaria has setup plant Floera ceramics Pvt Ltd
and entered into Joint venture with Vennar ceramics to cater the demand in south region.
This step has been taken by many companies to enhance their geographical presence in
south and other region because cost of transportation from Morbi to South is very
expensive as compared to freight rate for importing from other countries. But
implementation of anti-dumping duty on imports from china and capacity additions in
South, the market will be supplied by domestic players like Kajaria Ceramics, Somany
Ceramics, Asian Granito and Cera who have started capacity expansion in South.

The number of days required to reach the dealers‟ place has come down from 20-22 days
to 2-3 days. This has helped dealers to reduce inventory, earlier dealers were maintaining
very high inventory due to higher time of transportation.

From above we understand that Kajaria has its presence in UP which caters to East and
North region, has presence in Rajasthan and Gujarat this caters to high demand in west and
now they are established in south as well through Andhra Pradesh cluster. Kajaria, Somany
are two players who are very good with their supply chain management and providing
inventory to dealers on time. With good dealer margin and wide geographical presence
these companies have performed well in recent year to gain market share.

Advertisement and promotion spending as a percentage of total sales turnovers

Branding is believed to apply more to B2C companies, but B2B companies are not exempt.
A good example to evaluate this is the context of tiles which is a classic example of a
combination of B2B and B2C segments. A good portion of a tile manufacturer‟s sales is to
institutional builders and dealers (B2B segments) while the rest is direct sales to end
consumers (B2C segment).

Presently, the number of suppliers is so large that an average consumer is not aware of the
ceramic tile brands. As per statistics published by ICCTAS, the number of tile producers in
the National Sector is 14 for a share of 40% production (own/outsourced), whereas, the
number of regional tile producers is 200 for a production share of 60%. In terms of brand
awareness, consumers recall only a few brands in the National Sector, namely, HR
Johnson, Orient Bell, Somany, Kajaria, NITCO, and Asian granito. These brands invest in
marketing and advertising and consistently showcase their new designs and technology on
digital marketing platforms and/or via Ceramic fairs.

31
Below line chart depicts the advertisement spending as % of sales turnover and shows how
few companies are aggressively spending on advertisement and promotion activities. If we
look at both the line charts we observe that despite having largest market share, Kajaria
ceramics and HSIL are spending approx. 4-4.5% of total sales on advertisement. Somany
ceramics and Cera is also not behind and constantly spending 3.5-4% on advertisement.

Advertisement spending as % of sales turnover

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2010 2011 2012 2013 2014 2015 2016 2017 2018

Kajaria Somany Asian granito Nitco

If we look at the value terms Kajaria has spent Rs. 105.27 crore on advertisement and
branding activities in FY18. Today if ask anyone about ceramic sector Kajaria is one name
that no one can miss out. If we see Kajaria had spent Rs. 79.93 Crore in FY17 and had
spent Rs. 105.26 crore in FY18 which shows 31.69% increase YOY in spending amount.
Apart from Akshay Kumar, the tile brand ambassador, it has now tied up with the youth
icon Anushka Sharma to make her the brand ambassador for its Kerovit brand (faucets and
sanitary ware).

Advertisement spending in crore

120
100
80
60
40
20
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Kajaria 12.82 16.31 21.9 26.62 32.09 54.26 56.9 79.93 105.26
Somany 5.7 12.5 11.05 15.192 19.61 28.91 34.42 66.53 59.54
Asian granito 7.83 4.87 7.05 6.89 5.73 4.48 9.09 15.42 28.55
Nitco 9 9.85 9.07 10.44 15.1 16.14 13.86 17.97 14.98

32
Other companies are also spending money on these activities in similar ratio to sales, but
since the amount spent is not very high as compare to Kajaria, HSIL and H&R that is why
there spending is not much visible to end customers.

Understanding the importance of branding in such intense competitive industry Somany

ceramics has engaged a top notch creative agency Ogilvy & Mather (India‟s No.1
Advertising Agency) who understands the dynamic advertising & media environment and
somany has recently taken Salman Khan as their brand ambassador. Company launched a
fresh and peppy 360-degree TV advertisement campaign, „Aapka style, Somany style‟,
which reinforced the brand‟s commitment to meet the diverse customer personalities. To
provide thrust to sanitary ware & Bath Fittings business Company had undertaken a brand
positioning activity by associating with Royal Challengers Bangalore (RCB) as “Official
Partner” for IPL 2018 with category exclusivity.

Advertisement spending as % of sales turnover

6.00%

4.00%

2.00%

0.00%

Cera H&R HSIL Orient bell

To establish a direct connect with the consumers, H&R Johnson has signed Bollywood
actress Katrina Kaif as its brand ambassador to endorse all its established and new business
segments. CERA which embodies Style and Innovation signed Bollywood style icon Mrs
Sonam Kapoor Ahuja as its brand ambassador.

Benelave, from the house of HSIL, has signed leading Bollywood actor Shraddha Kapoor
as its brand ambassador to elevate brand awareness and visibility. Benelave offers a wide
range of bath space products to suit the needs of value-seeking consumers. Asian granito is
also running advertisement campaign “Chala de Jaadu” on TV and other media platforms.

Advertisement spending in crore

120
100
80
60
40
20
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Cera 9.647 9.78 14.53 17.708 27.034 33.1 25.69 32.6 45.51
H&R 33.15 48.51 40.85 52.75 54.19 83.92 65.47 75.17 76.42
HSIL 12.39 10.46 11.14 23.02 42.25 51.12 73.32 77.89 107.38
Orient bell 4.08 4.91 7.04 4.84 5.23 8.08 11.5 18.51 28.51

33
Celebrity endorsement

Company Brand Ambassador

Kajaria Tiles – Akshay Kumar
Kerovit (Sanitary ware and faucets) – Anushka Sharma
Plywood – Ranveer Singh
Somany Salman Khan
RCB – Official partner
Cera Sonam Kapoor
HRJ Katrina Kaif
HSIL Benelave (Bathroom solutions) – Shradha Kapoor

In a nutshell all companies understand and spend money on advertisement but Kajaria,
Somany, Cera and Johnson are few names that retail consumers can recall. This has helped
over the years to these companies to gain major share in organised sector. Unorganised
sector do not indulge much in promoting activities through advertisement and there focus
is mainly to participate in the annual ceramic exhibitions. Brands such as Motto tiles, Dell
Ceramics, Itaca, Italake, Tocco Ceramics, Casa, Accord Ceramics, and Vita are few
examples of the regional players. These unorganised players possess the power to generate
sales on basis of pricing. But with more awareness amongst individuals and understanding
that on these product customers do not spend regularly, it is one time investment that is
why shift from local to brand is happening in urban areas.

Sales volume of major Indian players and capacity expansion plans

Sales volume of major player in MSM

250

200
27.4 23.6
150 27.46 25.94 36.9
27.4 28.41 35.5
23.6 25.1
100 49.52 51.17
46.35 49.74
42.35
50 80.3
58.67 64.34 67.74 71.96
0
2015 2016 2017 2018 2019

Kajaria Somany AGL Orient bell

Above bar graph talks about the sales volume of various known players in organised
sector. This shows how companies are increasing their installed capacity and sales volume
YOY through Greenfield or Brownfield expansion.

34
A thriving housing sector due to government policies and a continuous increase in the
demand of value-added products in the retail segment resulted in a substantial investment
by the entities in the organised segment to increase their installed capacity. From above
graph we can observe that Kajaria ceramics, Somany, Asian granite and H&R Johnson are
few players who constantly increasing their installed capacity in thrust of serving more
geographies in Tier II and Tier III cities and generating more sales volume. Whereas Cera
and HSIL are not major contributor in Tiles industry as of now and companies like Nitco
and Orient bell have not done much expansion in past 6 years.

Kajaria Segment wise Somany segment wise

revenue revenue
Total Revenue Total Revenue Own manufacturing
Own Manufacturing(Tiles) JVs (Tiles) Outsourcing
JVs (Tiles) Bathware Other
Outsourcing(Tiles) 1685.13
1631.31
Sanitary ware /Faucets
612.54 629.46
2956.2
2710.6

1653.6
1525.8

624.69 565.61
684.2
661.4

231.97
416.6

292.77
384.1

184.8
139.1

16.8

152.08 188.01
10.03 9.27

2018 2019 2018 2019

AGL segment wise revenue Orient bell segment wise

Total Revenue Own manufacturing
revenue
JVs Outsourcing Total revenue own manufacturing
1126 1131 JVs Outsourcing
642.7
569.36
428.25
362.21
461 420 431 417
245 284
118.53
95.93 128.48
78.67

2018 2019 2018 2019

35
Cera segment wise revenue
Total Revenue Tiles JVs
Sanitaryware Faucets
Wellness
1343
1185

665 705.1

234.02 263 275.31 315.6

22.58 46.98

2018 2019

While a few Greenfield expansion projects have been undertaken by the manufacturers,
majority of the capacity addition has been through Joint Venture (JV) agreements with
small and medium scale players or the outright acquisition of existing operational units.
While greenfield expansions are expensive (considering the rising property prices) with a
longer gestation period, the inorganic mode allow leading manufacturers to leverage on the
existing surplus capacity available in the unorganised segment, which still comprises about
49% of the total tile market in India.
Most of the top industry players, including international ones, are adopting an asset light
model by entering into JV‟s with the unorganised players. The model enables entities to
generate higher cash flows from incremental sales volume as well as de-leverage their
balance sheet.

36
Chapter 7
Analysing cost drivers in production process

This is an age of mass production as a result of which competition in every industry is cut-
throat. Therefore, it is utmost importance for a company not only to increase the sales of its
products but also to ensure that its increase in the sale of its operation related to
production, administration and sales are economical. There are only two ways to maximize
the profit of every organization.

(i) To maximize the sales price and

(ii) To maximize the cost of production.

Cost analysis is a significant tool in cost management. Analysis of cost is necessary for
comparison over the years for cost control and cost planning. Cost is the amount of
expenditure incurred on or attributable to a specified article, product or activity. Some of
the major cost constituents are cost of materials consumed, power and fuel, salaries and
wages, overhead and finance. A low ratio is favourable. A high ratio indicates that only a
relatively small percentage share of sales is available for meeting financial liabilities. The
ratios computed for the cost analysis are:

Cost of material consumed as % of net sales

Raw Material occupies an important position with regard to the availability and economic
production of a finished product. Hence the raw material cost has to be assessed for
making decision.

Line graph shows that almost for all companies in tile manufacturing cost of material
consumed, mainly raw material and packaging material as a percentage of sales is around
25-30%. This shows that this is the major cost driver in production process. A low ratio is
favourable. A high ratio indicates that only a relatively small percentage share of sales is
available for meeting financial liabilities.

Here for better comparison we have taken average of KJC, Somany, AGL, Nitco and
Orient bell because these companies majorly involved in tiles production only. Whereas
Cera, HSIL and H&R Johnson has good share in sanitary ware market as well. Cost of
material consumed is different for Tiles and sanitary ware industry. Kajaria‟s cost of
material consumed to net sales is higher than average of 5 companies in all years from
2011 to 2018. Whereas Somany‟s percentage has drastically increased in period 2016-17,
this was due to reduction in purchase in trade and increase in raw material consumption.

37
Nitco although not performing very well in recent year to gain market share but has better
ratio compare to KJC and Somany. With greater market share and expansion KJC and
Somany can focus on cost of material consumed and increase the profit. On the other hand
sanitary ware leaders Cera and HSIL has good ratio, it would be difficult to compare with
H&R because H&R has different set of input cost with cement production.

Companies 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 16.51% 23.65% 23.48% 22.82% 25.80% 27.64% 26.56% 26.94% 26.78%
Somany 17.69% 17.34% 15.62% 13.71% 13.18% 13.15% 26.83% 26.33% 25.28%
Asian granito 33.99% 29.40% 27.55% 24.11% 20.54% 23.86% 24.96% 24.57%
Nitco 31.31% 21.04% 19.60% 26.50% 21.60% 24.76% 31.11% 29.77%
Cera 8.97% 12.53% 10.18% 9.32% 8.26% 8.16% 9.03% 10.34% 10.33%
H&R 28.85% 28.86% 28.42% 28.38% 28.00% 26.80% 27.11% 29.09% 29.03%
HSIL 15.97% 17.87% 19.46% 18.15% 17.88% 18.28% 17.86% 18.53% 22.86%
Orient bell 22.30% 20.78% 17.38% 16.52% 17.28% 15.87% 15.32% 17.19%
Average of (KJC,Som,AGL,Nitco and Orient bell) 24.36% 22.44% 20.73% 20.73% 19.68% 21.05% 24.95% 24.96%
Average of (Cera, H&R and HSIL) 17.93% 19.75% 19.35% 18.62% 18.05% 17.74% 18.00% 19.32%

Cost of material consumed as % of net sales

40.00%
35.00% Kajaria
30.00% Somany
25.00% Asian granito

20.00% Nitco

15.00% Cera

10.00% H&R

5.00% HSIL
Orient bell
0.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019

Cost of power & fuel as % of net sales

Power & fuel expenses in Ceramic Industry play a vital role. For the purpose of analysis
any expenses related to electricity and for other fuel have been considered under this head.
Ratio of power and fuel cost to Net Sales has been presented in line graph below.
It shows that for all companies‟ power & fuel as % of net sales is around 12-22%. We can
observe the trend here; during the period of 2015 to 2017 for all companies this percentage
is low. This shows that during this period crude prices in international market were on
decreasing trend. Price of Natural gas used for firing the kiln and in process of ceramic
making is directly related to Brent crude price in international market. Except Somany

38
ceramics for all companies similar trend is followed, whereas somany reduced its purchase
in trend and material consumption has increased which led to higher power & fuel to net
sales during this period also. From mid FY17 we can observe that Brent crude oil prices
started increasing which led to higher Natural gas prices for all companies. For Cera this
ratio is comparatively low because it is into sanitary ware manufacturing and this is
comparatively less power & fuel consuming. If we look at the average we find that Kajaria
and Somany ceramics has higher Power & fuel to net sales ratio which shows that these
companies can reduce this percentage and can increase the profit margin.
Company 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 9.83% 16.05% 19.36% 20.20% 22.19% 19.87% 17.57% 19.17% 20.84%
Somany 12.12% 12.46% 12.44% 13.09% 13.18% 11.87% 18.36% 20.15% 21.57%
Asian granito 17.61% 17.73% 17.40% 15.07% 15.51% 12.87% 13.29% 12.15%
Nitco 4.10% 4.54% 8.82% 16.64% 16.42% 11.99% 9.46% 13.29%
Cera 5.06% 4.92% 4.75% 4.51% 3.98% 3.35% 3.28% 4.53%
H&R 14.97% 18.67% 18.44% 18.88% 16.53% 15.26% 15.12% 16.85% 19.51%
HSIL 18.17% 18.91% 22.92% 20.29% 14.14% 11.24% 11.82% 12.47% 12.93%
Orient bell 18.59% 20.10% 21.38% 23.88% 24.02% 21.37% 15.45% 17.79%
Average of (KJC,Som,AGL,Nitco and Orient bell) 12.45% 14.18% 15.88% 17.78% 18.26% 15.59% 14.83% 16.51%
Average of (Cera, H&R and HSIL) 12.73% 14.17% 15.37% 14.56% 11.55% 9.95% 10.07% 11.28%

39
Cost of power & fuel as % of net sales
30.00%

25.00% Kajaria
Somany
20.00%
Asian granito

15.00% Nitco
Cera
10.00% H&R
HSIL
5.00%
Orient bell

0.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019

Employee cost as % of net sales

The amount paid to employees by way of salaries, wages, bonus, gratuities and
contribution towards the provident funds, superannuation funds, family pension scheme,
gratuity funds have been classified as Employee cost in the line chart below.

This shows that Employee cost as % of net sales for all companies is in range of 10-12%.
Companies can reduce this cost by setting plant in location where easy and cheap labour is
available. Although companies should not just reduce this cost to gain profit margin
because good employee friendly policies help companies to perform better but they should
be as per industry standard or average considering the business outlook as well.

Employee cost as % of net sales

16.00%

14.00%
Kajaria
12.00% Somany
10.00% Asian granito

8.00% Nitco
Cera
6.00%
H&R
4.00%
HSIL
2.00%
Orient bell
0.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019

40
Chapter 8
Financial analysis of all companies

Financial analysis is a process of identifying the financial strength and weakness of the
firm by properly establishing relationships between the items, the balance sheet, profit and
loss account and Cash flow statement. Financial analysis helps to assess the financial
position and profitability of a concern.

The objectives of analysing financial statement are:-

1. Assessment of past performance using Horizontal analysis of Balance sheet, P&L

and Cash flow statement.
2. Ratio analysis to understand and identify company for valuation
3. Prediction of bankruptcy using Altman Z score

While doing financial analysis of past data we have to understand that every company has
different range of product and profit margin changes with product. Here all companies
belong to ceramic sector but some are market leader in tiles segment, i.e. major portion of
revenue is generated via sales in tiles and some are leaders in sanitary ware and faucets
segment. Since margin is more in sanitary ware segment compare to tiles hence we will try
to understand trend within company first then will compare it with same segment
companies. For example, Kajaria ceramics, Somany ceramics, Asian granite, Nitco and
orient bell are majorly involved in manufacturing of tiles. On the other hand Cera, HSIL
are leaders in sanitary ware and faucets segment. H&R Johnson (Prism Johnson) comprise
of various business such as cement, ceramic tiles and sanitary ware etc.

41
Assessment of past performance (Horizontal analysis)

Profit and Loss statement analysis

Net sales Growth YOY - All values in crore
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 735.56 953.25 1,313.03 1,611.98 1,840.04 2,186.89 2,413.45 2,549.63 2,710.60 2,956.20
YOY Growth (%) 29.60% 37.74% 22.77% 14.15% 18.85% 10.36% 5.64% 6.31% 9.06%
Somany 540.23 719.93 879.04 1,053.87 1,262.91 1,543.13 1,717.67 1,810.99 1,712.71 1,715.05
YOY Growth (%) 33.26% 22.10% 19.89% 19.84% 22.19% 11.31% 5.43% -5.43% 0.14%
Asian Granito 444.6284 479.3318 622.574 708.36 771.96 846.01 993.9 1,063.88 1,158.55
YOY Growth (%) 7.81% 29.88% 13.78% 8.98% 9.59% 17.48% 7.04% 8.90%
Nitco 451.56 642.71 841.94 773.37 776.86 837.43 788.7 715.76 609.58
YOY Growth (%) 42.33% 31.00% -8.14% 0.45% 7.80% -5.82% -9.25% -14.83%
Cera 191.36451 242.95123 319.39 487.867 663.692 821.668 933.68 1,008.53 1,185.34 1,351.55
YOY Growth (%) 26.96% 31.46% 52.75% 36.04% 23.80% 13.63% 8.02% 17.53% 14.02%
H&R 2871.25 3447.44 4596.2 4871.14 5039.72 5654.43 5758.92 5563.18 5641.37 6194.42
YOY Growth (%) 20.07% 33.32% 5.98% 3.46% 12.20% 1.85% -3.40% 1.41% 9.80%
HSIL 804.41 1095.55 1462.81 1761.27 1858.2 1980.62 2128.48 2078.17 2252.78 2712.37
YOY Growth (%) 36.19% 33.52% 20.40% 5.50% 6.59% 7.47% -2.36% 8.40% 20.40%
Orient bell 254 332.29 546.28 573.7 584.67 693.225 702.549 637.44 647.82 571.14
YOY Growth (%) 30.86% 64.40% 5.02% 1.91% 18.57% 1.35% -9.27% 1.63% -11.84%

Expense (Excluding interest & depreciation) Growth YOY - All values in Crore
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 620.9 802.51 1,124.26 1,381.57 1,528.07 1,910.25 2,021.71 2,040.67 2,267.11 2,543.22
YOY Growth (%) 29.25% 40.09% 22.89% 10.60% 25.01% 5.83% 0.94% 11.10% 12.18%
Somany 494.27 673.71 805.27 984.18 1,154.86 1,474.74 1,572.46 1,613.67 1,565.08 1,587.48
YOY Growth (%) 36.30% 19.53% 22.22% 17.34% 27.70% 6.63% 2.62% -3.01% 1.43%
Asian Granito 402.29 422.28 551.065 664.57 699.73 774 911.68 962.53 1,022.98
YOY Growth (%) 4.97% 30.50% 20.60% 5.29% 10.61% 17.79% 5.58% 6.28%
Nitco 484.93 606.28 853.04 646.88 758.38 801.78 779.4 700.63 581.19
YOY Growth (%) 25.02% 40.70% -24.17% 17.24% 5.72% -2.79% -10.11% -17.05%
Cera 162.97 207.66 266.024 412.536 568.75 704.13 799.11 831.91 1,046.43 1,176.31
YOY Growth (%) 27.42% 28.11% 55.07% 37.87% 23.80% 13.49% 4.10% 25.79% 12.41%
H&R 2,362.10 3,108.66 4,342.92 4,616.00 4,871.78 5,330.59 4,877.95 4,638.81 5,028.43 5,689.80
YOY Growth (%) 31.61% 39.70% 6.29% 5.54% 9.42% -8.49% -4.90% 8.40% 13.15%
HSIL 702.46 925.1 1,258.59 1,588.73 1,648.01 1,668.10 1,683.76 1,797.94 2,056.39 2,394.87
YOY Growth (%) 31.69% 36.05% 26.23% 3.73% 1.22% 0.94% 6.78% 14.37% 16.46%
Orient bell 235.71 316.36 505.32 544.42 530.62 647.38 655.51 569.94 606.89 540.05
YOY Growth (%) 34.22% 59.73% 7.74% -2.53% 22.00% 1.26% -13.05% 6.48% -11.01%

Operating profit growth YOY

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 106.42 148.64 206.19 244.64 280.71 354.13 457.46 496.33 456.36 449.49
YOY Growth (%) 39.67% 38.72% 18.65% 14.74% 26.16% 29.18% 8.50% -8.05% -1.51%
Somany 56.94 67.73 74.21 85.72 81.38 107.57 142.9 191.47 185.85 163.37
YOY Growth (%) 18.95% 9.57% 15.51% -5.06% 32.18% 32.84% 33.99% -2.94% -12.10%
Asian Granito 42.3384 57.05 71.5 69.85 64.1 59.59 90.83 127.09 138.99
YOY Growth (%) 34.75% 25.33% -2.31% -8.23% -7.04% 52.42% 39.92% 9.36%
Nitco 29.39 76.76 85.12 -37.98 -13.66 2.18 18.51 23.76 3.59
YOY Growth (%) 161.18% 10.89% -144.62% 64.03% 115.96% 749.08% 28.36% -84.89%
Cera 28.3945 35.291232 53.3657 75.33111 94.9424 117.5377 141.28 175.59 177.38 198.25
YOY Growth (%) 24.29% 51.22% 41.16% 26.03% 23.80% 20.20% 24.29% 1.02% 11.77%
H&R 543.23 376.45 308.33 305.4 179.25 351.21 876.69 907.39 576.69 601.01
YOY Growth (%) -30.70% -18.10% -0.95% -41.31% 95.93% 149.62% 3.50% -36.45% 4.22%
HSIL 125.8 206.37 249.81 258.7 253.3 332.51 465.01 286.71 271.81 315.95
YOY Growth (%) 64.05% 21.05% 3.56% -2.09% 31.27% 39.85% -38.34% -5.20% 16.24%
Orient bell 18.22 17.47 49.71 57.78 46.78 45.84 47.03 54.35 46.99 37.01
YOY Growth (%) -4.12% 184.54% 16.23% -19.04% -2.01% 2.60% 15.56% -13.54% -21.24%

42
 Kajaria: Top line growth can be observed in table below, it shows that top line
growth of Kajaria ceramics has been good for last 10 years. Although it has shown
some decline in past three years, which can be justified by sluggishness in real
estate and construction industry. Growth in expense over the years is more than
growth in revenue; this is due to volatility in fuel prices in international market,
cost of material consumed and other operating expense. Due to this operating profit
has shown decline trend in past couple of years. Although it is good that company
is generating all its revenue from operation and amount of other income are very
less. Company has growth rate of average 22.24% in period 2011 to 2016.

 Somany: Company has not been able to generate enough revenue in recent years
due to which growth in revenue has declined in 2018 and 2019. It is not a major
concern since industry has gone through slowdown and recovering slowly. In 2018
expenses reduced and due to this decline in operating profit are marginal. Whereas
in 2019 expense increased and operating profit decline by 12% approx.

 Asian granito: Company has managed to generate average 5 year top line growth
of 10% approx. which is good sign in current sluggishness. But operating profit has
reduced in period 2013 to 2015 due to higher growth in expenses. Positive aspect is
company‟s performance in last 3 years which shows good growth.

 Nitco: Company is not performing well in recent years which are impacting its
operating profit. We can observe that operating profit in FY18 has decreased by
84.89%. Operating profit margin is very less for Nitco compare to other companies
in industry. In 2018 operating profit margin is 0.59 for Nitco as compare to 16.8%
for Kajaria and 10.85 for somany. Nitco is performing below average and balance
sheet also doesn‟t give good picture.

 Cera: Good growth in top line has been observed for Cera despite slowdown in
industry. Since Cera sanitary ware is into mid/premium category and have market
share of 22-24% in sanitary ware segment amongst organised players. It has
managed to increase its top line and operating profit is also improved.

 H&R Johnson: This Company is involved in various line of business and

manufacturing of tiles is one of them. It would be difficult for direct comparison
with other ceramic companies but we can observe the trend in top line which shows
that from 2014 growth in revenue is stable or growing very less. Operating profit
decreased in 2018 by 36.45%.

 HSIL: Company is showing fluctuation in operating profit, in some year company

has generated good revenue and operating profit and in some it has declined. But
Operating profit margin of company is in range of 10% to 15% in past few years.

43
 Orient bell: In last 3 years company‟s top line has been on decreasing trend and
these results in lower operating profit for company. Operating profit decreased by
13.54% and 21.24% in FY18 and FY19 respectively.

Balance Sheet analysis of all companies: -

Reserve Growth YOY - All values in crore
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 174.6 207.8 267.35 346.16 489.03 725.05 956.01 1,159.23 1,335.12 1,559.00
YOY Growth (%) 19.01% 28.66% 29.48% 41.27% 48.26% 31.85% 21.26% 15.17% 16.77%
Somany 75.83 96.97 118.99 146.15 215.69 250.24 419.69 512.76 572.21 604.53
YOY Growth (%) 27.88% 22.71% 22.83% 47.58% 16.02% 67.71% 22.18% 11.59% 5.65%
Asian Granito 185.279 202.92 218.52 239.91 257.88 267.21 333.09 368.92 401.58
YOY Growth (%) 9.52% 7.69% 9.79% 7.49% 3.62% 24.65% 10.76% 8.85%
Nitco 479.36 503.1 445.85 211.24 35.5 -92.26 -152.73 -184.02 75.87
YOY Growth (%) 4.95% -11.38% -52.62% -83.19% -359.89% -65.54% -20.49% 141.23%
Cera 85.37 105.22 132.85 173.17 217.63 345.2 414.48 515.65 599.12 694.41
YOY Growth (%) 23.25% 26.26% 30.35% 25.67% 58.62% 20.07% 24.41% 16.19% 15.90%
H&R 698.31 747.28 707.24 645.33 555.46 550.97 494.82 491.57 534.5 622.75
YOY Growth (%) 7.01% -5.36% -8.75% -13.93% -0.81% -10.19% -0.66% 8.73% 16.51%
HSIL 456.28 658.67 954.19 1,013.08 1,015.08 1,308.63 1,372.04 1,432.07 1,470.50 1,498.35
YOY Growth (%) 44.36% 44.87% 6.17% 0.20% 28.92% 4.85% 4.38% 2.68% 1.89%
Orient bell 50.97 106.42 155.65 161.81 163.06 167.49 173.88 167.38 207.54 218.32
YOY Growth (%) 108.79% 46.26% 3.96% 0.77% 2.72% 3.82% -3.74% 23.99% 5.19%

Total Debt Growth YOY - All values in crore

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Kajaria 262.8 208.32 206 262.77 193.8 222.03 252.6 170.58 135.09 94.94
YOY Growth (%) -20.73% -1.11% 27.56% -26.25% 14.57% 13.77% -32.47% -20.81% -29.72%
Somany 161.99 157.86 150.52 141.74 147.24 161.64 208.93 234.36 477.23 510.61
YOY Growth (%) -2.55% -4.65% -5.83% 3.88% 9.78% 29.26% 12.17% 103.63% 6.99%
Asian Granito 137.11 131.57 179.27 236.92 248.05 165.15 316.96 313.12 320.23
YOY Growth (%) -4.04% 36.25% 32.16% 4.70% -33.42% 91.92% -1.21% 2.27%
Nitco 455.5 527.84 590.52 1,194.22 951.36 886.89 791.58 599.59 836.81
YOY Growth (%) 15.88% 11.87% 102.23% -20.34% -6.78% -10.75% -24.25% 39.56%
Cera 27.21 37.89 41.21 54.94 42.36 59.25 57.76 93.45 91.81 84.25
YOY Growth (%) 39.25% 8.76% 33.32% -22.90% 39.87% -2.51% 61.79% -1.75% -8.23%
H&R 980.14 1,008.74 1,289.08 1,615.25 1,808.63 2,085.77 1,983.74 1,641.70 1,675.59 1,477.72
YOY Growth (%) 2.92% 27.79% 25.30% 11.97% 15.32% -4.89% -17.24% 2.06% -11.81%
HSIL 485.27 345.41 790.78 933.21 949.06 576.17 500.54 842.79 1,159.73 1,157.76
YOY Growth (%) -28.82% 128.94% 18.01% 1.70% -39.29% -13.13% 68.38% 37.61% -0.17%
Orient bell 63.8 175.87 182.23 180.32 162.47 139.83 122.97 110.21 87.03 100.98
YOY Growth (%) 175.66% 3.62% -1.05% -9.90% -13.93% -12.06% -10.38% -21.03% 16.03%

 Kajaria: We can observe from table shown above that cash reserve for Kajaria
ceramics is very healthy and growing YOY. With growth of average 17% in past 3
years and Total debt of company is reducing YOY it is very good sign which shows
that company is stable and almost debt free. Company‟s Total debt to cash reserve
ratio is 0.061 for FY19. If we check Total share capital of company has not
increased which shows that it is not liquidating its share and generating cash from
operation which is very good sign.

 Somany: Total share capital is static at 8.48 crore and cash reserve is increasing
YOY but Total debt is also increasing in same ratio. Increasing total debt is the
reason behind increase in net block. In FY18 Company‟s net block has increased
from 376.65 crore to 671.70 crore. Company is on expansion plans. In near future
company should try to reduce its debt because current Total debt to cash reserve
ratio is 0.84 in FY19.

44
 Asian Granito: Company‟s share capital has increased in FY17 which is not good
sign and company‟s debt has increased by 91.92% in FY16. In FY16 company‟s
net block has also increased which shows company‟s expansion in fixed assets.

 Nitco: Cash reserve was on decreasing trend from 2011 to 2017 but in 2018 we can
see the positive cash reserve of 75.87 crore which means 141.23% growth in cash
reserve compare to 2017. This sudden change in cash reserve is due to debt
restructuring done by company. Company‟s share capital has increased from 54.7
crore in FY17 to 71.86 crore in FY18. Company‟s total debt is 11 times its cash
reserve and this states that company might difficult in debt servicing if they don‟t
generate enough cash from operation. These factors speak negativity about
company and would not be recommended for inverting.

 Cera: Company is looking good if we analyse cash reserve and total debt. Similar
to Kajaria ceramics, Cera has observed good growth in cash reserve with average 3
year growth of 18.74%. In comparison to reserve total debt of company is very
minimal with Total debt to cash reserve ratio of 0.12. This shows that company do
not have any debt management issue and will grow in profit margin.

 HRJ (Prism Johnson): Company‟s share capital is constant and it‟s good sign but
the concern is increase in debt over the years from 980.14 crore in 2010 to 1477.72
crore in 2019. On the other hand in period of 2012 to 2017 company‟s cash reserve
has decreased. This shows that company is not in stable condition right now even
after reducing some debt in FY17.

 HSIL: Company‟s cash reserve is increasing but at very mere average 3 year
growth of 2.97%. On the other hand company‟s debt has grown at 68.38% in 2017
and 37.61% in 2018 which is worrisome. This excess debt is affecting company‟s
net profit and Net profit in past 3 years has been on decreasing trend.

 Orient Bell: Among all the companies taken for analysis and comparison, orient
bell has least market share in terms of revenue. But over the years its cash reserve
is on increasing trend and Total debt has reduced in past 4 years. Current Total debt
to cash reserve ratio is around 0.5. Share capital is also static with some minimal
increase. This company looks stable on Balance sheet analysis.

If we compare over the years than Kajaria ceramics and Cera has performed well in all
areas. This horizontal analysis makes them positive investment proposal.

45
Working capital analysis:

Working capital in days Working capital in days

2014 2015 2016 2017 2018 300
Kajaria 27 28 30 38 59 250
Kajaria
Somany 28 31 38 60 100 200
Somany
AGL 101 82 75 84 100 150
AGL
Nitco 224 191 195 231 262 Nitco
100
Cera 57 77 91 85 95 Cera
50
HRJ 16 19 24 23 27 HRJ
0
HSIL 117 119 119 109 120 HSIL

2014
2015
2016
2017
2018
Orient bell 40 46 40 37 60

Days in working capital talks about the efficiency of company. Lower the days in working
capital higher efficiency. Days in working capital expresses how many days a company
takes to convert its working capital into revenue.

From above chart and table we can observe that Kajaria ceramics, HRJ (Prism Johnson)
and Orient bell has least working capital in days compare to other players in industry.
Prism Johnson is involved in various lines of business apart from ceramics and hence
direct comparison cannot be done. But Kajaria, which is market leader in ceramics tiles
division, has comparatively less working capital in days. This says that where Kajaria takes
59 days to convert its working capital into revenue, somany which is second largest tiles
player in industry takes 100 days. Cera, which is leader in sanitary ware, takes 95 days to
convert into sales.

In 2018, it can be observed that working capital in days has increased for all companies
which could be due to GST; hence it is not fair to compare with previous years. But all
companies should take appropriate measures to lower the working capital days.

46
Cash flow statement analysis

2010 2011 2012 2013 2014 2015 2016 2017 2018

Operating Cash flow 107.7 159.4 90.9 97.6 166.1 180.3 315.6 337.7 238.3
Capex -47.7 -166.8 -75.1 -154.3 -156.8 -269.6 -276.1 -147 -152.7
Kajaria
Free cash flow 60.1 -7.4 15.8 -56.7 9.4 -89.3 39.6 190.7 85.6
OCF/Sales 14.64% 16.72% 6.92% 6.05% 9.03% 8.24% 13.08% 13.25% 8.79%
Operating Cash flow 41.4 23.5 78.6 70.7 73.8 24.8 59.6 117.2 110.9
Capex -46.6 -35 -31.7 -38.1 -59.9 -51.8 -138 -107.4 -135.4
Somany
Free cash flow -5.2 -11.5 47 32.6 13.9 -27 -78.4 9.9 -24.5
OCF/Sales 7.66% 3.26% 8.94% 6.71% 5.84% 1.61% 3.47% 6.47% 6.48%
Operating Cash flow 38.7 24.9 2.3 19.2 61.6 104.2 20.7 62.7 96.5
Capex -44.2 -22.1 -17.1 -13.1 -29.8 -37.8 -223.5 -40.6 -47.9
AGL
Free cash flow -5.5 2.8 -14.8 6.1 31.8 66.4 -202.8 22.2 48.6
OCF/Sales 8.70% 5.19% 0.37% 2.71% 7.98% 12.32% 2.08% 5.89% 8.33%
Operating Cash flow -23.6 94.5 142.8 -279.1 50.7 11.2 8.6 31 369.4
Capex -110.6 -184.2 -139.8 -119.6 -14.2 -2.2 -12.5 -9.6 -6
Nitco
Free cash flow -134.2 -89.7 3 -398.7 36.5 9 -3.9 21.4 363.5
OCF/Sales -5.23% 14.70% 16.96% -36.09% 6.53% 1.34% 1.09% 4.33% 60.60%
Operating Cash flow 23 26.79 3.9 42.4 63.4 40.6 113.8 101.6 75.4
Capex -4.4 22.01 -24.6 -38.6 -41.9 -85.3 -90.4 -72.6 -58.1
Cera
Free cash flow 18.6 4.78 -20.7 3.9 21.6 -44.8 23.4 29 17.3
OCF/Sales 12.02% 11.03% 1.22% 8.69% 9.55% 4.94% 12.19% 10.07% 6.36%
Operating Cash flow 371.6 288.4 266.7 259.9 56.6 198.6 462.1 675.6 586.6
Capex -618.5 -491.6 -299 -342.7 -211.2 -179.9 -224 -195.9 -341.6
HRJ
Free cash flow -246.9 -203.2 -32.3 -82.7 -154.6 18.7 238.1 479.7 245
OCF/Sales 12.94% 8.37% 5.80% 5.34% 1.12% 3.51% 8.02% 12.14% 10.40%
Operating Cash flow 18.3 172 153.6 30.6 162.5 264.4 310.6 204.2 54.8
Capex -91 0 -517.3 -120.4 -192.5 -96.3 -77.9 -225.8 -296.8
HSIL
Free cash flow -72.7 172 -363.7 -89.8 -30 168.1 232.7 -21.6 -242
OCF/Sales 2.27% 15.70% 10.50% 1.74% 8.75% 13.35% 14.59% 9.83% 2.43%
Operating Cash flow 21.3 4.3 44.6 55.8 54.2 46.9 41.6 50.8 26.7
Capex -3.9 -9.8 -11.7 -31.7 -11.2 -2.8 -3.9 -15.3 -15.5
Orient bell
Free cash flow 17.4 -5.5 32.9 24 43 44.1 37.7 35.6 11.2
OCF/Sales 8.39% 1.29% 8.16% 9.73% 9.27% 6.77% 5.92% 7.97% 4.12%

Above table shows how much cash companies are generating from its core operations and
how they are spending in capital for business growth. Cash flow is the most important tool
to analyse the health of company, it talks about the volume of cash which is generated and
spent in different activities. Free cash flow is the cash available with company after its
capex, this free cash flow is refined metric to understand the cash available to pay higher
dividends, repurchase shares to reduce shares outstanding or acquire another company to
enhance growth prospects for the firm. OCF to sales ratio shows how much amount of cash
generated for amount of sales. This will be good ratio to compare companies rather than
absolute value of OCF or FCF.

47
 Kajaria: If we observe the last 3 years data we can say that Kajaria is generating
better operating cash flow compare to its peers. They are also doing capital
expansion at good rate for growth of business and still left with good amount of
free cash flow. Company is not borrowing from outside and its cash from operation
is enough to sustain capex. This is good sign for investors.

 Somany: We can observe that in last 3 years company is not able to meet its capex
plans from its cash flow from operation and hence free cash flow is negative. It is
true that company is expanding its capital at good rate but OCF to sales ratio shows
that amount of OCF generated on sales is comparatively lower than industry leader.

 Asian granito: Operating cash flow generated over the years is positive; in 2016
company has done major capital expansion due to which FCF has become negative
for that period. Company‟s OCF is not stable over the years.

 Nitco: We can observe that OCF and FCF have increased drastically in FY2018.
But such a huge increment in OCF is due to exceptional items in Income statement.
Company has done debt restructuring during the year due to which OCF has
increased. And it is not organic revenue from sales.

 Cera: Company is able to generate stable OCF to sales ratio over the years. It looks
stable and good because company is also doing capital expansion and not
borrowing from outside. Company is virtually debt free and OCF is enough to
match capex.

 HRJ: If we look at the past 10 years data then we will observe that company is
performing fairly well in terms of OCF and FCF. In last 3 years company has
generated good amount of OCF due to which even after heavy capex its FCF is
positive. OCF to sales for HRJ is better than any company in last couple of years.

 HSIL: Capital expansion of company is very heavy in last couple of years whereas
it is not able to generate OCF last year. Company‟s FCF is decreased and negative -
242 crore. This shows that company need to borrow funds from outside to continue
and grow in future. Already debt of company is high and this will not be beneficial
until company generate good amount of operating cash in future.

 Orient bell: With least market capital this company is weighing fairly well in term
of OCF to sales though Operating cash flow is reduced in FY18.

48
Ratio Analysis

Kajaria 2015 2016 2017 2018 2019 Somany 2015 2016 2017 2018 2019
Profitability Profitability
Net Profit Margin 8.08 9.48 9.93 8.56 7.66 Net Profit Margin 3.01 3.77 5.14 4.12 2.7
Operating Profit Margin 13.79 16.4 16.45 13.47 12.19 Operating Profit Margin 5.29 7.02 8.75 8.76 6.94
ROE 27.64 26.51 23.58 18.6 15.49 ROE 19.27 18.86 19.61 12.79 7.5
ROCE 17.75 17.86 28.95 23.79 21.18 ROCE 11.85 10.35 25.41 17.59 13.47
ROA 12.84 13.18 12.77 11.24 9.54 ROA 5.75 6.78 8.25 4.94 2.78
Solvency Solvency
Debt to Equity 0.13 0.16 0.1 0.04 0.04 Debt to Equity 0.3 0.28 0.22 0.28 0.28
Interest Coverage Ratio 10.16 12.04 13.14 16.5 24.28 Interest Coverage Ratio 4.53 5.4 7.52 4.03 3.01
Activity Activity
Inventory Turnover (Days) 51 58 53 51 50 Inventory Turnover (Days) 27 30 38 51 54
Receivables Turnover (Days) 35 41 49 61 57 Receivables Turnover (Days) 56 61 73 98 75
Fixed asset Turnover Ratio 2.63 2.37 2.23 2.37 2.54 Fixed asset Turnover Ratio 6.12 5.3 4.55 3.18 2.35
Liquidity Liquidity
Current Ratio 1.02 1.15 1.49 1.73 1.5 Current Ratio 1.18 1.47 1.53 1.33 1.42
Quick Ratio 0.38 0.44 0.72 0.99 1.25 Quick Ratio 0.89 1.13 1.21 0.89 1.02

Asian Granito 2015 2016 2017 2018 2019 Nitco 2015 2016 2017 2018 2019
Profitability Profitability
Net Profit Margin 1.75 2.44 3.67 4.54 1.57 Net Profit Margin -14.25 -7.63 -4.58 31.02 -10.06
Operating Profit Margin 4.79 6.54 8.61 9.88 4.99 Operating Profit Margin -7.83 -5.39 -3.44 -12.19 -6.75
ROE 5.19 7.43 10.24 12.63 4.62 ROE 317.67 61.38 25.79 114.32
ROCE 4.46 4.34 19.07 19.63 10.29 ROCE -14.85 -9.8 -6.19 -7.16
ROA 2.21 3.03 3.81 4.6 1.62 ROA -7.45 -3.92 -2.18 13.4
Solvency Solvency
Debt to Equity 0.05 0.33 0.32 0.27 0.22 Debt to Equity -21.39 -7.38 -4.25 4.06
Interest Coverage Ratio 1.9 2.24 2.45 3.3 1.82 Interest Coverage Ratio -1.44 -5.31 -3.94 14.79
Activity Activity
Inventory Turnover (Days) 86 80 89 86 93 Inventory Turnover Ratio 157 161 188 199
Receivables Turnover (Days) 71 72 103 126 123 Receivables Turnover Ratio 51 68 73 110
Fixed asset Turnover Ratio 4.44 3.37 2.69 2.81 2.53 Fixed asset Turnover Ratio 1.11 1.14 1.11 1.04
Liquidity Liquidity
Current Ratio 1.22 1.25 1.31 1.24 1.15 Current Ratio 1.05 0.88 0.73 2.18
Quick Ratio 0.62 0.62 0.74 0.73 0.69 Quick Ratio 0.27 0.26 0.21 0.91

CERA 2015 2016 2017 2018 2019 HRJ 2015 2016 2017 2018 2019
Profitability Profitability
Net Profit Margin 8.24 8.94 9.86 8.7 8.51 Net Profit Margin 0.05 0.06 -0.04 0.77 1.87
Operating Profit Margin 12.72 13.63 15.37 13.18 12.59 Operating Profit Margin 3.29 3.65 3.26 4.68 6.47
ROE 23.51 21.6 21.08 18.33 16.42 ROE 0.25 0.32 -0.18 4.18 10.33
ROCE 14.93 26.53 22.83 22.92 ROCE 7.46 10.21 9.18 11.43 13.75
ROA 12.33 11.53 11.12 10.18 9.66 ROA 0.25 0.32 -0.18 4.18 2.12
Solvency Solvency
Debt to Equity 0.04 0.09 0.06 0.08 0.06 Debt to Equity 1.55 1.46 1.2 1.11 1.04
Interest Coverage Ratio 14.06 24.7 20.85 17.82 22.11 Interest Coverage Ratio 0.97 0.98 1.2 1.46 1.95
Activity Activity
Inventory Turnover Ratio 51 51 47 45 Inventory Turnover Ratio 45 45 41 41 42
Receivables Turnover Ratio 72 75 80 83 76 Receivables Turnover Ratio 37 42 44 45 41
Fixed asset Turnover Ratio 4.33 3.61 3.15 3.35 3.34 Fixed asset Turnover Ratio 2.28 2.31 2.04 2.13 2.27
Liquidity Liquidity
Current Ratio 1.81 1.92 1.89 1.97 2.02 Current Ratio 1.04 1 0.76 0.73 0.81
Quick Ratio 1.02 1.05 1.06 1.27 1.4 Quick Ratio 0.49 0.55 0.38 0.36 0.51

49
HSIL 2015 2016 2017 2018 2019 Orient Bell 2015 2016 2017 2018 2019
Profitability Profitability
Net Profit Margin 4.31 4.33 4.83 3.29 2.58 Net Profit Margin 0.69 0.92 1.69 6.09 1.62
Operating Profit Margin 10.5 10.03 8.78 7.3 6.08 Operating Profit Margin 4.22 5.11 5.52 4.93 3.59
ROE 7.27 6.59 7.03 5 4.62 ROE 2.67 3.49 6.77 22.09 3.99
ROCE 4.72 5.92 8.85 7.32 7.66 ROCE 8.25 17.91 3.99
ROA 3.22 3.42 3.54 2.26 1.96 ROA 0.97 1.37 2.71 10.06 2.02
Solvency Solvency
Debt to Equity 0.27 0.15 0.23 0.35 0.5 Debt to Equity 0.34 0.28 0.34 0.17 0.19
Interest Coverage Ratio 2.75 5 5.39 3.28 2.23 Interest Coverage Ratio 1.55 1.81 2.86 4.72 2.58
Activity Activity
Inventory Turnover Ratio 84 86 86 86 78 Inventory Turnover Ratio 61 51 47 46 55
Receivables Turnover Ratio 82 72 70 83 74 Receivables Turnover Ratio 50 56 58 71 77
Fixed asset Turnover Ratio 1.24 1.31 1.31 1.29 1.33 Fixed asset Turnover Ratio 3 3.25 3.71 3.84 2.38
Liquidity Liquidity
Current Ratio 1.17 1.1 1.15 1.2 1.01 Current Ratio 0.98 1.04 1.19 1.54 1.48
Quick Ratio 0.59 0.53 0.62 0.63 0.86 Quick Ratio 0.53 0.6 0.72 0.88 0.87

Kajaria:

 Net profit margin and operating profit margin of Kajaria is higher compare to any
other company and it shows how Kajaria is leading the market and generating good
amount of sales every year. However these margins have decreased marginally in
2019, this is due to slowdown in industry.
 Kajaria also stand higher in terms of ROE and ROCE compare to peers.
 Negligible debt to equity ratio shows that company is almost debt free and has no
obligation of paying heavy amount of interest like other companies. And this debt
to equity is decreasing over the years with good interest coverage ratio.
 Liquidity ratio shows that company is in good position and with current ratio of 1.5
and quick ratio of 1.25 it is financially strong to pay its short term obligations.

Somany:

 Profitability ratio of company is low compare to its peers. In FY19, Net profit
margin decreased to 2.7%. Company has not performed will in last year but overall
its net profit margin and operating profit margin is low.
 Company‟s ROE and ROCE is on par with industry average
 Negligible debt to equity ratio is good sign for investors and company has strong
interest coverage ratio as well.
 Company‟s receivable turnover is high as compare to industry leader i.e. Kajaria. In
FY19 Company has tried to maintain strong credit policy to reduce its receivable
period and some amount of sales got hit due to this. But in long term it will benefit
company.
 Company has decent current and quick ratio and will not have any difficulty in
meeting short term obligations.

50
Asian Granito:

 Low net profit margin in FY19 (Decreased from 4.54% FY18 to 1.57% FY19) is
concern for company as this margin for AGL is very low compare to peers.
 Company‟s increasing Inventory turnover and receivable period is serious concern
for it operations. This shows company is not able to convert its inventory into
goods sold efficiently and its receivable are increasing and some might turn into
bad debts.
 Current ratio of company is 1.25 which shows that company can fulfil its short term
obligations but quick ratio gives good picture which does not include inventory.
And quick ratio shows that without inventory company is not sufficient to pay its
short term liabilities.

Nitco:

 Nitco is constantly making losses and its future doesn‟t seem positive. We can
observe that over the years net profit margin and operating profit margin are highly
negative.
 FY18 showed positive net profit margin but this is due to exceptional items and not
from operating revenue. Operating margin for FY18 is still negative.
 High debt to equity ratio of 4.06 in FY18 shows that company is operating heavily
on debt and is not able to service its debt.
 Company has done debt restricting in FY18.
 ROE of company seems positive and good in numbers but story behind this is
different, because company is making heavy losses and equity holder‟s fund is also
negative. This led to positive figure in ROE but it is misleading.
 Company do not have much difficulty in short term liquidity but have very serious
concern over solvency.

Cera:

 Cera is performing very well and this can be observed through its profitability
ratios. Despite slowdown in industry Cera has shown constantly more than 8% in
net profit margin and more than 12% in operating profit margin over the last 5
years.
 Company has negligible debt which is shown by debt to equity ratio of 0.06 and
healthy interest coverage of more than 20% over the years
 Company is able maintain its current ratio around 2 and quick ratio more than 1.
Company can easily pay all its short term obligations.

51
HRJ:

 In last couple of years company has increased profit margin from negative to
positive. Being involved in different lines of business and majorly cement industry
this cannot be directly compare with its peers but as an company level analysis its
net profit margin is very less.
 Debt to equity ratio is reducing over the years but still above 1. It is good sign for
company‟s solvency that it is trying to reduce debt.
 In last 2 years company is working on negative working capital. This is very
serious for company‟s short term obligation and they might not fulfil the same in
near future. Its quick ratio is below 0.5 and this shows the cause of concern for
investing point of view.

HSIL:

 Net profit margin is decreased to 2.58% in FY19 from 3.29% and this decreased
trend has been observed in last 4 years.
 ROE and ROCE is less compare to other companies in industry.

Orient bell:

 Company‟s net profit margin in FY18 is 6.09 and in other years it is quite low. This
is due to exceptional item in income statement. Company sold its investment for
22.43 crore and due to this company‟s net profit margin looks inflated.
 On other ratios company is fairly average compare to other companies.
 Company‟s debt to equity ratio is decreasing over the years but still its interest
coverage ratio is not very strong.

52
Prediction of bankruptcy using Altman Z score

Altman Z-Score is a quantitative balance sheet method of determining a company's

financial health. Safe” companies, i.e. companies that have a low probability of
bankruptcy, have an Altman Z-Score greater than 3.0.The Altman Z-Score is a measure of
a company's health and likelihood of bankruptcy. Several key ratios are used in the
formulation of an Altman Z-Score Value.

Objectives

 Predicting possible financial distress of companies.

 To help companies work on their core business and create value for investors.
 To helps Investors in decision making.
 To predict future performance of company.

The Z score consists of five variables

A = Working Capital / Total Assets

B = Retained Earnings / Total Assets
C = EBIT / Total Assets
D = Market Value of Equity / Total Liabilities
E = Net Sales / Total Assets

Score for public manufacturing companies is as follows.

Z = 1.2*A + 1.4*B + 3.3*C + 0.6*D + 0.99*E

Critical values of Altman’s Model

Score Zone Result Colour

Z<1.8 Distress Likely to bankrupt Red
1.8<Z<2.99 Grey Zone Stale Grey
Z>2.99 Safe Zone Safe Green

Kajaria 2019 2018 2017 Somany 2019 2018 2017 AGL 2019 2018 2017
A 0.25 0.19 0.13 A 0.16 0.14 0.18 A 0.08 0.12 0.11
B 0.46 0.41 0.33 B 0.24 0.22 0.21 B 0.24 0.24 0.22
C 0.16 0.18 0.21 C 0.08 0.10 0.15 C 0.05 0.10 0.10
D 12.84 12.46 11.74 D 1.85 2.95 3.47 D 0.94 1.87 1.74
E 1.25 1.31 1.41 E 1.03 1.04 1.20 E 0.93 0.97 1.00
Z-Score 10.41 10.16 9.77 Z-Score 2.94 3.61 4.29 Z-Score 2.08 2.89 2.83

53
Nitco 2018 2017 2016 Cera 2019 2018 2017 HRJ 2019 2018 2017
A 0.30 -0.20 -0.07 A 0.31 0.30 0.26 A -0.08 -0.12 -0.10
B -0.30 -0.40 -0.36 B 0.27 0.19 0.19 B 0.06 0.04 0.03
C -0.05 -0.02 -0.03 C 0.16 0.16 0.18 C 0.08 0.06 0.05
D 0.01 0.00 0.00 D 8.20 10.33 9.37 D 1.17 1.40 1.34
E 0.45 0.48 0.52 E 1.13 1.13 1.07 E 1.13 1.07 1.02
Z-Score 0.22 -0.37 -0.17 Z-Score 7.33 8.48 7.86 Z-Score 2.08 2.03 1.93

HSIL 2019 2018 2017 Orient Bell 2019 2018 2017

A 0.09 0.07 0.05 A 0.146 0.180 0.065
B 0.17 0.15 0.16 B 0.319 0.318 0.235
C 0.05 0.05 0.06 C 0.049 0.079 0.091
D 0.89 1.35 1.55 D 1.086 1.853 1.050
E 0.76 0.65 0.67 E 1.245 1.499 1.522
Z-Score 1.83 1.92 2.08 Z-Score 2.680 3.534 2.859

Z-Score chart
Z-score > 2.99 (Safe Zone) = Kajaria, Cera and Somani
12.00 Z-Score < 2.99 (Distress Zone) = HRJ, HSIL, AGL, Orient bell and Nitco
10.00
8.00
6.00
4.00
2.00
0.00
-2.002016 2017 2018 2019

Kajaria Somany AGL Nitco Cera HRJ HSIL Orient bell

As Z score for Kajaria ceramics, Somany ceramics and Cera sanitary ware is more than
2.99 and it is in the safe zone. This is mainly because of their debt structure, all these
companies are virtually debt free companies and hence their Market value of equity to total
liabilities is very high, this improves the Z-score of these companies. Also these companies
are generating good sales from their operation and hence sales to total asset ratio is good.
Clearly Kajaria and Cera are better than somany, but somany also is in safe zone. It
advisable to invest in these companies and hence these three companies will be taken for
valuation purpose. Orient bell also looks is in safe zone, but this company is very low in
market share and market capital compare to its peers.

54
AGL, HRJ (Prism Johnson) and HSIL does not look in shape and these companies are into
grey zone. Though they are safe from bankruptcy at current moment but further debt
structuring and bad revenue generation might affect the Z-Score in future. These
companies are not able to generate enough revenue and should improve their market share
and should reduce debt to be in safe zone.
Nitco seems to be in very bad condition and hence they are into Red zone. Z-Score less
than 1.8 shows that companies are likely to go bankrupt in coming couple of years. Hence
it is not at all advisable to invest in this company. Nitco has recently done debt
restructuring hence their Z-Score look positive but it is still way below 1.8.
We can say that Kajaria, Somany and Cera look good at the moment and fundamentals of
company is strong.

55
Chapter 9
Valuation of company and recommendation

After rigorous analysis and comparison of companies on different parameters I have

selected two companies i.e. Kajaria ceramics and Cera sanitary ware for valuation. These
two companies have performed fairly well in all the areas and leading the market. Kajaria
being market leader in tiles segment and Cera in sanitary ware segment gives positive
perspective for future growth as well.
For valuation of these companies I have used multiple based valuations and not intrinsic
DCF valuations.

Why not DCF (Discounted cash flow)?

DCF or intrinsic valuation gives company‟s current value based on projections of
company‟s future earnings. In a simple way DCF is calculation of company‟s current and
future available cash, designated as free cash flow. These future projections of cash are
then discounted using company‟s weighted average cost of capital to obtain present value.

There are primarily 3 reasons why I am not using DCF for valuation of Kajaria ceramics
and Cera sanitary ware.

1. Operating cash flow projection: DCF model generally use 5 or 10 years of

estimates. For companies like Kajaria and Cera, who are still at the growth stage,
this projection of cash flow in long term future becomes very difficult. For such
companies cash flow generation is very uncertain. Any analyst can forecast the
operating cash flow for current year and couple of years ahead but more than that
cannot be estimated properly considering the volatility with such companies and
heavy dependency on other industries.

2. Capital expenditure projection: For projection of free cash flow one has to
project the capital expenditure of company. In such industries like ceramics and
any other consumption oriented industry it is difficult to forecast the capital
expenditure for long run because these companies and industries are myopic and
mercurial in nature. Company‟s management may guide capex for couple of years
but forecasting more than that may give misleading figure.

3. Discount rate and growth rate assumptions: Discount rate and growth rate
assumptions are very important in DCF model as small changes in these can lead to
drastic change in value of stock. Analysts generally use weighted average cost of
capital of the firm for discount rate. But these approaches are quite theoretical and
based on many assumptions. These assumptions can change the value in real world
investing application. Perpetual growth rate or terminal value assumption is the
most susceptible part of DCFF. Assuming that anything will hold in perpetuity is

56
highly theoretical. For mature companies like ITC or any power and infrastructure
related companies, who has long term projects and continuous constant cash
generation for these companies estimate perpetual growth rate. But for companies
like Kajaria and Cera, who are still at the growth stage one cannot decide perpetual
growth rate.

Using multiple based valuations will entail fewer assumptions to value the stock than
under discounted cash flow scenario. Company‟s price to earnings multiple can be
calculated after every trade, hence we have lot of data on past performance.

For valuation I have used 5 year average of 1 year forward price to earnings ratio. Since
the stock market is forward looking (as opposed to backward), it places more emphasis on
what is expected to happen in the future, rather than what happened in the past. For this
reason, more emphasis is typically placed on forward valuation multiples, rather than
historical multiples.

It is always better to take fewer assumptions and go roughly right than taking more
assumption and going absolutely wrong.

57
Kajaria Ceramics

28 June 2019
Reuters: KAJR.NS; Bloomberg: KJC IN BUY
Initiating coverage Sector: Building material
CMP: Rs 588
Background: Target price: 684
Upside: 16.3%
Kajaria ceramics the largest tile manufacturer in
KEY DATA
India and 9th largest in the world was incorporated
on 20th Dec, 1985 at Kanpur. The company Current share O/S (INR mn): 159.0
entered into technical collaboration agreement Mkt cap (INR bn): 93.5
with Todagrass S.A. Spain, for the manufacturing 52 Wk H/L: 649/310
of ceramic glazed and floor tiles. Kajaria started
production in August 1988 at Sikandarabad (UP) Price performance (%)
with 1 msm per annum capacity. In 1989,
company started exporting tiles to Gulf countries, 1M 3M 1Yr
Kajaria (6.28) 3.24 19.9
Europe and Bangladesh. 2nd plant started in 1988
Midcap100 (1.57) (1.02) (2.62)
at Gailpur (Rajasthan) with capacity of 6 msm p.a.
Kajaria is the only tile manufacturing brand in
India to be awarded „Superbrand‟ status, which
they have retained for 10th consecutive years.

About management:

Name Designation
Mr. Ashok Kajaria Chairmen & MD
Mr. Chetan Kajaria Joint MD
Mr. Rishi Kajaria Joint MD
Shareholding pattern (%)
Mr. Ram Chandra COO (A&T)
Mr. Sanjeev Agarwal CFO
Mar18 Dec18 Mar19
Current manufacturing capacity: Promoters 47.48 47.58 47.58
FII 28.09 24.68 25.96
Plant (Tiles) Wall & PVT GVT Total DII 8.89 10.24 10.31
floor Others 15.54 17.50 16.15
Own manufacturing Pledged 0.0 0.0 0.0
Sikandarabad (UP) 8.4 8.4
Gailpur (Rajasthan) 25.2 9.1 34.3 Valuation summary (INR bn)
Malutana (Rajasthan) 6.5 6.5
Joint ventures Morbi Y/E Mar 2019 2020E 2021E
Jaxx vitrified 10.2 10.2 Revenue 29.56 33.7 38.41
Cosa ceramics 5.7 5.7 EBITDA 4.49 5.53 6.30
Vennar (AP) 2.9 PAT 2.28 3.18 3.62
Total 28.1 22.4 17.5 68 EPS 14.3 20 22.8
Kajaria Floera (a wholly owned subsidiary) % Growth -3.4 39.8 14
capacity of 5.00 MSM p.a. in Andhra Pradesh. The P/E 41.1 29.4 25.7
Plant is expected to be commissioned in August 19 P/B 5.93 5.04 4.41

58
Industry revival

Ceramic industry has gone through sluggish phase in last few years due to various
initiatives of government and real estate slowdown. Although government initiatives to
formalise the economy will benefit in long run but in short time it has hit the industry to
the core.

 Real estate is the most important growth driver for ceramic industry which has
observed slump phase in last 5 years. It is expected that after time correction phase
from 2013 now in coming couple of years with various government initiative and
demand real estate will grow.
 RBI has included housing loans up to 3.5 million in priority sector lending in metro
cities, this was done to boost the affordable real estate.
 Growing urban population with 10 million people migrating from rural to urban
areas and trend of nuclear families with increasing disposable income can benefit
industry in long run
 Pradhan Mantri Awas Yojana (PMAY) with an objective to build 20 million
affordable houses by 31st march 2022.
 Smart cities project where 100 smart cities will be built will provide boost to
construction and ceramics industry.
 Replacement demand will be another area which the ceramic the ceramic
manufacturer will be concentrating to expand their revenue. It is expected that
replacement demand will grow by 7.8% in FY20.
 In FY17 out of total imports of ceramic tiles in India, china alone contributed to
80% of imports followed by Italy, Spain and UAE. GOI imposed an anti-dumping
duty on tiles from china for 5 years from 2016 to a tune of USD 1.87 per SQM,
depending on the exporting company.

Watershed event in Indian ceramic industry which led to demographic change in

Morbi

Magnificent “Morbi”, known as the Maca of ceramic industry in India is world‟s second
largest ceramic cluster after China‟s “Foshan”. The Morbii cluster which accounts for
more than 70% of India‟s total ceramic production is spread across a 10km stretch on the
Morbi-Dhuva highway in Gujarat. Morbi is very well strategically located for ceramics
business to prosper. It is in the vicinity of major ports (such as Kandala and Mundra)
Further there is availability in abundance of raw material (local clay suitable for ceramic
products) and of quartz,calcite, and frits in Gujarat and in neighbouring Rajasthan.

Major players in the organised segment of ceramic industry are either in joint venture or
outsourcing from Morbi based units. Morbi based units get the benefit of subsidies given
by Gujarat govt. for gas prices compare to non Morbi based plants. In last 6 years exports
of ceramic tile from India has grown by CAGR of 47.19% and most of this export has
come from Morbi. Export from Morbi is estimated to be of 12,000 crore. There are approx.
850 manufacturing units in the cluster.

59
What factor changing Morbi’s demographic?

850 Units
in Morbi

350 on gas 450 on coal

50 on both
gasifier

200 shifted 250 still not

to gas operational

India‟s ceramic industry is majorly dominated by unorganised sector. Approx. 50% in

value terms and 69% in volume terms is contribution of unorganised sector.

 Double whammy of GST and NGT‟s order on ban of coal gasifier on unorganised
sector is what causing change in Morbi‟s demography.
 Switching fuel from coal to gas has increased the production cost by 8-10% which
has impacted the price delta between organised and unorganised sector, since
organised sector was working on gas only.
 Unorganised sector was able to buy coal on cash but now under GST and NGT rule
they have to buy cash with proper transaction.
 Now dealers will not get under invoiced or no invoiced product from unorganised
segment, so they will shift to better organised market.
 Earlier cost difference of 30-35% between organised and unorganised players has
come down to 6-8%

We have seen the impact of shift from unorganised to organise in few sectors in past 3
years. As mentioned above in report about case study of Jewellery sector and growth in
Titan Company, similar trend has been observed in fashion retail and garment segment.
Where companies like future retail, Aditya Birla retails and few other players has benefited
due to GST. However the shift from unorganised to organise has taken place at snail‟s
speed in this ceramic sector but it is likely to increase in coming future with proper
surveillance and tax compliance. Currently companies based of Morbi are generating fake
E-way bill, to overcome this Invoice matching is required. We can say that with NGT‟s
order on coal gasifier this shift will take place soon at good speed and organised players
such as market leader Kajaria, Somany and Cera will get benefited from this.

60
What makes Kajaria an attractive investment opportunity?

Industry
revival
Maximum
product
offering
(SKUs)
Comparison with closest competitor
Impeccable and in Tiles
PAN distribution
network Kajaria Somany
Market share 10% 7%
Effective commumnication
through aggressive Active dealers 1945+ 1837+
advertisement and Display centres 38 15
promotion
Exclusive
showrooms 270 111
Best return ratios and financials
among peers 100 60
A&P Spending Crore Crore

We have already discussed on Industry revival in the report, Kajaria ceramics

is the biggest beneficiary of this industry revival due to reasons stated.

 Maximum SKUs with Impeccable distribution network: Company has more

than 1945 active dealers and approx. 5000 touch point with largest (2800+ SKUs)
product basket of tiles in India. Through its product offering Kajaria caters the
demand of multi-regional and multi-cultural all class of society. Company has 270
exclusive dealers (200 exclusive dealers in FY20) who sell only Kajaria products.
These dealers contribute 30% of total revenue. Company plans to increase
exclusive dealers to 400 by FY21. All active dealers are widely spread which marks
Kajaria presence in entire nation. More 2800+ SKUs are strength of company

 Advertisement and promotion: Kajaria has shown tremendous aggressiveness in

Advertisement spending over the last few years. Company is constantly spending
3.5-4% of revenue in promotional activities and has spent 100 crore in FY19.
Bollywood star Akshay Kumar is promoting Kajaria tiles; Mrs Anushka Sharma
Kohli is promoting Kerovit (Sanitary ware and faucets). Recently company has
roped in Actor Ranveer Singh for their plywood segment.

61
 Market share gain leading to increase in sales volume: - Kajaria‟s sales volume
grew by 12% YOY from 71.96 msm in FY18 to 80.30 msm in FY19. YOY change
in Q4March19 volume is also 11%. Despite the sluggishness in industry Kajaria
has maintained the volume growth this shows that company is increasing its market
share. Currently they have 10% market share of overall tiles industry and is
expected to increase it to 14% over next 4 years. The management has guided 15%
volume growth for FY20, which is quite achievable for market leader. To increase
the current production capacity from 68 msm Company is starting in plant of 5
msm in AP from August 2019.

 Sanitary ware and faucets division growing at healthy pace: - Sanitary ware and
faucets has contributed revenue of 184.8 crore in FY19 and has grown by 31.7%
from FY18. It is expected to grow at same pace and generate profit from coming
years. The company is planning to expand its capacity by 1.5 lakhs p.a. from
current 6 lakhs p.a. Due to high profit margin in sanitary ware and faucets business,
this will increase company bottom line in future.

 Return ratios and strong financials:

Kajaria bodes well in all the areas KJL Somany AGL
compare to its peers. Here for Net profit margin 7.6 2.7 1.57
Op. profit margin 12.19 6.94 4.9
comparison we have taken closest
ROE 15.49 7.5 4.62
peer in tiles industry. ROCE 21.18 13.47 10.29
Interest coverage 24.28 3.01 1.82
Despite the slowdown in Industry
Working cap. days 59 100 100
Kajaria‟s top line has grown by 9%
Current ratio 1.5 1.42 1.15
in FY19. Z-score 10.41 2.94 2.08

 Kajaria stands higher in terms of ROE and ROCE than any other company
in tile business. Company is able to generate good returns every year.
 Net profit margin and operating profit margin have decreased marginally in
FY19 due to industry slowdown but still it has highest margin among its
peers.
 Company is virtually debt free and interest coverage of 24.28 shows
healthiness of company
 Kajaria‟s working capital in days is almost half of all the companies in
industry. This shows company‟s efficiency to convert its working capital
into revenue.
 Z-score more than 10.41 indicated company is far from bankruptcy and it is
in good position for long term, whereas somany and AGL are in grey zone
of bankruptcy

62
Risks for the company

Volatility in fuel prices

could impact the Real estate slowdown
company’s margin

Risks

JVs affecting companies

Imports from china
bottom line

 Volatility in fuel prices could impact the company’s margin: - Liquefied

Natural Gas (LNG) prices have increased significantly over the previous year. And
due to subdued demand companies were not able to pass on this increased cost to
customers. But it is believed that increasing customer sentiments and brand
awareness in near future will allow to pass on any increased cost to customers.

 Real estate slowdown: - Real estate industry has gone through slump phase in
recent years and is recovering from that. Since real estate is the major growth driver
of ceramic industry any slowdown in real estate will greatly hamper the ceramic
industry growth. It is believed that time correction phase in real estate in almost
over and now this industry will grow.

 Import from china: - However after anti-dumping duty on ceramic products from
china we have seen that imports has reduced drastically and it has benefited
domestic players. This anti-dumping duty is for 5 years and will get over in 2021.
Any changes after that might affect the structure of domestic product to some
extent. This import is very small in number and may not affect major players like
Kajaria.

 JVs affecting companies bottom line: - Kajaria‟s JVs have been drag on its
bottom line in the recent past as they have incurred losses in last two financial
years. In FY18, JVs lost was around 33 crore and in FY19 it was around 2 crore.
Company believe that JVs will be profitable in FY20 as they have improved the
shop floor efficiency.

63
Valuation summary:

Industry has seen the slump phase and now strong revival has started. Kajaria ceramics
having the largest market share in tiles, led by strong and efficient management has shown
their execution capability in recent years. In long run it looks positive with favourable
demand drivers and shift from unorganised to organised sector. NGT ban on coal gasifier
and implementation of GST with strong surveillance of E-way bill will benefit in future.

At CMP 588 the stock is trading at 29.4X FY20E and 25.7X FY21E earning. I recommend
BUY rating on the stock with target price of 684 in 12 months. Valuing the company at
30X FY21 EPS

1 Yr forward PE 5 Yrs avg – 28.9,

1 Yr forward PE 3 Yrs avg – 30.48 and
1 Yr forward PE 10 Yrs avg (+1 std dev) – 29.6

1 Yr forward PE 1 Yr forward PE
40.00 40.00
35.00
30.00 30.00
20.00 25.00
20.00
10.00 15.00
10.00
0.00 5.00
Dec-13
May-09
Apr-10

Oct-15
Mar-11
Feb-12
Jan-13

Nov-14

Aug-17
Sep-16

Jul-18

0.00
Dec-16
May-09

Aug-12
Jun-10

Oct-14
Nov-15

Jan-18
Jul-11

Sep-13

Feb-19
P/E (x) 10 Yrs Avg (x)
5 Yrs Avg (x) 3 Yrs Avg (x) P/E (x) Std Dev. (+1 SD)

Scenario Summary Upside Downside

Current Values: ( Best case scenario) (Worst case scenario)
Changing Cells:
Increase in Sales 14.0% 17.0% 6.0%
Cost of material consumed as a % of sales 26.0% 26.0% 27.0%
Employee benefit expense as a % of sales 11.7% 11.7% 12.0%
Power & fuel as a % of sales 20.8% 20.0% 21.0%
Advertisement expense as a % of sales 3.2% 3.5% 3.5%
Other expenses as a % of sales 10.1% 10.0% 11.5%
Depreciation as a % of sales 3.0% 3.5% 3.5%
Finance cost as a % of NCL 10.7% 10.7% 12.0%
Result Cells:Target market price (1 Yr forward P/E multiple 30)
2020 684.06 728.59 427.86
2021 779.83 852.45 453.53

64
Cera Sanitary ware
28 June 2019
Reuters:CERA.NS; Bloomberg:CRS IN
BUY
Initiating coverage
Sector: Building material
Background: CMP: Rs 2990
Target price: 3423
Cera sanitary ware Ltd. has the largest market Upside: 14.5%
share in sanitary ware segment. Company was KEY DATA
incorporated in 2002 at Gujarat. The company‟s
Current share o/s (INR mn): 13
main product lines are Sanitary ware, Faucets
Mkt cap (INR bn): 38.88
ware and bath ware. The company also operates
52 Wk H/L: 3195/2144.05
wind and solar power plants for captive use. The
company is engaged in Manufacture of Ceramic
Sinks, Wash Basins, Wash Basin Pedestals Baths Price performance (%)
Bidets, Water Closet Pans Flushing Cisterns 1M 3M 1Yr
Urinals and similar sanitary fixtures. Company Cera (0.63) 12.01 7.24
has entered tiles segment by Joint venture with Midcap (1.57) (1.02) (2.62)
Andhra Pradesh based Anjani Tiles ltd and Morbi
(Gujarat) based Milo tiles ltd.

About management:

Name Designation
Mr. Vikram somani Chairman & MD
Mr. Atul Sanghavi Executive director & CEO
Mrs. Deepshikha Vice Chairperson
khaitan
Mr. R B Shah0 CFO & COO Shareholding pattern (%)
Mr. Narendra Patel President and company
secretary Mar18 Dec18 Mar19
Promoters 54.75 54.75 54.75
Current manufacturing capacity: FII 8.13 8.24 7.56
DII 9.17 8.88 10.2
Plant (Tiles) Total Others 27.95 28.13 27.07
Joint venture Pledged 0.0 0.0 0.0
Milo (Morbi – 7250 sqr mtr/day
Gujarat) Valuation summary (INR bn)
Anjani (AP) 10000 sqr mtr/day
Sanitary ware Y/E Mar 2019 2020E 2021E
Kadi (Mehsana) 10000 pcs /day Revenue 13.51 15.5 17.8
Faucets EBITDA 1.98 2.21 2.54
Kadi (Mehsana) 7500 pcs/day PAT 1.15 1.38 1.58
EPS 89.1 106.3 122.3
% Growth 9.2 19.3 15.5
P/E 33.5 28.12 24.4
P/B 5.54 4.95 4.30

65
What makes Cera an interesting investment opportunity?

One stop bathroom

solution provider
with 14000+
touchpoints Rising
Best return ratio
and strong replacement
financials demand

Why cera?
High margin Brand visibility
business with and aggressive
multiple revenue A&P spending
channels
Largest market
share in
sanitaryware

 One stop bathroom solution provider: Cera has diversified its product offering
and has become the one stop bathroom solution provider. Cera started as sanitary
ware manufacturer but now it has ventured into manufacturing faucets and tiles as
well. Sinks, customised shower, partition/cubical, bathtub and mirrors all are being
marketed (traded) by Cera. Cera‟s more than 14000+ touch points speak about its
presence across the nation. Touch points have increased by 8% YOY from 13161 in
FY18 to 14218+ in FY19. Cera has Active 2841+ dealers, 11306+ retailers, 136
Cera style galleries and 9 style studios. Its reach across the nation with wide
product offering is reason behind increasing market share.

 Rising replacement demand: In global scenario (mostly in developed countries)

only 20% of demand is primary and rest 80% is replacement demand. Whereas in
India currently 13-15% is replacement demand and rest primary new constructions.
But replacement demand is rising at good pace; it has increased from 8% in FY14
to 14% in FY18. Indians are on the path of global trend and western style which is
promoting bathroom up gradation more frequently than before. Shortening of
replacement cycle is beneficial for industry as bathrooms in cities are upgraded on
every 10-12 years, instead of 20 years earlier and this trend will continue.

66
 Brand visibility and aggressive A&P spending: One of the most important
factors between Tiles and sanitary ware is brand visibility. Brand is not visible for
tiles business, we will observe that when the tile is used in home décor one cannot
make out whether it is of which brand. Although we can differentiate based on
quality whether it is premium or low but company name or brand cannot be
observed. Whereas in sanitary and faucets business brand visibility is there, this
gives added advantage to advertisement and promotional activities. From the age of
„necessity‟ washrooms are becoming „status statement‟. The changing perception,
lifestyle and rising disposable income is increasing appetite for aesthetic and
premium products. To enhance this visibility Cera is spending 4% of revenue
constantly on advertisement and promotion.

 Largest market share in sanitary ware: Aggressive spending on advertisement

and wide dealer and retailer base has made Cera capture the largest market share in
sanitary ware business, approx. 24% share of entire market is captured by Cera.
Cera‟s market share in faucet business is also increasing, faucets completely
dominated by Jaquar at the moment.

 High margin business with multiple revenue channels: Sanitary ware business
has highest margin compare to tile and faucets. Input cost required for this is
comparatively less, in the production cost analysis section in the report we have
compared input cost for all companies. Power and fuel cost as a percentage of sales
is 3-4% for Cera, whereas for other tiles manufacturing companies it is in range of
18-21%. Same with the cost of material cost of material consumed as percentage of
sales is 8-10% for Cera and 25-30% for tile manufacturing companies. Cera enjoys
this advantage of higher margin in sanitary war business.

Multiple
revenue
channels

Sanitary ware Faucets Tiles Wellness

( 709 crore - (318 crore - (278 crore - (45 crore - 3%
53% share) 23% share) 21% share) share)

67
Cera is well diversified and generating good revenue from all its streams. This talk about
company‟s potential to launch and grow with new product line. Its faucets and tiles
business are growing at 20% and 16.5% respectively. Although still sanitary ware is major
revenue contributor but company has marked its presence in tiles and faucets business. It is
expected that in FY18-FY21E period sanitary ware and tiles will grow by CAGR 20%.
This growth is possible considering the low base.

 Best return ratios and strong financials:

Cera is the only company in industry 2017 2018 2019

Net profit margin 9.88 8.7 8.51
who has maintained double digit top
Op. profit margin 15.37 13.18 12.59
line growth over last three years
ROE 21.08 18.33 16.42
despite slowdown in industry. In ROCE 26.53 22.83 22.92
FY19 when all companies were Interest coverage 20.85 17.82 22.1
struggling to generate revenue due to Working cap. Days 91 85 95
industry sluggishness but Cera Current ratio 1.89 1.97 2.02
managed to increase its top line by Z-Score 7.86 8.48 7.33
14%.
 Cera is market leader in sanitary ware industry and sanitary ware is more profit
margin business compare to tiles. Cera is the only company who is generating net
profit margin and operating profit margin on par with Kajaria.
 ROE and ROCE of company is well above industry average and ROE of more than
15% is considered to be good in this industry.
 Company‟s interest coverage ratio over the years are very healthy and company is
almost debt free
 Current ratio is more than 2 and over the years it has remained around 2 only. This
shows company will not have any difficulty in paying its short term obligations
 Z-score of more than 7 Shows Company is far from bankruptcy level and is in
healthy position for long run.

68
Valuation summary:

Cera looks positive on long term perspective. Company has robust product portfolio and
multiple streams for revenue generation. Strong brand name with wide distribution (more
than 14000 touch point) and sound financials indicates that company will keep growing.
After stabilizing its presence in sanitary ware, now Cera is aggressively increasing share in
the tiles and faucets market. In FY19 tiles segment has grown by 16.5% and faucets
segment has grown by 20%. It is expected that in FY20 this growth will continue.

At CMP 2990 the stock is trading at 28.12X FY20E and 24.4X FY21E earning. I
recommend BUY rating on the stock with target price of 3423 in 12 months. Valuing the
company at 28X FY21 EPS

1 Yr forward PE 5 Yrs avg – 29.2,

1 Yr forward PE 3 Yrs avg – 29.45 and
1 Yr forward PE 10 Yrs avg (+1 std dev) – 29.9

1 Yr forward PE 1 Yr forward PE
50.00 50.00
40.00 40.00
30.00
30.00
20.00
20.00
10.00
0.00 10.00
May-09
Apr-10
Mar-11

Dec-13
Nov-14

Aug-17
Oct-15
Jan-13
Feb-12

Sep-16

Jul-18

0.00
Dec-13
May-09
Apr-10
Mar-11

Oct-15

Aug-17
Jan-13

Nov-14
Feb-12

Sep-16

Jul-18
P/E (x) 10 Yrs Avg (x)
5 Yrs Avg (x) 3 Yrs Avg (x) P/E (x) Std Dev. (+1 SD)

Scenario Summary Upside Downside

Current Values: (Best case scenario) (Worst case scenario)
Changing Cells:
Increase in Sales 15.0% 17.0% 8.0%
Cost of material consumed as a % of sales 10.3% 10.0% 12.0%
Purchase of stock in trade as a % of sales 36.7% 36.6% 37.0%
Employee benefit expenses as a % of sales 12.2% 12.2% 13.0%
Power & fuel as a % of sales 4.5% 4.3% 5.0%
Advertisement expense as a % of sales 3.8% 3.8% 4.0%
Other expenses as a % of sales 19.9% 19.0% 20.0%
Depreciation as a % of sales 2.1% 2.1% 2.5%
Finance cost as a % of NCL 7.8% 7.8% 9.0%
Result Cells: Target market price (1 Yr forward P/E multiple 28)
2020 3423.3 3957.5 2046.7
2021 3936.8 4630.3 2210.5

69
Relative Valuation:

Relative Valuation Statistics

Share price Enterprise Value (EV) P/B (x) EV/EBITDA (x) EV/Revenue (x) P/E multiple
Company Name 2019 2020E 2019 2020E 2019 2020E
Kajaria 566 8841.96 5.75 18.91 15.99 2.99 2.62 39.6 28.3
HSIL 240.65 2836.55 1.15 8.21 7.18 1.05 0.92 24.1 18.2
Somany 423.4 2282.73 3.03 12.51 11.10 1.34 1.19 38.5 24.7
Cera 2875.45 3811.32 5.32 17.58 17.21 2.82 2.45 32.3 27.1
HRJ 91.55 6012.17 4.03 9.58 8.99 0.98 0.92 34.3 18.5

Relative valuation is a model that determines financial worth of company by comparing it

with peer companies. Either price based multiples or enterprise value multiples are used in
for valuation.

Above table shows different valuation ratios for different companies. Kajaria and Cera
look attractive for all the ratios. This states that company is enjoying premium valuation
then its peers and are not overvalued.

Price to book value represents market value for every rupee of tangible assets. Both of
these companies have Price to book value more than 5. Companies for which investors
have high expectation of earnings in future they generally have high P/B ratio compare to
its peers.

Kajaria and Cera with high PE indicate the healthy future performance expectations of
investors and investors are ready to pay more for these companies compare to their peers.
Over the years Kajaria and Cera have enjoyed higher PE multiple compare to its peers.

70
Chapter 10
References & bibliography

1. Prasanna Chandra (McGraw Hill Education) - Corporate valuation: A guide for

analysts, managers and Investors
2. Altman, E.I. (1968). „Financial Ratios, Discriminate Analysis and the Prediction of
Corporate Bankruptcy‟, The Journal of Finance, Vol.4
3. Companies annual report and corporate presentation
4. Conference call transcripts

Websites

1. www.capitaline.com - Company‟s past performance and industry data

2. www.bloomberg.com - Bloomberg analysis on company and research report
3. www.ceicdata.com - Past performance of economy and industry
4. www.reutors.com - Consensus estimates for relative valuation
5. www.icctas.com - Ceramic sector statistics
6. www.ibef.org - Report on industry analysis of real estate and construction material
7. www.ceramicassociation.com- Morbi Ceramic association(Largest ceramic cluster)
8. www.pmaymis.gov.in - Statistics on “Pradhan Mantri Awas Yojana”

Various company websites for annual reports and management discussion

Government websites for industry outlook

71